ICLG The International Comparative Legal Guide to: Real Estate 2019

14th Edition A practical cross-border insight into real estate law

Published by Global Legal Group with contributions from: ALTIUS Maples and Calder Anderson Mori & Tomotsune Marval, O’Farrell & Mairal Blenheim Meyerlustenberger Lachenal AG Brulc, Gaberščik and partners, Law Firm, Ltd. Norton Rose Fulbright South Africa Inc. Cordero & Cordero Abogados Pepeliaev Group Eric Silwamba, Jalasi and Linyama Legal Practitioners Project Law Attorneys Ltd Ferraiuoli LLC Ropes & Gray International LLP Gianni, Origoni, Grippo, Cappelli & Partners Shepherd and Wedderburn LLP Greenberg Traurig Grzesiak sp.k. Simon Reid-Kay & Associates Greenberg Traurig, LLP Taras Burhan Law Office LLC Hogan Lovells Tirard, Naudin Kapellmann Tughan Kubes Passeyrer Attorneys at Law Valmas Associates L&L Partners Wintertons Legal Practitioners Machado, Meyer, Sendacz e Opice Advogados Ziv Lev & Co. Law Office Mantis & Athinodorou LLC The International Comparative Legal Guide to: Real Estate 2019

General Chapter:

1 Forward Funding Now! – Iain Morpeth, Ropes & Gray LLP 1

Country Question and Answer Chapters:

2 Argentina Marval, O’Farrell & Mairal: Diego A. Chighizola 5 Contributing Editor Iain Morpeth, 3 Austria Kubes Passeyrer Attorneys at Law: Dr. David Kubes & Mag. Tina Vollmann 17 Ropes & Gray LLP 4 ALTIUS: Lieven Peeters & Kathleen Verbiest 27 Sales Director Belgium Florjan Osmani 5 Brazil Machado, Meyer, Sendacz e Opice Advogados: Maria Flavia Seabra & Account Director Juliana Ribeiro 36 Oliver Smith 6 Costa Rica Cordero & Cordero Abogados: Hernan Cordero B. & Rolando Gonzalez C. 45 Sales Support Manager Toni Hayward 7 Cyprus Mantis & Athinodorou LLC: Michael Mantis 55

Senior Editors 8 England & Wales Ropes & Gray International LLP: Carol Hopper & Partha Pal 63 Caroline Collingwood & Suzie Levy 9 Finland Project Law Attorneys Ltd: Matias Forss & Sakari Lähteenmäki 75 CEO Dror Levy 10 France Tirard, Naudin: Maryse Naudin 83

Group Consulting Editor 11 Germany Kapellmann: Dr. Florian Kirchhof & Dr. Max Mommertz 94 Alan Falach 12 Greece Valmas Associates: Ioannis Valmas 104 Publisher Rory Smith 13 Hong Kong Simon Reid-Kay & Associates: Simon Reid-Kay 113 Published by Global Legal Group Ltd. 14 India L&L Partners: Amaresh Kumar Singh & Manjul Mantri 122 59 Tanner Street London SE1 3PL, UK 15 Ireland Maples and Calder: Diarmuid Mawe & Craig Kenny 140 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 Email: [email protected] 16 Israel Ziv Lev & Co. Law Office: Moshe Merdler & Ziv Lev 156 URL: www.glgroup.co.uk 17 Italy Gianni, Origoni, Grippo, Cappelli & Partners: Davide Braghini & Domenico Tulli 166 GLG Cover Design F&F Studio Design 18 Japan Anderson Mori & Tomotsune: Kenichi Yamamoto 177 GLG Cover Image Source iStockphoto 19 Netherlands Blenheim: Mark van Weeren & Tim Pruntel 186 Printed by Stephens & George 20 Northern Ireland Tughans: David Jones & Luke Thompson 196 Print Group November 2018 21 Poland Greenberg Traurig Grzesiak sp.k.: Agnieszka Stankiewicz & Barbara Pancer 204 Copyright © 2018 Global Legal Group Ltd. 22 Puerto Rico Ferraiuoli LLC: Eduardo Tamargo-Motroni & María del Rosario Fernández-Ginorio 214 All rights reserved No photocopying 23 Russia Pepeliaev Group: Alexey Konevsky & Vladislav Ivanov 223 ISBN 978-1-912509-47-8 ISSN 1749-4745 24 Scotland Shepherd and Wedderburn LLP: David Mitchell & Scott Ritchie 232

Strategic Partners 25 Slovenia Brulc, Gaberščik and partners, Law Firm, Ltd.: Damijan Brulc & Marjetka Kenda 246

26 South Africa Norton Rose Fulbright South Africa Inc.: Pieter Niehaus 255

27 Spain Hogan Lovells: Emilio Gómez Delgado 265

28 Switzerland Meyerlustenberger Lachenal AG: Wolfgang Müller & Denise Läubli 275

39 Ukraine Taras Burhan Law Office LLC: Taras Burhan & Zvenyslava Kit 284

30 USA Greenberg Traurig, LLP: Christina Braisted Rogers 294

31 Zambia Eric Silwamba, Jalasi and Linyama Legal Practitioners: Joseph Alexander Jalasi, Jr. 306

32 Zimbabwe Wintertons Legal Practitioners: Cordellia Nyasha Midzi & Peter Moor 314

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

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

WWW.ICLG.COM EDITORIAL

Welcome to the fourteenth edition of The International Comparative Legal Guide to: Real Estate. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of real estate. It is divided into two main sections: One general chapter. This chapter covers the topic of forward funding. Country question and answer chapters. These provide a broad overview of common issues in real estate laws and regulations in 31 jurisdictions. All chapters are written by leading real estate lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor Iain Morpeth of Ropes & Gray LLP for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

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

PREFACE

It is a pleasure to have been asked to provide the preface to The International Comparative Legal Guide to: Real Estate for 2019, which is now in its fourteenth edition. The Guide has become a well-established benchmark for international real estate transactions and is one of the most comprehensive available. The 2019 edition now contains contributions covering 31 countries round the globe. With investment capital flowing round the world so much more freely than in the past, an understanding of the diverse ways in which transactions in the real estate market are dealt with in different jurisdictions has become an increasingly important requirement for the international investor. We hope you find the Guide a useful reference point when faced with a question concerning cross-border real estate transactions and we encourage you to contact us with suggestions to improve future editions.

Iain Morpeth Partner Ropes & Gray LLP Contributing Editor Chapter 1

Forward Funding Now!

Ropes & Gray LLP Iain Morpeth

This forward funding arrangement has enabled small, thinly 1 Introduction capitalised developers to access construction finance where they might have had difficulty accessing bank finance. This, in turn, has Old legal technology never dies; it just comes back in a different form. led investors to get more involved in the detail of the procurement And so it is with forward funding of development projects. Whenever arrangements because they might have to take them over if the construction finance is difficult to obtain from lenders, forward developer fails. funding is discovered, or re-discovered, as a source of finance. The arrangement will be documented by a bilateral forward funding Interestingly the origin of the forward funding arrangement, at least agreement between the developer and the investor. This will in the UK, lies in the secondary banking crisis of the early 1970s, a contain all of the agreed contractual arrangements and will, on its particularly deep property crash after a speculative boom in which successful completion, result in the investor owning a completed banks had over-lent on property. When interest rates were hiked to and let building and the developer having been reimbursed all its dampen down inflation, this led to a banking crisis in which over development costs and having received its developer’s profit in cash 50 secondary banks were bailed out by the Bank of England. The with no residual interest in the project. consequence was that, for over a decade, UK banks were not willing to provide construction financing. This form of funding can be combined with debt financing if the investor wishes to leverage its investment and the debt is available. Developers still needed to finance their projects, however. Where The investor will enter into the credit agreement and security previously they had been borrowing from banks to fund projects documents and meet its funding commitments to the developer and, when a building was practically completed and let, had been by both drawing down under the credit agreement and funding the selling the completed project to an investor, now they had to cut out equity portion itself as it goes. the lender. All they did was to go direct to the end investor and ask it to fund the project instead. This is a forward funding. There are a number of essential elements to these deals. The first Whilst these direct forward funding arrangements are still done is that title is transferred to the investor. Typically, the developer today, there has been an increasing trend towards forward funding sells the site to the investor at the outset in return for an agreed through forward equity commitments into a joint venture. purchase price. This could be at cost to the developer or at an agreed value that gives the developer some element of early profit. Taking This chapter looks at how these two different types of transaction title means that the investor owns the land on which construction have been blended together to provide modern construction funding is to take place and so has no need for other security. The land and considers: will usually have planning permission so the project can commence ■ the classic forward funding; immediately. ■ forward funding via a joint venture; The second key element is that the developer will be responsible for ■ land transfers; delivering the development and so must put in place its construction ■ development procurement; procurement arrangements. There will be an agreed set of plans ■ investor’s funding commitments; and specifications in sufficient detail to fix the nature, extent and ■ lettings; and quality of the development or an agreed procedure for establishing these and getting the investor’s approval at a later date. The trick ■ developer’s profit. is to avoid having too generic a set of plans and specifications, so that the developer has the headroom to change what is being built 2 The Classic Forward Funding without investor approval, or too detailed a set of plans, so that the investor ends up having to approve every little design development. People will be familiar with a conventional forward funding There will also be a variations regime establishing what changes to arrangement. Here a developer, who owns a development site, enters the plans and specifications will require consent and how approval into an agreement with an investor under which it transfers title to the is sought. site and agrees to procure the construction and letting of the project. In addition to agreeing plans and specifications, the agreement The investor reimburses development costs and pays a profit share will set out the process for appointing the design consultants and a when the project has been practically completed and let. Whilst the building contractor to construct the building. The investor will be developer is acting in a quasi-development management role, given concerned about the form of building contract because ultimately that it procures others to design and construct, the developer has it is providing the funding that is paid to the contractor, because always taken on a direct construction obligation. the form of contract needs to match the design development

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 1 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray LLP Forward Funding Now!

arrangements and because it will want to minimise the risk of The essential elements of a conventional forward funding described cost overruns. There will also be direct agreements or collateral above are replicated in three documents rather than one single bilateral warranties entered into by the key consultants and the contractor agreement: a shareholders’ agreement; a subscription agreement; and directly with the investor under which the investor is given a step-in a management agreement. The developer’s management services right in case of developer default. Combined with its ownership of and the construction procurement arrangements will be documented the land, the investor has the ability to take over and continue the under the management agreement; the parties’ funding commitments project itself if its relationship with the developer fails. and the drawdown mechanics will be provided under the subscription The third key feature is the funding arrangements which parallel agreement. the employer’s payment arrangements under the building contract. A shareholders’ agreement will establish the governance arrangements These provide for monthly payments in arrears of sums certified by covering decision-making over variations to plans and specifications, the architect or contract administrator as the value of work carried construction procurement, the business plan, lettings and other matters out on site in the preceding month. Other costs, such as consultants’ via the board composition and a list of reserved matters requiring the fees, agents’ fees or payments to a local authority, are rolled up consent of both parties. It will also deal with the profit payable to into the same monthly payment cycle. The usual procedure is that the developer, which will take the form of a promote or carry, the applications for funding are made on a monthly basis supported arrangements for debt financing, transfers of interests to third parties, by evidence showing what sums are due (architects certificates, which will usually be prevented during the development period, and invoices, etc.) and are signed off by the investor’s retained monitoring the eventual exit mechanic or liquidity event. surveyors. There will invariably be a funding cap and all cost With that in mind, how are the essential elements of a forward overruns above the agreed contingencies will be the responsibility funding detailed above transcribed into a joint venture? of the developer. The fourth essential element is the letting of the building. The developer is tasked with securing lettings and typically there is an 4 Land Transfers agreed letting strategy which it must implement. Once the terms of a letting are agreed with a tenant and approved by the investor, the The land will be acquired by the joint venture directly. This may be developer arranges for the negotiation of any agreement for lease, on the basis of a novation of the contract for sale or a subsale of the if it is a pre-let, and of the lease and for exchange of agreements or property to the joint venture company or, where the developer owns completion of the lease. the land already, by means of a contribution of the land by transfer The last key element is the developer’s profit payment. This to the joint venture company in return for the issue of shares. The becomes payable when the building has been practically completed usual constraint is the level of SDLT or transfer tax now levied on and lettings have been completed of all, or the agreed percentage, land transfers. The developer will be keen to avoid doubling up on of the net internal area in the new building. It is a cash payment transfer costs. Alternatively, the developer may have set up a single calculated by reference to a simple formula. purpose company to acquire the land and this company may become the joint venture vehicle. The formula will provide for the capital value of the completed development to be established by multiplying the aggregate annual The issue that is common to the conventional forward funding is rents payable under all the completed leases by the agreed cap the appropriate value for the land. Is it the cost to the developer of rate and deducting the aggregate development costs funded by acquiring the site and getting planning permission or is it the market the investor and deducting an agreed interest roll up to reflect the value of the site at that date? This is for negotiation at the time but opportunity cost to the investor of its funding. Often there will investors are usually reluctant to allow profit to be extracted by a be multiple cap rates applying to successively increasing slices of developer before the project is completed. rent so as to provide an incentive for the developer to get the best rents. The interest roll up has historically been at a rate somewhere 5 Development Procurement between the agreed cap rate and interest rates. When cap rates were lower than interest rates, this meant that the developer was getting Under a forward funding agreement, the developer undertakes the benefit of cheaper funding. the primary responsibility for developing the project including With cap rates fixed under the formula, the only variables will be designing, constructing and letting it. Indeed there is a separate rents and development costs. It will be apparent that if development supply for VAT purposes between the investor and the developer, costs reduce or if rents increase, the developer’s profit will increase. in addition to the VATable supply between employer and contractor This could give an incentive for the developer to try to reduce the arising under the construction contract. specification in some way, so as to reduce cost at the expense of the Whilst market practice varies as to whether the developer takes on a long-term quality of the project, or to artificially increase rents by design responsibility to the investor, the developer usually takes on providing enhanced tenant incentives to boost the rent per square construction responsibility. The effect of this is that if a construction foot. These are usually dealt with by preventing variations to the defect emerges in the project at a later date, the investor can claim specification which reduce quality and by preventing over-renting against the developer as well as against the contractor under the and by restricting tenant incentive packages to market levels. collateral warranty. In turn, the developer will have a claim against the contractor it appointed. Developers usually try and back-to-back 3 Forward Funding Via a Joint Venture the two streams of liability together so as to minimise their exposure. One significant area where the developer will be exposed is cost Today these deals are more often done indirectly through a joint overruns. Because the developer has taken on the primary development venture vehicle, whether it be a limited company, a limited responsibility, it is liable for cost overruns where development costs partnership or a JPUT. It may be a bilateral joint venture between run over budget and blow through any contingency. The investor will a capital partner and an operating partner, where the equity split deal with this by putting a cap on its funding commitment and by may be 90/10, or it may be a consortium joint venture where there requiring cost to complete certificates on each quarterly drawdown is more than one capital source and all parties are equal investors. showing no cost overrun as a condition to funding. If there is one,

2 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray LLP Forward Funding Now!

they will require the overrun to be funded by the developer before it subscription agreement with the JV company under which it will pays the next drawdown notice. agree with the JV company to fund its share of development costs Under a joint venture, the project is procured very differently. Rather by means of subscription for shares or the advance of shareholder than the developer appointing the consultants and the contractor, loans. The developer will agree to fund its pro rata share under the JV company will enter into the consultants’ appointments and the subscription agreement as well. The developer, in its role as the construction contract directly. The developer will take on a manager, will manage the drawdown process on behalf of the joint development management role under a management agreement. venture company and arrange for payment of the development costs. Whilst the extent of the management obligations under a management The drawdown mechanics will follow those typically contained in agreement is to be negotiated, it is not usual for the developer to take a funding agreement. Drawdowns will be made monthly in arrears primary responsibility for building the project and so to take design against architects certificates or invoices showing the sums that have or construction liability. In contrast to the position in a forward been incurred during the preceding month and which are due for funding, the investor’s recourse for a defect is through the joint payment. The investor will usually appoint monitoring surveyors to venture company’s claim under the consultant’s appointments and monitor progress and review drawdowns. the building contract. There is no need for collateral warranties to be Establishing whether there are cost overruns will be dealt with in a given to the investor. similar way to a forward funding. Each month the cost consultant The shareholders’ agreement and the management agreement govern will specify what, in its view, the construction cost to complete the construction procurement methodology. Cost overruns will not is and the manager will produce an updated development budget be the responsibility of the developer and will be dealt with in the showing updated total development costs and costs incurred to funding arrangements (see below). date and any remaining contingency. If a cost overrun is identified, If the project is shovel ready, the detailed plans and specifications which is outside any allowance pre-agreed between shareholders, will be part of the agreed business plan. If it is not, the shareholders’ the investor will be entitled to stop further funding until the situation agreement and the management agreement will need to contain is resolved even though it may not yet have hit its maximum the procedure by which the general arrangement drawings and commitment. The developer is not usually required to fund cost specifications are produced and approved by the investor. Itis overruns, in contrast to the position in a forward funding agreement. important for the investor to fix the nature, extent and quality of the Instead the investor is given the right to require further funding to project that it will be funding. Variations will be dealt with through be put in by the parties if it considers it necessary to save the project the governance arrangements in the shareholders’ agreement and (e.g.: to cure a default under a loan or to fund cost overruns). This material changes will require board approval. is sometimes called emergency funding and is usually optional for The means by which the investor protects itself against developer both parties. If the developer decides not to contribute its share, the failure in a joint venture will differ as well. Instead of termination of investor may make up the shortfall by making an interest bearing the bilateral funding agreement and use of step in rights to continue loan and may convert the loan into shares at a later date thereby the project, the investor will exercise its rights under the shareholders diluting the developer. agreement to take control of the company after a developer default, terminate the management agreement and bring in another project manager to manage completion of the project. Other consequences 8 Developer’s Profit will be that the developer will lose its right to a promote or carry (see below) just as it would lose its right to a developer’s profit on The developer will be incentivised by means of a promote or carry termination of a funding agreement. The investor is also given a under the joint venture model payable on exit instead of a profit default call option over the developer’s interests in the joint venture payment payable when the building is completed and let and at a discount to market value which the investor may decide to calculated by reference to pre-agreed cap rates as under a bilateral exercise as well. funding agreement. Following a sale of the completed and stabilised project by the joint 6 Lettings venture vehicle, the net proceeds of sale will go through a waterfall in the shareholders’ agreement. This will provide for the payment Lettings will be managed in the same way as under a conventional of, or the making of reserves to cover, all liabilities, for the return of forward funding agreement with an agreed letting strategy which all capital invested by the two parties, for payment to the parties of will be kept updated under the business plan. Implementation of the the agreed hurdle rate of return (be it an IRR, an equity multiple or letting strategy will be managed by the developer in its capacity as both) and finally for payment to the two shareholders of the surplus manager under the management agreement. Changes to the letting in different proportions to their pro rata entitlements so that the strategy will constitute a change to the business plan and so require developer receives more (the difference being the promote or carry). approval by the investor. For an investor, there are some advantages to a promote. The first is The developer is not entitled to a letting fee when it achieves a that it is paid out of actual sales proceeds which provide the cash out letting under a conventional funding agreement and is usually not of which to make the payment. The second is that a promote reflects entitled to one in the joint venture model either, although third market cap rates and values at the time because sales proceeds party letting fees are of course a cost to be paid by the JV company. reflect a market price in contrast to a forward funding where the However, sometimes it is agreed that letting fees are payable to the payment is derived from a valuation formula using pre-agreed cap developer/manager in which case third party agents’ fees become rates which may have moved when the investor comes to sell. The the responsibility of the developer/manager. third is that the promote waterfall requires the return of all capital invested and the achievement of a hurdle IRR to the investor before the developer is entitled to earn its profit. In a forward funding, 7 Investor’s Funding Commitment there is no certainty that the investor will get its required return.

Instead of a contractual commitment to fund the developer’s costs under a bilateral funding agreement, the investor will enter into a

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 3 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray LLP Forward Funding Now!

9 Conclusion Iain Morpeth Ropes & Gray International LLP Construction projects continue to rely on the availability of forward 60 Ludgate Hill funding and, although this article has only been able to touch on London EC4M 7AW some of the issues that arise when a forward funding elides with a United Kingdom joint venture, it will be apparent that its essential elements can be Tel: +44 20 3201 1639 accommodated in a joint venture relationship. Email: [email protected] URL: www.ropesgray.com Forward funding will continue to evolve and both approaches described above are flexible enough to accommodate endless variations. Nevertheless, it is nice to see old legal technology coming Iain Morpeth is a partner in Ropes & Gray LLP and is chair of its back in a new form. international private equity real estate practice. He advises private funds, investment banks, endowments, sovereign wealth funds and other investors, as well as sponsors and operating partners, on real estate related transactions. Iain has a wide experience of transaction types including real estate M&A, real estate private equity, joint ventures, co-investment, acquisitions and disposals of shares, debt and property assets, development projects, earn outs and PFI as well as preferred equity, mezzanine lending, restructurings, structured finance, work outs and outsourcing. He is an English solicitor and is located in the firm’s London office.

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

4 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 2

Argentina

Marval, O’Farrell & Mairal Diego A. Chighizola

“equivalent surface” determined according to the location of 1 Real Estate Law the land. The Inter Ministerial Council of Rural Lands (Consejo Interministerial de Tierras Rurales), the enforcement agency of 1.1 Please briefly describe the main laws that govern the new law, defines the “equivalent surface” considering: (i) the real estate in your jurisdiction. Laws relating to proportion of “rural lands” in relation to the municipality, department leases of business premises should be listed in and province; and (ii) the potential and quality of rural lands for response to question 10.1. Those relating to zoning their use and exploitation. Furthermore, foreign investors may not and environmental should be listed in response to own more than 15% of the real property in the country, province or question 12.1. Those relating to tax should be listed in municipality, and the same foreign owner shall not exceed 1,000 response to questions in Section 9. hectares of the “core area”, or the “equivalent surface”. Likewise, under security zone regulations, foreign ownership in certain areas The Argentine Constitution and various treaties on human rights to of national security, such as border zones, requires the prior consent which Argentina is a party expressly provide for the right to private of the relevant federal agency, which is normally granted, although, property. Real estate in Argentina is governed by the Argentine Civil it may take some time to obtain. In principle, acquisition of real and Commercial Code (the “Code”) and by other specific laws (i.e., property in the City of Buenos Aires (a practice that is being followed Law 13,512 on Propiedad Horizontal and Law 24,441 governing by other local jurisdictions) by a foreign entity (in particular, when trusts). Law 26,737 imposes limits on ownership or possession of more than one asset is being acquired) may require the registration rural land by foreign individuals or legal entities. of a branch of such foreign entity before the public registry (“IGJ”).

1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? 3 Real Estate Rights

It is not applicable in Argentina. 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual 1.3 Are international laws relevant to real estate in your between the parties? jurisdiction? Please ignore EU legislation enacted locally in EU countries. The types of rights over land are outlined in laws passed by the Argentine Congress, mainly in the Code, which include: ownership; No, international laws are not relevant to real estate in Argentina, co-ownership; usufruct; easements; timeshare; private cemetery with the exception of applicable treaties on human rights (please (graveyard); surface (surface area – superficie); propiedad horizontal; refer to question 1.1) and general rules provided by investment and real estate condos (conjuntos inmobiliarios). protection treaties. 3.2 Are there any scenarios where the right to land diverges 2 Ownership from the right to a building constructed thereon?

No. As a general rule, buildings or constructions are attached to the 2.1 Are there legal restrictions on ownership of real estate real property forming an indivisible unit. The only exception is the by particular classes of persons (e.g. non-resident recent incorporated right of surface that may allow separation of persons)? land and construction over it.

According to Law 26,737, foreign ownership of rural land shall not 3.3 Is there a split between legal title and beneficial title exceed 15% of the total amount of “rural lands” in the Argentine in your jurisdiction and what are the registration territory. This percentage is to be calculated also in relation to the consequences of any split? Are there any proposals territory of the province or municipality where the relevant land to change this? is located. Ownership by the same foreign owner (i.e. foreign individuals, foreign entities or local entities controlled by a foreign No, there is no split between legal title and beneficial title in person) shall not exceed 1,000 hectares of the “core area”, or the Argentina.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 5 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

4 System of Registration 5.2 How do the owners of registered real estate prove their title?

4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? The owners of registered real state prove their title through the certificate that the real estate registry of the applicable jurisdiction issues stating that the title has been duly registered. In general, all land related to real estate rights (and its encumbrances) over such property must be registered with the local real estate registry. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need

Argentina to be provided to the land registry for the registration 4.2 Is there a state guarantee of title? What does it of ownership right? Can information on ownership of guarantee? registered real estate be accessed electronically?

There is no title insurance system in Argentina. Transactions cannot be completed electronically, but certain filings may be accessed online. Broadly speaking, information 4.3 What rights in land are compulsory registrable? What on ownership is not available online; in the city of Buenos Aires’s (if any) is the consequence of non-registration? registry, though, it is possible to obtain the identity of the owners of a given property online. For purposes of requesting registration, Real estate rights over land that are not registered are not effective a copy of the public deed together with a formal petition should be against third parties. submitted to the relevant land registry.

4.4 What rights in land are not required to be registered? 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? Most contractual rights over property (other than rights in rem) do not need to be registered. Some exceptions may apply to leases. Yes, compensation can be claimed under general rules of tort liability.

4.5 Where there are both unregistered and registered land or rights is there a probationary period following first 5.5 Are there restrictions on public access to the registration or are there perhaps different classes register? Can a buyer obtain all the information he or qualities of title on first registration? Please give might reasonably need regarding encumbrances and details. First registration means the occasion upon other rights affecting real estate and is this achieved which unregistered land or rights are first registered by a search of the register? If not, what additional in the registries. information/process is required?

It is not applicable in Argentina. There are no restrictions on public access to the register, but the petitions can only be signed by certain professionals (i.e., lawyers, notary publics, engineers, accountants, surveyors or real estate 4.6 On a land sale, when is title (or ownership) transferred brokers). to the buyer?

Ownership is transferred to the buyer upon the date on which the 6 Real Estate Market notarial deed of conveyance (escritura pública) is executed. The Code provides that possession by the acquirer is not required for the conveyance of legal title in: (i) mortgage deeds; and (ii) easements. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally be involved in a real estate transaction in your 4.7 Please briefly describe how some rights obtain priority jurisdiction? Please briefly describe their roles and/or over other rights. Do earlier rights defeat later rights? duties.

Priority against third parties is obtained through timely registration of (a) Selling and purchasing agents (or realtors) the notarial deed with the relevant real estate registry. Priority among A real estate broker may intervene as intermediary on behalf of different registrations is granted by the date and order number of the either the seller or the purchaser. notarial deeds given by the real estate registry at the time of the filing. (b) Lawyers Legal advice is recommended in connection with negotiation or 5 The Registry / Registries execution of any binding document. Lawyers usually provide tax and foreign exchange advice for transactions involving international parties. 5.1 How many land registries operate in your jurisdiction? (c) Notaries If more than one please specify their differing rules and requirements. The deed of conveyance has to be executed before a notary public, who is responsible for verifying that the seller has good title on the There are 24 in total, one real estate registry for each Argentine property. province and another one for the City of Buenos Aires. Each real (d) Others estate registry has its own particular rules. A surveyor (agrimensor) should check whether the boundaries of

6 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

any property located outside city centres as described in the real Among other significant development transactions, Consultatio estate registry correspond to the parties’ understanding of the same. Real Estate is developing “Catalinas Norte”, which at 150 million will be the tallest building in the City of Buenos Aires, to be used as office space. 6.2 How and on what basis are these persons remunerated? “Nordelta” is a luxury housing project being developed by Consultatio Real Estate in Tigre, Province of Buenos Aires. Some of the persons detailed above, such as notaries, may have Nordelta is a city centre comprised of 23 gated communities, a golf regulations on fees depending on local rules and regulations; course, shopping centre, private schools, hotels, offices and other although, in many cases these regulations are not followed by the services. Currently, there are more than 30,000 people living in parties involved. In general, fees are agreed as a percentage of the Nordelta. It is estimated that over USD 1 billion has been invested transaction price. in the development, and the project is still being further developed Argentina and exploited. A similar city centre is currently being developed in Escobar, 6.3 Is there any change in the sources or the availability of capital to finance real estate transactions in your Province of Buenos Aires. The development, “Puertos del Lago”, jurisdiction, whether equity or debt? What are the will consist of 20 gated communities over 1,440 acres of land. main sources of capital you see active in your market? Grupo Monarca is developing the following projects, which are currently under construction: Condo “Pradera Santa Bárbara”; In recent years, there has been a great interest from the private sector Condo “Ribera Nordelta”; and Condo “Pasionaria San Isidro”, in in the issuance of debt and equities in the domestic and international addition to housing developments within “Nordelta”. All of the capital markets, and several programmes of mortgage loans for aforementioned are residential housing complexes. housing construction have grown in importance, mainly as a result Grupo ODS developed the “Artmaría” project in Puerto Madero, of the Pro.Cre.Ar programme, the launching of new loans with UVA which was started in 2009 but was not finished until 2014. Artmaría and UVI (household units) and new mortgage loans from banks like is made up of five main buildings comprising a mixture of residential Ciudad or Nación. and office space. TGLT S.A. is currently involved in the development of several 6.4 What is the appetite for investors and/or developers residential complexes, namely: “Astor Palermo”; “Astor Nuñez”; to invest in your region compared to last year and “Forum Puerto Norte”; “Venice”; and “Forum Alcorta”, among what are the sectors/areas of most interest? Please others. give examples.

During the 2008 to 2015 period, the construction sector’s growth 6.5 Have you observed any trends in particular market decelerated due to, among other factors, the financial crisis that struck sub sectors slowing down in your jurisdiction in the international markets, which resulted in the absence of credit for terms of their attractiveness to investors/developers? Please give examples. investors, increased foreign exchange restrictions, and continued depreciation of the US dollar vis-à-vis the Argentine Peso. In addition, it is worth mentioning that due to the aforementioned restrictions, Yes, big surfaces for hypermarket in the construction of houses and during this period the private financial sector did not increase the working spaces are slowing down in Argentina, starting to focus sources or amount of finance granted for real estate investments. on the worldwide trend of small premises with little footage and amenities with low or premium (for high income public) expenses. Since the administration change at the end of 2015, the current For more information please refer to question 10.8 below. government has announced and executed several significant economic and policy reforms that have resulted in the revitalisation of the capital market and in an increase of interest from the private 7 Liabilities of Buyers and Sellers in Real sector in the issuance of debt and equities in the domestic and Estate Transactions international capital markets. A top priority for the current Government is attracting foreign direct investment. In that sense, Argentina has relaxed foreign exchange 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? restrictions and passed a new tax amnesty that has resulted in the declaration of more than USD 116 billion. Execution of the deed of conveyance between the buyer and seller In spite of these efforts, due to foreign exchange regulations, lack and registration of such deed with the local real estate registry of financing options and high inflation rates, there has been a great are required to transfer real estate; and once executed, the deed reduction in construction and real estate activity in general. In fact, should be filed for registration at the relevant real estate registry. an overview of the real estate market information would show few Beforehand, parties may execute a preliminary contract (Boleto de residential sector transactions in recent years. Compraventa). Regulations state that sellers must inform the tax The commercial office sector has suffered for similar reasons, in authority about every offer, negotiation or transfer involving real addition to slow business activity in general. The rural sector has property for an amount exceeding ARS 300,000 (approximately also experienced a decline in investment, following a series of USD 35,000). government policies that have restricted meat exports and fixed wheat and soy prices. 7.2 Is the seller under a duty of disclosure? What matters The hotel sector, which originally benefitted from the tourism boom must be disclosed? in Argentina, ended up suffering due to an increase on costs as a consequence of inflation and the decrease of the competitiveness Yes. Under the general duty of good faith common to any contract, the originally favoured by foreign exchange. seller should reasonably disclose any encumbrance or hindrance which

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 7 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

may impede the buyer from fully enjoying the property. Additionally, No. 1-E/2017 further reduced the Mandatory Minimum Stay Period the parties generally agree by contract to these kinds of representations to zero days. In accordance with Communication ‘‘A’’ 6436, in and warranties, whereby the seller ensures that he or she has good title. force as from January 20, 2018, all of the rules previously regulating In addition, disclosure is required by the consumer protection law. foreign exchange transactions were removed (unless otherwise indicated) and replaced by the following rules and regulations: ■ Any individual or entity is able to freely trade through the 7.3 Can the seller be liable to the buyer for MELI. misrepresentation? ■ All foreign exchange transactions must be conducted through an authorised financial entity. Please refer to question 7.4 below. ■ The hours of operation restrictions for the foreign exchange

Argentina market were removed. 7.4 Do sellers usually give any form of title “guarantee” ■ The obligation of Argentine residents to comply with the or contractual warranties to the buyer? What would survey of foreign assets and liabilities even if there was no be the scope of these? What is the function of any inflow of funds to the MELI and/or no future access to it for such guarantee or warranties (e.g. to apportion risk, transactions to be declared. to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying ■ The obligation to execute foreign exchange tickets for out his own diligence? each foreign exchange transaction was removed; provided, however, that registration of all transactions by the intervening financial entity remains in effect. Real estate transactions are customarily negotiated on an “as is” basis. However, the Code provides for certain implied warranties ■ Financial entities must comply with prevention of anti-money laundering and financing of terrorism rules. on a sale granted by the seller to the buyer. These warranties consist of the following: (i) that the seller has good title and the property ■ Exchange transactions must be made at an exchange rate is free of encumbrances (Garantia de eviccion); and (ii) that the freely agreed between the parties. property has no hidden defects (Garantia por vicios redhibitorios). 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the 7.5 Does the seller retain any liabilities in respect of the borrower? property post sale? Please give details.

Mortgages and trusts are the most common collateral in connection The only liabilities that the seller retains post sale are the warranties with real estate. A mortgage remains in full force and effect until all described in question 7.4 above for three years after the ownership secured amounts have been paid in full or the mortgage is otherwise of the land is transferred to the buyer. cancelled by mutual agreement. However, unless extended, the registration of a mortgage will automatically expire 20 years as from 7.6 What (if any) are the liabilities of the buyer (in addition the registration date. to paying the sale price)?

8.3 What are the common proceedings for realisation of There are certain legal charges attached to real property relating to mortgaged properties? Are there any options for a municipal and provincial taxes, expenses and maintenance of building mortgagee to realise a mortgaged property without common areas and the charges levied by the utilities companies. involving court proceedings or the contribution of the mortgagor?

8 Finance and Banking Mortgages may be realised by judicial or private procedures. Regarding judicial procedures, the mortgagee may commence an 8.1 Please briefly describe any regulations concerning ordinary declaratory trial, an expedited trial, a mortgage expedited the lending of money to finance real estate. Are the trial or a provincial foreclosure trial. rules different as between resident and non-resident If the debtor issues mortgage letters (letras hipotecarias), the persons and/or between individual persons and mortgagee may realise it by private procedure without the contribution corporate entities? of the debtor. The mortgagee may: a) request directly from the register the issuance of a second copy of the deed; or b) require the payment Since the administration change at the end of 2015, the Government of the debts that exist on the property regarding ordinary expenses, has implemented a series of reforms related to foreign exchange taxes and fees that weigh on the property. If the debtor does not pay restrictions, including the removal of certain currency controls the debt within ten (10) business days from the request, the mortgagee that were imposed under the previous administration, in order to may auction the property as if debt free. In such case, the lender may provide greater flexibility and replace the “Mercado Único y Libre order itself, without court intervention, a public auction sale of the de Cambios” (Foreign Exchange Market, or ‘‘MULC’’). property by an auctioneer appointed by and with the usual conditions Through Executive Decree No. 27/2018 and Central Bank of that place. Notices must be published. The base of the auction will Communication ‘‘A’’ 6244, the Argentine Government established be the amount of debt at the time of the sale. a free foreign exchange market (‘‘MELI’’).

On December 18, 2015, through Ministry of Treasury and Public 8.4 What minimum formalities are required for real estate Finance Resolution No. 3/2015, the then new Government: (i) reduced lending? the percentage of deposit to zero; and (ii) changed the mandatory minimum stay period of funds in the country to 120 calendar days as None, except for the registration of mortgages or trusts over land of the inflow date of such amount (the ‘‘Mandatory Minimum Stay with the relevant real estate registry. Period’’). On January 5, 2017, the Ministry of Treasury Resolution

8 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

ABL provides for two restructuring proceedings: (i) the out-of-court 8.5 How is a real estate lender protected from claims restructuring agreement; and (ii) the reorganisation proceedings. against the borrower or the real estate asset by other creditors? Upon admission by the court of either an out-of-court restructuring agreement or reorganisation proceeding all pre-petition claims and Trusts are also widely used as security devices. A trust will be actions in connection with unsecured monetary claims are stayed. formed upon the transfer of ownership in trust of a property by a An out-of-court restructuring agreement or reorganisation plan to settlor to a trustee who will undertake to exercise the rights in respect which is consented by more than 50% of the unsecured creditors (on of it for the benefit of certain beneficiaries. The trust property forms a headcount basis) and more than 66⅔% of the unsecured credits a separate estate from both the trustee or the settlor’s estate (except (in principal amount) and endorsed or approved by the court will be in the case of fraud). The trust’s duration may not exceed 30 years. binding on all unsecured creditors of the debtor (whether they have The benefits of the trust in guarantee over the mortgage include consented to the restructuring or not). Argentina the following: the property remains in bankruptcy, separate from the debtor’s assets; an out-of-court foreclosure is allowed; and the 8.8 What is the impact of an insolvency process or a rotation of beneficiaries is easier. corporate rehabilitation process on the position of a real estate lender?

8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? Filing of a petition for confirmation of an out-of-court reorganisation agreement does not have any effect on the enforcement rights on the In general, security can be avoided in limited cases related to the collateral of creditors secured with a mortgage or guarantee trust on debtor’s insolvency situation. real estate. Any creditor of the borrower may file at any moment a fraudulent Upon commencement of a reorganisation proceeding, in order to conveyance action under the Code seeking avoidance of any enforce any rights on claims secured with a mortgage or pledge, transfers for consideration having the effect of provoking or secured creditors must first file proof of claims in the reorganisation aggravating the insolvency of the debtor entered into by and between proceedings. the debtor and a third party who knew or should have known the Admission of a reorganisation proceeding does not trigger the insolvency situation of the debtor at the time of the transaction (the automatic stay of actions seeking the foreclosure of the collateral on “Fraudulent Conveyance Action”). If the Fraudulent Conveyance pre-petition claims secured with a mortgage and does not produce the Action is successful, the action is binding only against the plaintiff consolidation of the mortgage foreclosure proceedings pending as of and up to the amount of its credit. If the assets under the fraudulent the commencement date before the reorganisation proceedings court. transaction are lost for the creditor, a third party acting in bad Commencement of a reorganisation proceeding does not itself affect faith may be liable for the damages caused to the plaintiff; and a the rights and remedies of secured creditors on the collateral; provided third party acting in good faith may be liable for the amount of its that in case of manifest need or urgency (taking in consideration the enrichment. The statute of limitations for the filing of a Fraudulent convenience for the continuation of the business activities of the debtor Conveyance Action expires after two years from the date on which and the protection of the creditor’s rights) in any mortgage foreclosure the transaction was known or should have been known. The plaintiff proceeding the court may order a temporary stay of the realisation of has the burden of proof in the fraudulent conveyance action. the collateral and a temporary suspension of any injunction enjoining If the debtor is adjudicated bankrupt under the Argentine Bankruptcy the use of the collateral by the debtor, in both cases for a term of Law 24,522, as amended (the “ABL”), the court will fix the date not more than 90 business days. Any compensatory interests accrued of the debtor´s payment cessation or commencement of insolvency during the term of the stay or suspension not satisfied out of the (fecha de cesación de pagos), which may be a date that may not proceeds of the realisation of the collateral will enjoy the preference go back more than two years from the date of filing of the petition of administrative expenses in liquidation. for the debtor’s reorganisation, or of adjudication of bankruptcy Upon enforcement of the collateral, the proceeds will be applied to (if bankruptcy is adjudicated directly). The period between the the repayment of principal and interests accrued as of the payment date determined by the court as the general payments cessation date; provided that if the proceeds are not sufficient to cancel all date and the date of the filing of a petition for reorganisation or amounts due, any remaining balance will be deemed unsecured and, the adjudication of bankruptcy is defined as the claw-back period therefore, subject to the restructuring terms. (período de sospecha) (the “Claw-back Period”). In reorganisation proceedings, claims secured with guarantee trusts The granting of security (e.g., mortgage, pledge or any other are (de facto) subject to a similar treatment as claims secured with preference) in respect of debts not due and not secured under their a mortgage. original terms made by the debtor within the Claw-back Period In the event of liquidation (bankruptcy), secured creditors having filed are void. In addition, any other transactions detrimental to the proof of claims may request to the court the realisation of the collateral debtor’s creditors made by third parties with knowledge of the and satisfaction of their secured claims at any time. After prior notice debtor’s insolvency during the Claw-back Period are voidable (the to the receiver, the court will decide whether admitting or denying the “Avoidance Action”). The third party has the burden of proving that request which, if admitted, will proceed at an ancillary proceeding the transaction did not cause any detriment to the debtor’s creditors. (special liquidation proceeding). For other realisation procedures in The statute of limitations for the filing of an Avoidance Action the event of bankruptcy, please refer to question 8.9 below. expires after three years from the bankruptcy adjudication. However, the receiver may request court authorisation to satisfy the secured credit in full with liquid funds available if maintenance of the 8.7 What actions, if any, can a borrower take to frustrate collateral is beneficial for the creditors. To this effect the court may enforcement action by a lender? authorise the receiver to grant other securities or sell other assets. Immediately upon bankruptcy adjudication, the receiver may A borrower can frustrate enforcement actions by lenders and creditors continue with the business activities of the debtor. During the term in general by filing a restructuring proceeding under the ABL. The

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 9 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

of continuation, enforcement of collateral needed for the business If not agreed to the contrary, these alternatives shall be optional for exploitation is stayed when: (i) the secured credit is not due as of the secured parties or the security agent, if any, together with the the bankruptcy adjudication date and the receiver performs the possibility of selling the shares in a public auction as mentioned above. obligations due after such resolution in due time; (ii) the secured The secured parties or the security agent, if any, could acquire the credits are due as of the bankruptcy adjudication date but the shares sold in a public auction or through a private selling or an security is not admitted by a final and non-appealable resolution; or award process. (iii) the secured creditor consented to the stay of the enforcement. In addition in case of continuation, the court may also order the stay of Once the sale is completed, the secured parties or the security agent, if collateral enforcement proceedings at the request of an employees’ any, shall have accountability duties which can be judicially impugned. cooperative (formed for purposes of acquiring the debtor’s business) In any event, such procedure does not affect the validity of such sale. for a maximum term of two years. The foreclosure of privately issued and distributed securities Argentina not admitted to public offering implies an offer to purchase the securities to the general public and, hence, would be subject to the 8.9 What is the process for enforcing security over prior approval by the Argentine Securities Commission (Comisión shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, Nacional de Valores). can shares be appropriated when a borrower is in When a creditor has been adjudicated bankrupt, realisation of the administration or has entered another insolvency or collateral will be subject to the ABL. reorganisation procedure? Pursuant to the ABL, to the extent the creditor requested, and the court admitted, the special liquidation proceeding (please refer to question A share pledge agreement over said shares should be duly executed 8.8 above), the court will forthwith order the realisation of the collateral in accordance with the provisions of Section 2219 et seq. of the by public auction. Secured creditors acquiring the collateral in the Code. In order to perfect such pledge, the pledgers should deliver auction may set-off the purchase price with their credits after having to the secured parties or the security agent, if any, simultaneously with the execution of said agreement the following: (i) the share granted guarantee of preferred creditor. If the secured creditor does certificates issued by the company, representing the shares, which the not request the special liquidation proceeding, then the collateral will security agent shall hold and keep until all and each of the secured be realised upon any of the general available liquidation alternatives obligations have been completely and timely complied with, to the as further described below, in which event the security interest will be secured parties’ entire satisfaction or the security created by such attached to the proceeds of the collateral realisation: agreement is otherwise released; (ii) a certified copy of the notice to (i) Individual Public Auction: individual sales are made by the company giving notice of the creation of the pledge on the shares, public auction; provided that the court may also order the sale as provided in Section 215 of Law 19,550, as amended, together with through a bidding process in the manner contemplated above, the company’s receipt therefor; (iii) a certified copy of the relevant as deemed advisable. pages of the company’s stock ledger, evidencing the registration of (ii) Private Auction: secured creditors with real property security the pledge created on the shares in the name of the secured parties interests may realise the collateral by private auction if or security agent, if any, for its own benefit and for the benefit and in permitted under the terms of the security; provided that if favour of the secured parties; and (iv) a letter from the president of the the private auction is conducted after the publication of the notices informing the bankruptcy adjudication, then prior company or an attorney-in-fact being duly empowered and authorised notice of the private auction must be given to the court under for that purpose, acknowledging the creation of the pledge. penalty of voidance of the auction. Upon the occurrence of an enforcement event under said pledge (iii) Private Sale: the court may authorise the private sale of the agreement, the secured parties or the security agent, if any, may collateral after notice to the receiver if more beneficial to the proceed to the foreclosure of the pledge created on the shares without estate due to the nature of the asset, its reduced value or the any further demand or judicial or extrajudicial notice, by selling failure of the auction. Private sales could be delegated to the such shares in a public auction announced by the secured parties or receiver or a third party. the security agent, if any, (or its agent or representative thereof) with (iv) Securities: securities listed on securities exchanges or trading a prior notice of 10 (ten) business days published during 1 (one) day on over-the-counter markets must be sold at the exchange or on a legal newspapers of the jurisdiction where such shares should, market authorised by the court after notice to the receiver. in accordance with the pledge agreement, be located. The foreclosure of privately issued and distributed securities Simultaneously with creation of said share pledge, parties may not admitted to public offering implies an offer to purchase the agree on a special form of disposition (procedimiento especial de securities to the general public and, hence, would be subject to the venta) pursuant to the provisions of Section 2229 of the Code. prior approval by the Argentine Securities Commission (Comisión According to such section, the secured parties or the security agent, Nacional de Valores). if any, could sell such shares based on a certain base value given to such shares at the debt maturity date, as said by a mutually appointed third-party expert or by means of any other mutually 9 Tax agreed procedure or, if not otherwise agreed, by a third-party expert appointed by a judge by a simple petition formulated by the secured As a preliminarily matter, please bear in mind that Law 27,430 (the parties or the security agent, if any. “Tax Reform”) introduced several amendments to the Argentine tax regime, including the Income Tax Law (and indirectly, Property The sale of such shares may be made through a special process Sales Tax), Value Added Tax, Procedural Tax Law, among other mutually agreed by the parties, which could consist of selling said taxes. Several of such amendments have not been regulated and shares by a mutually appointed third-party expert or by the secured their scope is not yet clear. In addition, regarding such amendments parties or the security agent, if any, whether directly or through an case-law or tax authorities’ opinions have not yet been issued. As appointed third person at prices arising from certain negotiation a result, in certain cases our comments below refer to a reasonable segments or upon reports indicating current market values at time of position that should be confirmed once the regulation is issued. selling published either by certain specialised business chambers or by any other mutually agreed designated publisher.

10 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

Table footnotes: 9.1 Are transfers of real estate subject to a transfer tax? 1. Indeed, if the Argentine resident individual: (i) carries out a How much? Who is liable? business selling real estate; and/or (ii) builds and sells under the “Commonhold Property regime”; and/or (iii) parcels with the Yes, they are subject to a transfer tax. Please find below the applicable aim of urbanize and/or (iv) develops the so-called “Conjunto transfer taxes to the sale of real estate located in Argentina. Inmobiliario” (Country Clubs, Industrial Parks, etc.), then a) Income Tax and Property Sales Tax Income Tax applies at a 5%–35% rate. Income Tax or Property Sales Tax may apply depending on the 2. Indeed, if the Argentine resident individual: (i) carries out a business selling real estate; and/or (ii) builds and sells under the beneficiary of the income and the date of acquisition of the property. “Commonhold Property regime”; and/or (iii) parcels with the APPLICABLE TAX aim of urbanise and/or (iv) develops the so-called “Conjunto depending on DATE OF Inmobiliario” (Country Clubs, Industrial Parks, etc.), then Argentina ACQUISITION Payment of the Income Tax applies at a 5%–35% rate. Beneficiary From Until tax in charge of 3. If Argentina and the country of the foreign-resident have entered January December 31, into a treaty to avoid double taxation, such treaty may establish 1, 2018 2017 onwards ceilings to the rates applicable according to Argentine income tax law. Taxpayer files its tax return at 4. If Argentina and the country of the foreign-resident have entered the ending of into a treaty to avoid double taxation, such treaty may establish the fiscal year ceilings to the rates applicable according to Argentine income tax including the law. Income Tax Income Tax income and (30% during (30% during deducting costs, 5. If Argentina and the country of the foreign-resident have entered fiscal years fiscal years expenses, etc. into a treaty to avoid double taxation, such treaty may establish Legal entity beginning beginning However, the ceilings to the rates applicable according to Argentine income tax incorporated prior to prior to public notary law. in ARG December 31, December 31, taking part in b) Stamp Tax 2019. 25% 2019. 25% the operation from such date from such should make Stamp tax is a provincial tax levied on public and private onwards). date onwards). a withholding instruments executed in Argentina. If the instrument is executed upon the abroad, the Stamp Tax applies to the extent that negotiated assets payment of the price as an are located in Argentina or the agreement/operations have effects advance tax within Argentina. In general, this tax is calculated on the economic payment. value of the agreement and the parties who executed the document Taxpayer files are severally and jointly liable for its payment. In general, the its tax return at provinces and the City of Buenos Aires establish withholding the ending of regimes through which a notary public is obliged to withhold and Income Tax the fiscal year (15%) on the including the pay the tax to the authorities. The average general rate across the price after income and different jurisdictions is 1%; however, when the agreement refers to Property deducting deducting costs, Sales Tax real estate, the rate is higher (e.g. in the City of Buenos Aires, while acquisition expenses, etc. (1.5%) on the general rate is 1%, the one applicable to the sale of real estate ARG-resident cost and However, the the price, individual allowed public notary is 3.6%). unless certain amortisations taking part in exceptions Offers accepted tacitly by means of an act (for example, payment, – if any – the operation apply.1 delivery of documents, issuance of an invoice, etc.) or those written unless certain should make exceptions a withholding documents which do not reproduce the content of the offer, its apply. 2 upon the enunciations or its core elements should not be under the scope of payment of the Stamp Tax in certain provinces. price as advance tax payment. Income Tax Income Tax 9.2 When is the transfer tax paid? (the taxpayer (the taxpayer Legal entity is allowed is allowed incorporated Argentine Property Sales Tax: Such tax becomes due when the real property to choose to choose abroad payer/public between between is deemed to be transferred (i.e., the time a preliminary contract is (without a notary make the a 17.5% a 17.5% executed and possession is granted, or at the time the public deed of permanent withholding of applicable on applicable on establishment the tax. conveyance is executed; whichever occurs first). the price or the price or in Argentina) 35% on the 35% on the Income Tax: Regarding Argentine-residents, this tax is payable real gain).3 real gain). 4 on a yearly basis. However, public notaries are obliged to make a Income Tax withholding of 3% on the price as an “advance payment”. Regarding Property Foreign- (15%) on the foreign beneficiaries, this tax is paid through a withholding to be Sales Tax resident price after Argentine (1.5%) on the made by the payer/public notary taking part in the operation. Such individual deducting payer/public price if it is withholding, once paid to the tax authorities, is deemed as definitive (without a acquisition notary make the demonstrated permanent cost and withholding of (i.e., the foreign beneficiary is not obliged to file any tax return or to that the establishment allowed the tax. pay the tax before Argentine authorities). seller is an in Argentina) amortisations individual. Stamp Tax: The term (usually 10 or 15 days) to pay the tax is – if any.5 triggered once the agreement is executed.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 11 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

c) Other taxes 9.3 Are transfers of real estate by individuals subject to Please bear in mind that the provinces, the City of Buenos Aires and income tax? Argentine municipalities collect property taxes and other taxes that remunerate the rendering of public services (e.g., tax remunerating Yes, transfers are subject to income tax. Please refer to the answer lighting, sweeping, cleaning services). to question 9.1 above.

9.6 Is taxation different if ownership of a company (or 9.4 Are transfers of real estate subject to VAT? How other entity) owning real estate is transferred? much? Who is liable? Are there any exemptions?

Yes, the sale of shares corresponding to Argentine companies that Argentina As a general principle, the transfer of real estate is excluded from are owners of real estate, in certain cases, receive a different tax the scope of VAT. However, constructions and works made on the treatment under Income Tax. If the shares are sold by an Argentine- parties’ own or third parties’ property are included in the scope of resident entity, the same rate would apply that is applicable in this tax. As a result, if the company/person that built on their own/ the case of real estate (i.e., 30% for fiscal years beginning prior third party’s property sells such property, VAT applies only on the to December 31, 2019, and 25% from such date onwards). If the price of the constructions or works but not on the value of the land shares are sold by Argentine individuals, the applicable rate would or the value of existing constructions or works. In other words, in be 15% of the price, after the deduction of the acquisition cost. these cases, VAT taxes the construction or works on the property but not the property itself. If the shares are sold by foreign residents (whether individuals or entities), the rate would be 13.5% on the price or 15% on the “real gain”, in both cases to the extent that they do not reside in a 9.5 What other tax or taxes (if any) are payable by the non-cooperative jurisdiction or the funds do not come from non- seller on the disposal of a property? cooperative jurisdictions. (The Argentine Tax Authority publishes a list evidencing which jurisdictions are considered as Non- The transfer of funds from and to bank accounts in Argentina is cooperative.) Otherwise, a 31.5% rate would apply. subject to the Tax on Debits and Credits on Bank Accounts at a rate of 0.6% for each debit/credit. Thus, when a buyer transfers Given certain conditions, the results from a sale, transfer or the respective funds from its account in an Argentine financial disposition of shares, securities representing shares and certificates institution, he/she will be subject to the collection of the tax (at a of deposit of shares that are carried out through stock exchanges or 0.6% rate); and when such funds are accredited in the seller’s bank stock markets authorised by the Argentine Securities and Exchange account, the tax is triggered again (at a 0.6% rate). Thus, the tax Commission are exempted. applicable to the operation is 1.2%. If the funds are transferred In addition, the sale or transfer by foreign beneficiaries of shares between accounts in financial institutions abroad, in principle, this or other participations in foreign entities when at least 30% of its tax is not applicable. value derives from assets located in Argentina will be taxable at a In addition of transfer taxes, please be aware of the following taxes: rate of 15% calculated on the actual net gain or at a rate of 13.5% of the sale price, in proportion to the value that corresponds to the a) Tax on presumed minimum income: Argentine assets. Having said that, indirect transfers would not be This tax applies to all assets of Argentine companies and other taxed, to the extent that it can be proved that the transfer was carried entities, such as Argentine trusts (“fideicomisos”); common out within the same economic group, according to regulations which investment funds, and permanent establishments of foreign entities issuance is pending. This tax on indirect sales will only apply to and individuals in Argentina. The tax only applies if the total value participations in foreign entities acquired after the entry into force of the assets exceeds ARS 200,000 at the end of the entity’s financial of the tax reform. year. In this case, the total value of the assets will be taxed at the rate of 1%. 9.7 Are there any tax issues that a buyer of real estate Foreign beneficiaries are taxed at a 1% rate for (i) their urban should always take into consideration/conduct due properties to the extent they are exploited through an economic diligence on? activity, and (ii) their rural properties. Normal corporate income tax is allowed as a payment on account It is crucial to ensure that (i) there is not any seizure freezing the of this tax. Also, any tax payable under this heading is allowed as assets of the seller or any other kind of lien on the real estate to be a credit against normal corporate income tax for the following 10 acquired, and that (ii) there is no tax debt (at provincial or municipal years. level) levied on the asset to be acquired. According to Law 27,260, published in the Official Gazette on July 22, 2016, this tax has been abrogated for fiscal years starting as from 10 Leases of Business Premises January 1, 2019. b) Personal Assets Tax: 10.1 Please briefly describe the main laws that regulate The Personal Assets Tax Law 23,966, as amended, provides that all leases of business premises. individuals domiciled in Argentina are subject to a tax upon their worldwide assets. Individuals not domiciled in Argentina are only Leases are governed by the Code and the Urban Leases Law liable for this tax upon their assets located in Argentina. (“ULL”). Furthermore, in November 2016, the Senate approved a Foreign beneficiaries do not have to pay this tax regarding real new bill on leases (the “Bill”) submitted by the Federal Executive estate that was subject to tax on presumed minimum income, as we Branch that amends some of the provisions of the Code. On October explained in a). 16, 2018, the General Legislation Committee of the Lower House The tax rate is of 0.25% on the value of the assets exceeding the issued a favourable opinion of this Bill, and it is expected to be amount of ARS 1,050,000. approved by the end of 2018. Certain law provisions (the bulk of

12 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

them aimed to protect the lessee) are considered public policy and therefore mandatory for the parties. Lease contracts need only be in 10.5 In what circumstances are business leases usually writing. A notarial deed or registration is not required. terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party 10.2 What types of business lease exist? to be compensated by the other for any reason on termination? The types of business leases that exist are urban leases, rural leases and commercial leases, each of which is governed by a different set In addition to usual termination clauses (term expiration, default, of rules. breach of contract, etc.), termination of the lease is triggered by the total destruction of the leased property. In all cases where

the termination is not caused by the fault or wilful misconduct of Argentina 10.3 What are the typical provisions for leases of business the parties, such termination will not result in any obligation for premises in your jurisdiction regarding: (a) length of compensation, except for the repayment of all sums paid in advance. term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of Notwithstanding the minimum terms indicated in the answer to item the tenant; and (ii) transfer of lease as a result of a (a) of question 10.3, after the first six months of the lease have corporate restructuring (e.g. merger); and (f) repairs? elapsed, the tenant has a legal right to terminate the lease prior to the expiry of the minimum contractual term. In order to benefit from (a) Length of term this right, the tenant must give the landlord notice of its decision to terminate the lease at least 60 days prior to the date on which it The ULL provides for a minimum term of three years for urban intends to vacate the property. Should the tenant exercise this right business commercial leases. Any lease contract entered into for a during the first year of the tenancy, it is also obliged to compensate shorter term than the legal minimum will be considered as executed the landlord in the amount of one and a half month’s rent. This for the minimum term irrespective of its actual provisions. Under compensatory payment is reduced to one month’s rent after one year the ULL, lease agreements are also subject to a maximum term of of tenancy. 10 years. Furthermore, the Code provides for a minimum term of two years for urban business commercial leases and it extends the maximum term to 50 years. 10.6 Does the landlord and/or the tenant of a business (b) Rent increases lease cease to be liable for their respective obligations under the lease once they have sold their Parties are free to agree staggered price mechanisms unless this interest? Can they be responsible after the sale in implies some way of indexation (for example, a rent increase by respect of pre-sale non-compliance? means of a clause taking the inflation index into account would be void). The fact that the title to the freehold property is transferred does not (c) Tenant’s right to sell or sub-lease affect the underlying lease; the lease contract remains in full force A tenant may sub-lease in whole or in part the leased premises and effect against the new owner of the property. unless otherwise agreed. It is customary, though, to include an express prohibition to sub-lease in the agreement. 10.7 Green leases seek to impose obligations on (d) Insurance landlords and tenants designed to promote greater Usually, parties agree that the tenant must insure the property. sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please (e) (i) Change of control of the tenant briefly describe any “green obligations” commonly There are no mandatory provisions on this matter under applicable found in leases stating whether these are clearly law. defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for (e) (ii) Transfer of lease as a result of a corporate restructuring example aspirational objectives). (e.g. merger) There are no mandatory provisions on this matter under applicable Green leases are not common in Argentina. However, parties are law. free to agree to these kinds of obligations. (f) Repairs

The regulation of this matter is generally left to the parties, but the 10.8 Are there any trends in your market towards more general principle reflected in the Code is that the tenant shall be flexible space for occupiers, such as shared responsible for carrying out minor repairs and regular maintenance short-term working spaces (co-working) or shared of the leased property. The tenant is also responsible for those residential spaces with greater levels of facilities/ repairs arising from the tenant’s fault or wilful acts. Any defects in activities for residents (co-living)? If so please provide the structure of the property or more serious repair works must be examples/details. borne by the landlord. Yes, through different housing and working options, the maximisation of common spaces and the minimisation of private 10.4 What taxes are payable on rent either by the landlord spaces are starting to combine in Argentina to respond to the current or tenant of a business lease? demand especially of young people. Casa Campus is the first company in Argentina that is currently VAT is applicable to rentals of all types of real property (other than that involved in the development of several co-living residences, namely: used for the lessee’s personal housing) if the rental income exceeds “Casa Congreso”; “Casa San Telmo – Balcarce”; “Casa Pilar – Suites”; ARS 1,500 (approximately USD 176) per month. However, there are “Casa Pilar – Araucarias”; “Casa San Telmo – Independencia”; and some exemptions, and the tax treatment must be analysed on a case- “Casa Palermo – Cabrera”, among others. by-case basis. For other taxes, please refer to question 9.1 above.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 13 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

In referrence to co-working, there are several companies that are (ii) fails to preserve the leased premises, or its abandonment; and/or already providing these services in Argentina such as: “WeWork”; (iii) does not pay the agreed rent, during two consecutive periods. “Urban Station”; “La Maquinita”; “Belephant”; “GOWORK The ULL provides that prior to the complaint of eviction for non- Coworking”; among others. payment of the rent; the landlord must reliably notify the tenant of the amount due, granting for it a term that may not be less than 10 calendar days counted from the reception of the summons, noting 11 Leases of Residential Premises the place of payment.

11.1 Please briefly describe the main laws that regulate 12 Public Law Permits and Obligations leases of residential premises. Argentina Please refer to question 10.1 above. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, development and occupation of land? Please briefly 11.2 Do the laws differ if the premises are intended for describe them and include environmental laws. multiple different residential occupiers? Urban development in Argentina is basically governed by provincial No, they do not, as long as the premises are used in accordance to and municipal zoning regulations and building codes; therefore, what was agreed in the lease contract. they differ in each jurisdiction. The Federal government sets the minimum environmental standards for 11.3 What would typical provisions for a lease of the protection of the environment, and the provinces and municipalities residential premises be in your jurisdiction regarding: establish specific standards and implementing regulations. The (a) length of term; (b) rent increases/controls; (c) the Argentine Constitution forbids the introduction of hazardous waste tenant’s rights to remain in the premises at the end of into the country. Federal laws relate to various environmental issues, the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? such as industrial and waste management and disposal, air, land and water pollution, etc. The provinces have also enacted environmental (a) Length of term laws requiring companies to prepare and file environmental impact statements in order to obtain the relevant permits. The ULL and the Code provide for a minimum term of two years for residential leases. Any lease contract entered into for a shorter Certain provinces, such as the provinces of Buenos Aires and term than the legal minimum will be considered as executed for the Santa Fe, have enacted specific regulations for the so-called “large minimum term irrespective of its actual provisions. Under the ULL, commercial areas”, which apply to supermarkets, malls, shopping lease agreements are also subject to a maximum term of 10 years. centres and department stores (large retailers). Furthermore, the Code extends the maximum term for residential The right to private property is guaranteed by the Federal Constitution. leases to 20 years. However, both the Federal Government and the provinces are (b) Rent increases/controls empowered to governmental taking (expropiacion), provided that the following requirements, among others, are met: (i) the Federal Please refer to question 10.2 (b) above. Congress (or provincial legislature as the case may be) must enact a (c) Tenant’s rights to remain in the premises at the end of the law declaring the public interest triggering the taking; and (ii) prior term and due compensation must be paid to the owner. The compensation The applicable laws do not provide any rights to the tenant to remain may be judicially determined should the parties fail to agree on it. on the premises at the end of the term. The Code only provides that In principle, loss of profits is not compensated, though case law has if the landlord does not comply with its obligations, the tenant can loosened this restriction in certain special circumstances. early terminate the lease contract. (d) Tenant’s contribution/obligation to the property “costs” 12.2 Can the state force land owners to sell land to it? If so e.g. insurance and repair please briefly describe including price/compensation Although there are no mandatory provisions on this matter under mechanism. applicable laws, usually parties agree that the tenant must insure the property and pay bills and ordinary expenses. Regarding repairs, National and local governments may force a land owner to sell its the regulation of this matter is also generally left to the parties, but land to any of them. According to national proceedings, the land the general principle reflected in the Code is that the tenant shall be should firstly be declared of “public use”. After that declaration, an responsible for carrying out minor repairs and regular maintenance administrative procedure to determine the scope of the compelled of the leased property. The tenant is also responsible for those sale and to value the property begins. If the land owner does not agree repairs arising from the tenant’s fault or wilful acts. Any defects in with the conclusions of such procedure, the government must fill in the structure of the property or more serious repair works must be a judicial claim to force the sale. The judicial decision will only rule borne by the landlord. on the price of the land. The price only includes the “objective price” of the property and direct damages of the expropriation; personal 11.4 Would there be rights for a landlord to terminate a circumstances or lost profits are not taken into account. residential lease and what steps would be needed to achieve vacant possession if the circumstances 12.3 Which bodies control land/building use and/or existed for the right to be exercised? occupation and environmental regulation? How do buyers obtain reliable information on these matters? Yes, a landlord is entitled to terminate a residential lease if the tenant: (i) changes the purpose of the premises agreed in the lease contract; Control of proper zoning, land use, building codes and other

14 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

restrictions are carried out by provincial and municipal authorities. Environmental compliance is controlled at the federal, provincial 12.9 In what circumstances (if any) is environmental clean- and municipal level. The provinces have recently begun to work up ever mandatory? actively on these matters. Buyers usually obtain reliable information on environmental matters through due diligence on existing If damage to the environment is determined, clean-up (or administrative or judicial cases and from any claims initiated before remediation) will be mandatory. administrative authorities. Further, prospective buyers usually inspect the property on site. 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy performance of buildings in your jurisdiction. 12.4 What main permits or licences are required for

building works and/or the use of real estate? Argentina The Federal Government has taken some general measures in order It is not possible to provide a complete list of permits and licences to reduce electricity and gas consumption by means of charging required for the use of real estate because there may be as many higher tariffs when consumption increases are detected. regulations as the number of Argentine provinces and municipalities. 13 Climate Change 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions Building or use permits are regularly obtained, although it can be a trading scheme). lengthy process. The cost of, and timing for the issuance of building or use permits has to be analysed on a case-by-case basis. Argentina is not a party to Annex 1 of the Kyoto Protocol, so there are no mandatory reduction targets applicable to activities held in 12.6 What is the typical cost of building/use permits and Argentina. the time involved in obtaining them?

13.2 Are there any national greenhouse gas emissions Please refer to question 12.3. reduction targets?

12.7 Are there any regulations on the protection of historic Please refer to question 12.1. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use? 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? There are national and local regulations on the protection of historic monuments. In general, the declaration of “public use” of a No, there are no rules of national application on this matter, although particular property only limits its use, but should the conservation of there are some local laws which aim to improve the sustainability the historic monument be jeopardised, the government may compel of both newly constructed and existing buildings, i.e.: Law 13,059 the sale. of the Province of Buenos Aires regarding thermal isolation for new private and public buildings; Law 4,428 of the City of Buenos Aires 12.8 How can e.g. a potential buyer obtain reliable regarding green terraces for existent buildings; and Ordinance No. information on contamination and pollution of real 8,757 of the City of Rosario regarding efficient use of energy for estate? Is there a public register of contaminated land new buildings. in your jurisdiction?

Argentina has no national register on pollution or contamination.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 15 © Published and reproduced with kind permission by Global Legal Group Ltd, London Marval, O’Farrell & Mairal Argentina

Diego A. Chighizola Marval, O’Farrell & Mairal Leandro N. Alem 882 City of Buenos Aires Argentina

Tel: +54 11 4310 0100 Email: [email protected] URL: www.marval.com

Argentina Diego Chighizola joined Marval, O’Farrell & Mairal in 2001, and became a partner in 2012. He specialises in corporate finance, M&A, agribusiness and real estate. In recent years, he has been handling complex M&A transactions, including the investment by GE in YPF Energía Eléctrica; in real estate he advised on the investment by Goldman Sachs and Equity International in Pegasus Real Estate. Diego also worked as foreign associate at Cleary, Gottlieb, Steen & Hamilton, in New York, between 2004 and 2005. He graduated as a lawyer at the Universidad Católica Argentina (2001, cum laude), holds a Masters in Law from Columbia University School of Law, New York (2004) and a Masters in Finance from Universidad del CEMA (2007). Since 2011, he has taught contracts and business law at the Universidad de San Andrés. Diego has been admitted to the New York State Bar Association and is a member of the Buenos Aires Bar Association.

Marval’s real estate practice group is renowned for providing high quality advice on large, complex and sophisticated real estate transactions. Our real estate practice group specialises in purchase, sale and lease transactions, real estate development and construction and real estate financing. We are backed up by the firm’s market-leading banking, corporate and tax departments, providing essential cross-over expertise, particularly in real estate finance, purchase and sale transactions, project development and real estate-related capital markets matters. Our real estate practice covers a wide range of matters including: ■■ Purchase, sale and development of commercial, residential and hospitality real estate projects. ■■ Public works. ■■ Development agreements. ■■ Hotel operation. ■■ Zoning and planning. ■■ Construction agreements. ■■ Real property lease agreements. ■■ Financing, mortgages and foreclosures. ■■ Real estate trusts and securitisations.

16 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 3

Austria Dr. David Kubes

Kubes Passeyrer Attorneys at Law Mag. Tina Vollmann

1 Real Estate Law 2 Ownership

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 17 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

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

In Austria, one has the possibility to split the legal title and the 4.5 Where there are both unregistered and registered land beneficial title. Only the legal owner can apply for the registration or rights is there a probationary period following first in the land register and has the power to dispose of the real estate. registration or are there perhaps different classes or qualities of title on first registration? Please give It is advisable that the legal and beneficial owners create an inter details. First registration means the occasion upon partes agreement and agree on their reciprocal rights and duties. which unregistered land or rights are first registered In Austria there are no proposals to change that structure. in the registries.

As the registration of all rights is required in Austria, there is not a 4 System of Registration significant difference. All registered rights have priority. In case of non-registered rights, there is no protection against bona fide acquisition by third parties. Rental agreements are automatically 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? transferred to a buyer since they are attached to the real estate and as a general principle under Austrian law, the sale of a real estate does Austria has a comprehensive, nationwide land registry: every real not grant a reason to terminate a lease or rental contract. property, every public road, every lake and every wood is recorded and registered in the land registry. 4.6 On a land sale, when is title (or ownership) transferred to the buyer?

4.2 Is there a state guarantee of title? What does it guarantee? In Austria, the transfer of title takes place upon entry of the buyer into the land registry. Under Austrian law, entry into the land registry is regarded as the mode for the acquisition of title. The acquisition becomes final and 4.7 Please briefly describe how some rights obtain absolute after the expiration of a four-week period following entry, priority over other rights. Do earlier rights defeat later at which point the registered ownership is deemed to be guaranteed. rights?

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

18 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

among the secured creditors with the consent of all registered secured Purchase contracts, pledge agreements and all contracts that should creditors. However, all registered creditors whose secured claims be entered into the land registry (use and occupation agreements become subordinated must consent to such subordination in writing. (Benutzungsvereinbarungen), contracts on third party rights (Servitutsverträge), toleration agreements (Duldungsvereinbarungen)) must bear the notarised signatures of all contracting parties in order 5 The Registry / Registries to be valid. In Austria, the principle applies that an entry into in the land registry may be made only on the basis of a notarised signature. 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules 5.4 Can compensation be claimed from the registry/ and requirements.

registries if it/they make a mistake? Austria

In Austria only one land registry court is available online; it Compensation for mistakes committed by the land registry court is managed district-wide by all local courts (Bezirksgerichte) is a matter of ordinary public liability in Austria; to claim such established in Austria but it is a central register which is allocated to compensation, proceedings based on the Act on Public Liability various judicial districts. (Amtshaftungsgesetz) must be instituted against the Republic of Austria. 5.2 How do the owners of registered real estate prove their title? 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he The right of ownership can only be acquired by entry in the land might reasonably need regarding encumbrances and register. Therefore the registration in the land register is the ultimate other rights affecting real estate and is this achieved proof of title. (Eintragungsgrundsatz). Once the title of ownership by a search of the register? If not, what additional information/process is required? is registered, everyone can trust in the correctness and completeness of the land register’s information. In connection with the collection of contracts and deeds (Urkundensammlung) the ownership can be The Austrian land registry is a public register where all deposited proven to everybody. The seller only has to provide the excerpt deeds are openly accessible. It is possible to black certain parts of from the land register that confirms that he is the legal owner of the the contracts, if so agreed and if there is an important reason, but, purchased subject. From the entry in the land register, no one can as a rule, documents as such must be submitted completely and are claim that he or she has made certain acts without the notice of the publicly available for retrieval. real circumstances (bona fides). In case a buyer does not want to be registered right away, a duly 6 Real Estate Market executed purchase agreement with all signatures of the buyer and seller duly notarised can be used as a proof of title. In that case, the person actually registered in the land register has to appear as 6.1 Which parties (in addition to the buyer and seller “seller”; in case of multiple, non-registered sales, the ownership and the buyer’s finance provider) would normally be involved in a real estate transaction in your chain must be trackable and proven by notarised purchase jurisdiction? Please briefly describe their roles and/or agreements back to the last registered seller. duties.

5.3 Can any transaction relating to registered real estate In general, the most important party to a real estate transaction is be completed electronically? What documents need the escrow agent who manages the entire transaction for all parties to be provided to the land registry for the registration involved. Normally, the financing of the seller – if any – is also paid of ownership right? Can information on ownership of back out of the purchase price and the escrow agent takes care of registered real estate be accessed electronically? the entire handling of the pay-out of the purchase price, the set-off of any claims of the seller and the registration of a new pledge in The Austrian land registry is an electronic online register that is favour of the buyer’s financing bank. linked to all notaries’ offices and law firms. Only notaries and attorneys who are authorised to represent parties may submit electronic filings to the land registry. Regarding the entry of 6.2 How and on what basis are these persons changes affecting the right of ownership, all documents by which remunerated? rights or encumbrances are created require notarisation. The notary or attorney-at-law must scan the notarised documents and save them The remuneration of the escrow agent is 1.5% of the purchase price electronically to the central archive, the so-called “Archivium”. In plus 20% VAT. In general these costs must be borne by the buyer. a special program of the WEB-ERV service (a web-based system of paperless communication with courts), the corresponding 6.3 Is there any change in the sources or the availability registration certificates (Registerbescheinigungen) for the respective of capital to finance real estate transactions in deeds are transmitted to the land registry which can retrieve the your jurisdiction, whether equity or debt? What are corresponding documents from the central register after identifying the main sources of capital you see active in your them by the codes. This procedure was established in Austria in market? order to avoid the sending of original documents and to make all important documents available directly online in a register. It did Due to the low interest rates available today, 90% of all real estate not involve, however, any change to the formal requirements to be transactions are financed through loans, and on average 70% of the met by the original documents. market value of a real estate transaction is financed by a loan.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 19 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

6.4 What is the appetite for investors and/or developers 7.4 Do sellers usually give any form of title “guarantee” to invest in your region compared to last year and or contractual warranties to the buyer? What would what are the sectors/areas of most interest? Please be the scope of these? What is the function of any give examples. such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or There are no significant changes in Austria compared to last year. The warranties act as a substitute for the buyer carrying out his own diligence? primary real estate market has a yield of 1.5% to 2% and investors pay for prestige rather than a return on investment. Secondary or tertiary markets provide a yield up to 6% or 7%. Recently, logistic In Austria the title guarantee according to standard purchase agreements are “free and clean of leans; full ownership and Austria centres and shopping malls have been sold at a yield of 6.5%. individual provisions on rental agreements”. In 2018, Vienna was once again awarded as the most liveable city in the world by the Mercer Study on quality of living. Under Austrian law, a general principle provides for “rent overrules ownership”, meaning that the sale of a property or apartment forces the buyer to take over the agreed rent as it was. Buyers cannot 6.5 Have you observed any trends in particular market change, amend or alter a rental agreement after a sale. sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Liens and other debts of a real estate or apartment only pass over to Please give examples. the buyer if they are duly registered in the land register. A detailed due diligence, especially when dealing with rented real The only market that has slowed down in recent months is the estate or property, is essential! renting of office space. 7.5 Does the seller retain any liabilities in respect of the 7 Liabilities of Buyers and Sellers in Real property post sale? Please give details. Estate Transactions A seller who is registered in the land register and whose registration is legally valid and binding (four weeks after his registration) is 7.1 What (if any) are the minimum formalities for the sale deemed to be the official owner and his ownership can no longer and purchase of real estate? be disputed. Third parties claiming ownership have no right against a buyer who has bought from a registered owner. The registration The minimum formality for the sale and purchase of real estate is a itself is therefore the binding fact in respect of ownership. written contract with legalised signatures containing the “essentialia In general, the up-keeping costs until the agreed transfer date are negotii” of a contract, which are: post-sale liabilities and must be borne by seller. 1. the object; and 2. the sales price. 7.6 What (if any) are the liabilities of the buyer (in addition The Austrian civil law provides for subsidiary regulation for all to paying the sale price)? relevant matters, such as allocating liability if there was no mutual agreement in the contract. The liabilities of a buyer besides the payment of the purchase price are:

7.2 Is the seller under a duty of disclosure? What matters 1. the payment of the real estate transfer tax; must be disclosed? 2. the payment of the registration fee; and 3. the payment of the escrow agent fee. All information that is known to the seller and might influence Furthermore, under Austrian law, rental contracts are automatically the purchase decision of a “standard buyer” must be disclosed. transferred to a buyer and he must take on all rental contracts as However, requesting the following information from any seller they are. before buying real estate is recommended: 1. An excerpt of the land register. 2. The lease and rent contracts of tenants. 8 Finance and Banking 3. The last protocol of the general meeting of the owner community. 8.1 Please briefly describe any regulations concerning 4. A statement of the property management company on the lending of money to finance real estate. Are the expected repair work of the building. rules different as between resident and non-resident 5. The current balance of the repair fund of the building. persons and/or between individual persons and corporate entities? Carrying out research regarding possible contamination is advisable, especially if the construction or renovation of a building is intended. In general, a total of 70% of the market value of real estate can be financed through a loan with Austrian banks. 7.3 Can the seller be liable to the buyer for Banks in general register a pledge in the land register in the amount misrepresentation? of 130% of the amount borrowed. The registration fee is 1.2% of the registered amount. Yes, depending on the misrepresentation, a price reduction or even a cancellation of the contract is possible. For bank financings there is no difference for residential or non- residential persons or corporate or individual persons. For all

20 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

buyers the same KYC procedures exist and the ranking of the bank by the lender; the borrower just has the possibility to delay the in order to determine the amount to be financed always depends on enforcement if he claims an extension of the grace period for the credit worthiness of the buyer, irrespective of its residency. payment or a lack of formal prerequisites.

8.2 What are the main methods by which a real estate 8.8 What is the impact of an insolvency process or a lender seeks to protect itself from default by the corporate rehabilitation process on the position of a borrower? real estate lender?

The most common protections are: In case of insolvency, an entry in the land register must be made.

■ the registration of a pledge; The insolvency process is based on the principle that all lenders Austria ■ the security assignment of a lease, if any; must be treated equally. However, this applies only to the creditors whose claims are secured in the land register and on the same ■ the security assignment of all building insurances; and assigned ranking. This ranking determines how much the lenders ■ additional collateral such as a life insurance. get back from their claims. Furthermore, they can no longer sue In addition, the following protections exist: their borrowers outside the insolvency proceedings. ■ signing of an enforceable notarial deed for the unconditional and immediate payment of all outstanding loan or realisation of a mortgage; 8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate ■ an agreement on the free sale of the real estate in case of a shares in a borrower given as collateral? If so, default; or can shares be appropriated when a borrower is in ■ a power of attorney for the sale of the real estate in favour of administration or has entered another insolvency or the lender. reorganisation procedure?

In the case of a mortgage loan (lien on a property), the bank receives 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a a lien on the property in return for the loan (e.g. condominium, mortgagee to realise a mortgaged property without house, commercial property). Banks require financial security in involving court proceedings or the contribution of the case the borrower can no longer afford his or her payments. All mortgagor? security agreements must be included in the loan agreement. The mortgage must be entered into the land register. Creditors are In general, a mortgage must be realised through court proceedings successively entered in the land register in an assigned ranking. In and court auction. Any other way of realisation of a mortgage must case of mortgage loans, banks usually have their loans registered as be agreed in writing between the lender and the pledgee. a maximum amount hypothec. In case borrowers are unable to pay, In case of an enforceable notarial deed, court proceedings will not take banks are usually willing to reduce the monthly loan repayments but place and the court will immediately start the auction of the real estate. in the worst case the property is sold in a forced auction to the highest bidder and the proceeds are used to settle all outstanding debts.

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

The minimum requirements for real estate lending is the registration 9.1 Are transfers of real estate subject to a transfer tax? of a bank and an escrow agent that registers the pledge for and How much? Who is liable? behalf of the financing bank.

When transferring real estate, 3.5% real estate transfer tax and 1.1% 8.5 How is a real estate lender protected from claims registration fee are due. In general, these taxes and fees are borne by against the borrower or the real estate asset by other the buyer; however, both parties of a sales contract are liable for the creditors? payment of the real estate transfer tax towards the tax authorities. The registration fee is payable by the buyer only. The real estate lender is protected by the registration of a pledge in the land register. The land register provides for a ranking of all claims according to the date of registration. All registered pledges 9.2 When is the transfer tax paid? that rank prior to a pledge will be paid off in full first. The real estate transfer tax and the registration fee are normally paid to the escrow agent together with the purchase price and the 8.6 Under what circumstances can security taken by a escrow agent files all tax papers and pays the transfer tax and the lender be avoided or rendered unenforceable? registration fee upon registration of the buyer as the new owner.

Once a security is registered in the land register, it can only be avoided or rendered unenforceable if the documentation of such 9.3 Are transfers of real estate by individuals subject to security that was used for its registration was void or fake. income tax?

In respect of the profit a person makes out of the sale of real estate, 8.7 What actions, if any, can a borrower take to frustrate a “Real Estate Profit Tax” was introduced in Austria in 2012. As of enforcement action by a lender? 1.1.2016, a flat tax in the amount of 30% of the net profit of a real estate transaction is due for payment. If a real estate was purchased Actually there are no actions to frustrate the enforcement action before 2002, the flat rate of tax is 4.2% of the purchase price.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 21 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

9.4 Are transfers of real estate subject to VAT? How 10.3 What are the typical provisions for leases of business much? Who is liable? Are there any exemptions? premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or Real estate transfers are exempt from VAT. However, a seller may sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a opt into a VAT sale if the real estate was subject to renovation and the corporate restructuring (e.g. merger); and (f) repairs? seller has claimed back VAT out of the renovation of the building. If a real estate owner claims back VAT for renovation or construction (a) Length of term work, such VAT has to be paid back on a pro rata basis calculated The standard length of a business lease term is either over 10 years if he does not opt into a VAT sale.

Austria unlimited or 10 years. VAT in Austria is 20%. (b) Rent increases Rent is normally only indexed based on the consumer price 9.5 What other tax or taxes (if any) are payable by the index. seller on the disposal of a property? (c) Tenants right to sell or sublease Subleasing is normally not allowed in standard leases – only There are no additional taxes other than those mentioned above. upon prior written consent of the owner. (d) Insurance 9.6 Is taxation different if ownership of a company (or Insurance must be provided by the tenant. other entity) owning real estate is transferred? (e) (i) In case of a change of control of the tenant, the owner is entitled to raise the rent up to the market value if the agreed Real estate owned by companies is not subject to the Real Estate rent is below market value. Profit Tax. The profit of a real estate sale is standard profit of the (ii) Mergers are normally accepted if the beneficial owner company and, therefore, subject to standard corporation tax. does not change or the credit worthiness is not lowered after the merger. (f) Repairs 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due Maintenance must be provided by the tenant, repairs by the diligence on? owner.

The real estate buyer has to pay 3.5% real estate transfer tax and a 10.4 What taxes are payable on rent either by the landlord 1.1% registration fee. For debt financings, a mortgage usually has or tenant of a business lease? to be registered in the land register where the register fee amounts to 1.2% of the amount registered. The purchase of real estate is Lease agreements are subject to stamp tax. Stamp tax is due for exempt from VAT but the seller has the opportunity to opt into VAT. payment after the lease has been signed. For (i) limited lease contracts, it is 1% of the aggregated lease amount (a cap of 17 years 10 Leases of Business Premises exists), or (ii) for unlimited lease contracts, 1% of the aggregated lease amount of the first three years.

10.1 Please briefly describe the main laws that regulate 10.5 In what circumstances are business leases usually leases of business premises. terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a Under Austrian law, there are two sources of tenancy law. The tenant to extend or renew the lease or for either party General Civil Code also called ABGB (Allgemeine Bürgerliche to be compensated by the other for any reason on Gesetzbuch 1811) and the General Rent Act also called MRG termination? (Mietrechtsgesetz 1982). Therefore the tenancy agreements are either based on the ABGB, the MRG or other special statutes. There Business leases usually terminate at expiry or upon request of are several differences between the types of agreements but the most the tenant; extending and renewing leases is subject to a mutual significant differences exist where the MRG is fully, partially or not agreement with the landlord. In case of an early termination, the applicable. If the MRG is fully applicable the tenant, for example, landlord is entitled to compensation for the remaining rent period. is protected by strict rent limits in contrast to the partially ambit where the tenant is only protected against unwarranted eviction. 10.6 Does the landlord and/or the tenant of a business The freedom of contract is hardly limited in Austria but the norms of lease cease to be liable for their respective the MRG minimise the freedom of contract in favour of the tenant. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance? 10.2 What types of business lease exist? All liability is limited to outstanding payments to the government Under Austrian law, leases with a limited and unlimited terms exist. and/or outstanding payments to the owner community in case of co-ownership. Additional liability has to be agreed upon between the parties.

22 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

especially true in office leases or commercial leases in old buildings 10.7 Green leases seek to impose obligations on with a very low rent or offices under “rent control”, where rent can landlords and tenants designed to promote greater be increased if the owner changes. When buying a business it is sustainable use of buildings and in the reduction of therefore essential to check the rental agreement to make sure that the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly the agreed rent can be taken over. found in leases stating whether these are clearly defined, enforceable legal obligations or something 11.2 Do the laws differ if the premises are intended for not amounting to enforceable legal obligations (for multiple different residential occupiers? example aspirational objectives).

No, there is no difference. Austria Green leases are not very common in Austria. However, real estate developers started to construct “green buildings” and try to reduce the consumption of energy. 11.3 What would typical provisions for a lease of In order to contribute to green leases, the Austrian government residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the introduced the requirement of each landlord to provide a technical tenant’s rights to remain in the premises at the end of report on the energy efficiency of each building (Energieausweis). the term; and (d) the tenant’s contribution/obligation This report is obligatory and the results (class of energy efficiency, to the property “costs” e.g. insurance and repair? heating demand and use of electricity) must be disclosed to each tenant. The Austrian Tenancy Act (MRG) is considered to be one of the most complicated and divided conglomerate of regulations that 10.8 Are there any trends in your market towards more exists in Austria and for years has been subject to ongoing changes flexible space for occupiers, such as shared and attempts to straighten out past incongruences implemented by short-term working spaces (co-working) or shared different governments. residential spaces with greater levels of facilities/ The Austrian Tenancy Act is not applicable in the following cases: activities for residents (co-living)? If so please provide examples/details. ■ for hotels or hosting rooms, forwarding rooms, student residences or nursing homes; For some years now, “co-working” has been very popular in Austria. ■ apartments or individual rooms of charitable institutions; More and more office rooms provide the possibility of renting a ■ official residences or apartments given in the context with an table or a room, at very short notice, for some hours or days. In employment relationship; Austria, co-working spaces have some advantages compared to ■ secondary residences for the purpose of vacation; regular working spaces: they are usually cheaper than having your ■ if the building has not more than two independent apartments own office; they are already equipped with an office infrastructure; or business spaces; and and the rental contracts can be terminated quickly. ■ if the lease encompasses a whole enterprise. For co-sharing a residential space there are no legal exceptions to There is also the possibility of the partial application of the Tenancy the current rental act. There is a possibility for short-term rentals Act (namely of the most important provisions like cost control and shorter than six months, but no legal basis for a flexible “shared protection against dismissal). This applies in the following cases: space” residential concept. All tenants have to sign the lease or one ■ if the rented area is located in a building built with a building person has to rent the entire space and then sub-rent with the consent permission after 30.6.1953 and without subventions; of the landlord. ■ for rooftop extensions completed with a building permission As soon as a rental agreement is longer than six months, the strict after 31.12.2001; and rent control provisions apply to most of the apartments in Vienna. ■ for apartments in a condominium as defined in the Austrian Condominium Act (WEG, Wohnungseigentumsgesetz) if the building permission was granted after 8.5.1945. 11 Leases of Residential Premises Buildings built before 1945 are considered “old buildings” and the maximum rent is governed by an index of EUR 7.50 per square 11.1 Please briefly describe the main laws that regulate metre plus a list of benefits that entitles the landlord to increase such leases of residential premises. rent (for example, if the building is in a good neighbourhood, has a beautiful view, is on a quiet street, has additional bathrooms, etc.). The main laws for the leasing of residential premises are the Austrian (a) According to the Austrian Tenancy Act (MRG) the rental Civil Code (ABGB, Allgemeines Bürgerliches Gesetzbuch) and the contract can provide an unlimited term but can also provide Austrian Tenancy Act (MRG, Mietrechtsgesetz). a temporary length of term. In case of a temporary term the The Austrian Tenancy Act is one of the strictest acts in Europe law orders a rent reduction of 25%. regarding the protection of tenants and limitations for landlords. It (b) The parties can mutually agree on the increase in the rent. The is also one of the most complicated and most changed act over the one-sided rent increase is only permitted in limited ways, for past 30 years. Whether the Austrian Tenancy Act is applicable to a example if the rent can be linked to a reference index, usually the Consumer Price Index (VPI, Verbraucherpreisindex) or business lease depends of the year of construction of the building for the financing of certain maintenance works. and the date of signing the lease. The arbitration board (Schlichtungsstelle) controls, upon the There are restrictions in respect of the maximum rent and the request of the tenant, if the rent is adequate. possibilities to terminate a lease agreement. (c) After expiry of the term, the tenant has no right to remain On the other hand, the Austrian Tenancy Act provides for the in the premises; only in case of a mutual agreement can he possibility to increase rent in case a business is sold. This is remain in the accommodation.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 23 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

(d) The tenant has to pay the operating expenses, including, for example, water charges, fire insurance, liability insurance, 12.4 What main permits or licences are required for costs of cleaning and chimney sweepers, sewage fees and building works and/or the use of real estate? waste collection charges. Most building works require a building permit appropriate to the building regulations of the particular federal state where the building 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed is located. After the finalisation of the building works, the owner to achieve vacant possession if the circumstances needs the notification of completion. In case of a preservation order existed for the right to be exercised? a permit from the Monument Protection Authority is required. Austria The Austrian Tenancy Act (MRG) protects tenants and only allows 12.5 Are building/use permits and licences commonly landlords to terminate a residential lease if there is an important obtained in your jurisdiction? Can implied permission enough reason. Such important reasons include, for example, be obtained in any way (e.g. by long use)? default of payment, vandalism of the apartment or if the landlord urgently needs the apartment for himself or his relatives in order to By fulfilling all necessary prerequisites the owner has the enforceable avoid homelessness. legal right to a permit. Building works without a permit are illegal In case of termination of a residential lease, the landlord has to and an implied permission cannot be obtained by long use or any file a claim with the competent court. In general, the protection of other way; in this case the authorities will order the demolition of tenants under Austrian law is very high and courts do tend to render the building works. decisions in favour of tenants. 12.6 What is the typical cost of building/use permits and 12 Public Law Permits and Obligations the time involved in obtaining them?

Commonly the duration of a proceeding takes about four months. 12.1 What are the main laws which govern zoning/ If, for example, neighbours have different veto rights, the duration permitting and related matters concerning the use, of proceedings can be significantly longer. The proceeding itself development and occupation of land? Please briefly is not expensive but if expert opinions are required (e.g. to fight describe them and include environmental laws. neighbourly vetos), the costs can extend to several thousand euros.

In Austria, every federal state has its own laws according to the use and occupation of land. The surface dedication plan divides the land into 12.7 Are there any regulations on the protection of historic different categories, e.g. residential areas, industrial areas or grassland. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real The provincial jurisdiction also provides detailed regulations on estate or development/change of use? construction law. Austria does not have a unique environmental law but a The Austrian Heritage Protection Act (DMSG, Denkmal- fragmentation of different environmental categories. The Austrian schutzgesetz) regulates the protection of historic monuments and Climate Protection Act (KSG, Klimaschutzgesetz) regulates the affects the transfer of rights in real estate subordinately. The Primary maximum amount of greenhouse gas emissions; the Austrian Heritage Protection Act affects building works on historic monuments, Waste Management Act (AWG, Abfallwirtschaftsgesetz) contains so that the owner needs a permit of the responsible authority for every regulations regarding waste recycling, waste avoidance and different change of the protected part of the building. This is mostly the façade, duties of waste owners; the conservation laws of the federal states the roof but also inner staircases, ballrooms and historic rooms. Such regulate the protection of species and the flora and fauna. authority can also attach conditions to its approval. The change of use is only indirectly affected if the desired use required 12.2 Can the state force land owners to sell land to a technical modification of the space, like a ventilation system for it? If so please briefly describe including price/ offices or restaurants or a second escape way for emergencies: any compensation mechanism. and all changes that affect the protected areas of the building need authorisation from the heritage protection authorities. Yes, in case of necessity (e.g. for road or building construction) the state can force owners to sell land. In an administrative proceeding, 12.8 How can e.g. a potential buyer obtain reliable an expert evaluates the price to be paid to the owner. information on contamination and pollution of real estate? Is there a public register of contaminated land in your jurisdiction? 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do buyers obtain reliable information on these matters? There is an environmental liabilities register in Austria. Such register contains information about the contamination of real estate Primarily responsible for such regulations at community level is the with hazardous materials and substances. mayor and the administrative authorities (Bezirksverwaltungsbehörden) at federal state level. Most authorities provide support and the possibility of an informal meeting where buyers obtain reliable information.

24 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

12.9 In what circumstances (if any) is environmental clean- 13.2 Are there any national greenhouse gas emissions up ever mandatory? reduction targets?

In cases where contamination has occurred, a clean-up is obligatory. Currently, there are no mandatory reduction targets. The primary polluter is responsible for the clean-up and has to bear its costs. If the polluter is not detectable the owner of the real estate 13.3 Are there any other regulatory measures (not already is subsequently liable for the decontamination. mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

12.10 Please briefly outline any regulatory requirements Austria for the assessment and management of the energy Local government provides for promotions and financial aid for performance of buildings in your jurisdiction. owners who are willing to improve the energy performance of their buildings. Some of these costs are deductible from tax in order to In Austria an energy performance certificate contains all essential give an incentive to landlords. information (e.g. thermal insulation, noise protection, energy requirement) regarding the energy performance of a building. This energy performance certificate is necessary to acquire building permission and during the sale of a property a seller must provide such certificate to the buyer.

13 Climate Change

13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions trading scheme).

There are no regulatory measures for reducing carbon dioxide emissions.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 25 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kubes Passeyrer Attorneys at Law Austria

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

Tel: +43 1 526 5000 Tel: +43 1 526 5000 Fax: +43 1 526 5000 50 Fax: +43 1 526 5000 50 Email: [email protected] Email: [email protected] URL www.kpnet.at URL www.kpnet.at Austria Dr. David Kubes started specialising in real estate matters in 2005, Mag. Tina Vollmann holds a law degree (Mag. iur.) from the University directly after the foundation of Kubes Passeyrer attorneys at law. As of Graz. During her studies, she specialised in Corporate and M&A legal advisor to one of the major real estate developers in Austria, and Real Estate Law. In this time, she worked in the field of property a wide range of projects were successfully closed over the past law and gained valuable practical experience by completing numerous 10 years. In addition, lenders and foreign investors used Kubes internships in Austria and abroad. She also spent several months in Passeyrer attorneys at law for their real estate projects in Vienna. In Turkey and Australia. 2008, Austria’s first Sharia compliant real estate financing was led Tina speaks German, English and Italian. by Dr. Kubes in cooperation with a Swiss investment fund and Qatar National Bank.

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

26 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 4

Belgium Lieven Peeters

ALTIUS Kathleen Verbiest

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to Belgian law recognises several types of rights over land, mostly question 12.1. Those relating to tax should be listed in created by contract. However, some are created by law or acquired response to questions in Section 9. by statute of limitation. The Belgian Civil Code contains the principal rules on real estate Ownership is the most complete right over property. Bare ownership rights such as sale, easements, (co-)ownership, lease, construction is the situation where the property is encumbered with a right in rem law, etc., as well as on liens and mortgages on real property. The in favour of a third party. latter includes the rules on the opposability of a real estate transaction Belgian law also recognises several usage rights which might either towards third parties. be of a personal nature (e.g. lease), or in rem (e.g. usufruct, right to Other legislation (e.g. zoning and environmental laws) is more build, long-term lease, easement). fragmented. Especially, as it often concerns a regional competence Both a mortgage and mortgage mandate constitute a security right implying that each Region (i.e. Flanders, Brussels or Wallonia) has over a property. Whereas the first is opposable towards third parties its own legislation on the topic. as it is registered, the latter is a purely contractual right. Noticeable are also pre-emption rights which can be created either 1.2 What is the impact (if any) on real estate of local by contract or by law, as well as option rights that are of a contractual common law in your jurisdiction? nature.

Belgium is a civil law country, meaning that jurisprudence is 3.2 Are there any scenarios where the right to land diverges not law-making. However, jurisprudence often has an important from the right to a building constructed thereon? interpretative value. A right to build or long-term lease right allows a party to build and 1.3 Are international laws relevant to real estate in your own constructions without being the owner of the land itself. jurisdiction? Please ignore EU legislation enacted locally in EU countries. 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration Real estate is primarily governed by national laws. International consequences of any split? Are there any proposals law may come into play in cross-border transactions where one to change this? or more parties are subject to foreign law, such transactions may also impact the formalities (e.g. apostilling documents) or if certain Belgian law does not recognise a split between the legal title and requirements are translated from an EU Directive into Belgian laws. the beneficial title.

2 Ownership 4 System of Registration

2.1 Are there legal restrictions on ownership of real estate 4.1 Is all land in your jurisdiction required to be by particular classes of persons (e.g. non-resident registered? What land (or rights) are unregistered? persons)? All land is registered in the land registry. In addition, rights in rem There are no general restrictions on real estate ownership as every over land (and certain personal rights, e.g. lease agreements for more natural or legal person is normally entitled to own real estate. than nine years) are transcribed or registered in the mortgage register.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 27 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

4.2 Is there a state guarantee of title? What does it 5.2 How do the owners of registered real estate prove guarantee? their title?

In Belgium there is no state guarantee of title. Only the mortgage register provides a beginning of proof of ownership. An extract of the mortgage register containing all transcription and registrations over the past 30 years (being the 4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? statute of limitation for positive prescription) can be obtained by an interested party. All deeds transferring or designating rights in rem on immoveable The land registry is a tax instrument which provides a presumption Belgium property, including any deeds regarding co-ownership, as well of ownership at best. as lease agreements exceeding nine years are transcribed in the mortgage register. In addition, mortgages are registered in the 5.3 Can any transaction relating to registered real estate mortgage register. be completed electronically? What documents need to be provided to the land registry for the registration of ownership right? Can information on ownership of 4.4 What rights in land are not required to be registered? registered real estate be accessed electronically?

The rights not listed under question 4.3, such as lease agreements In principle, real estate transactions are mandatorily completed by not exceeding nine years, sale and/or purchase options, mortgage a notary public who shall automatically take the necessary steps for mandates, etc. the (electronic) registration of the transfer at the land registry. Information on ownership is not electronically accessible. 4.5 Where there are both unregistered and registered land Recently legislation was passed that a sale intra parte could be or rights is there a probationary period following first completed electronically (if certain conditions are met) and to allow registration or are there perhaps different classes or qualities of title on first registration? Please give public auctions online. details. First registration means the occasion upon which unregistered land or rights are first registered 5.4 Can compensation be claimed from the registry/ in the registries. registries if it/they make a mistake?

No probationary period exists in Belgium, neither are there any real No compensation can be claimed from the mortgage registry. You classes of registration. However, concerning mortgages, the time of can ask for a correction or rectification to be made. The notary registration is crucial to determine its rank towards other mortgages public is liable for any mistake attributable to him. on the same property.

5.5 Are there restrictions on public access to the 4.6 On a land sale, when is title (or ownership) transferred register? Can a buyer obtain all the information he to the buyer? might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved Although ownership normally transfers at the moment that an by a search of the register? If not, what additional agreement is reached on the sale, it is customary to stipulate that the information/process is required? transfer of ownership and risk shall be postponed until the execution of the authentic deed which will be opposable to all third parties as Upon payment of a fee, anyone can request an extract from the of its transcription in the mortgage register. mortgage register. The request should specify the immoveable property and the person(s) to which it relates as the extract shall only contain information on the transcribed rights of those persons 4.7 Please briefly describe how some rights obtain over such property, as well as on the mortgage(s) encumbering such priority over other rights. Do earlier rights defeat later rights? property. The mortgage registry can also provide copies of deeds transcribed Unless in the event of bad faith, the time of transcription or registration or registered in the mortgage register. of the right in the mortgage register is decisive to determine the priority of one right over another (e.g. in case of a double sale, if multiple mortgages are granted over the same property, etc.). 6 Real Estate Market

6.1 Which parties (in addition to the buyer and seller 5 The Registry / Registries and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or 5.1 How many land registries operate in your jurisdiction? duties. If more than one please specify their differing rules and requirements. Lawyers usually assist the buyer and/or seller in the due diligence There is one land registry (“kadaster/cadastre”) and a mortgage process and the drafting of contractual documents (LOI, sale and registry (recently renamed “kantoor rechtszekerheid/bureau purchase agreement, review of the deeds, etc.). A considerable sécurité juridique”) which is divided into different administrations amount of transfers of professional real estate takes place through per geographic area. share deals instead of an asset deal.

28 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

An asset deal cannot proceed without the assistance of a notary public for the authentic deed and subsequent registration formalities. 7 Liabilities of Buyers and Sellers in Real Each party is entitled to appoint its own notary public. Estate Transactions Other parties that could be involved are real estate brokers, architects, environmental advisors, etc. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate?

6.2 How and on what basis are these persons remunerated? Agreements between parties on price and the object used to be sufficient for transfer of real estate. However, over the last decades, several regulatory formalities were installed of which non- The fees of the notary public are determined by law and depend Belgium upon the purchase price. The fee is to be split if multiple notaries compliance is sanctioned with the sale being declared null and void. public are involved. The formalities differ between the Regions and relate to information that should be provided to the buyer prior to the sale (e.g. town Other parties are free to determine their own fee. planning information, soil certificate, EPC, PIF, etc.). An authentic deed is required for the opposability of the sale 6.3 Is there any change in the sources or the availability towards third parties and contains information on the ownership of capital to finance real estate transactions in history, pre-emption rights, fuel tanks, post intervention file, as well your jurisdiction, whether equity or debt? What are as mandatory fiscal notifications. the main sources of capital you see active in your market? 7.2 Is the seller under a duty of disclosure? What matters Private persons mainly finance their acquisitions through still cheap must be disclosed? debt. For a long time, the Belgian real estate market has been seen as a The seller has no explicit duty of disclosure aside from the information stable market taking into account its size and the limited availability mentioned above. The duty to disclose by the seller is to be seen in of seizable real estate products. The presence of the EU institutions combination with the duty of the buyer to get informed. Belgian and other international organisations in Brussels do attract law does require parties to act in good faith which implies that other international investors. International (pension and insurance) funds relevant information may have to be disclosed to a potential buyer. occupy the market together with the Belgian REITs. Institutional Sale agreements usually contain a provision that the seller shall not investors searching for yield redirect bond investments to real estate. be liable for any visible or hidden defects in the property, except to the extent the seller was aware of the hidden defects. 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and 7.3 Can the seller be liable to the buyer for what are the sectors/areas of most interest? Please misrepresentation? give examples. Liability for an untrue or misleading statement can be established, but The appetite for investors is high, due to the comparatively high the burden of proof is high, especially if the seller made no contractual real estate yields compared with neighbouring countries, still decent guarantees and has disclosed all the information in its possession. real estate yields compared to low yielding bonds and high-valued The sale can be declared null and void if the buyer establishes deceit equity markets. It is no surprise that the investment volume for of the seller or error. If the seller acted in bad faith (possibly during 2018 is likely to be close to the levels before the crisis of 2008 and the pre-contractual phase), the buyer may claim compensation. that non-core products are gaining market share. Retail is under the spell of the millennials forcing a lot of retailers to rethink their organisation. In 2018, we can note that the largest 7.4 Do sellers usually give any form of title “guarantee” crunch on yield is to be seen in logistics. New legislation on more or contractual warranties to the buyer? What would be the scope of these? What is the function of any flexible employment in e-commerce business may be a further such guarantee or warranties (e.g. to apportion risk, boost. The Belgian market has seen a doubling in size in “co- to give information)? Would any such guarantee or working” office space, a real estate product which still has to show warranties act as a substitute for the buyer carrying its robustness for investors. Student and senior housing (in its out his own diligence? current model) seem to have reached their top prior to 2018. Contractual warranties in an asset deal are often limited to the 6.5 Have you observed any trends in particular market seller’s knowledge (e.g. regarding polluting activities that have sub sectors slowing down in your jurisdiction in taken place at the property, regarding easements that apply, etc.). terms of their attractiveness to investors/developers? The agreement usually contains some informative provisions Please give examples. describing the current situation of the property without giving any guarantees in that respect (e.g. current use of the property, whether Retail is under the spell of the millennials forcing a lot of retailers to certain taxes are imposed such as vacancy tax, etc.). rethink their organisation. The new challenges are mainly stemming The warranties and guarantees do not substitute a proper due from e-commerce which is causing investors to be more cautious diligence carried out by the buyer. of major investments in this sector currently, with the exception of products in prime locations. In respect of an asset deal the notary will carry out a title search covering a 30-year period in order to establish evidence of ownership of the seller (see question 5.2).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 29 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

deeds to be executed before a notary public. A mortgage should also 7.5 Does the seller retain any liabilities in respect of the be inscribed in the mortgage register. property post sale? Please give details.

Such liabilities are very limited and often relate to environmental 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other and town planning matters (e.g. soil pollution of which the clean-up creditors? obligations of the seller continue post-sale, liability for any illegal constructions, etc.). In share deals such post-closing potential By taking out a mortgage, the lender becomes a preferential creditor liabilities will be negotiated more frequently. up to the secured amount.

Belgium A mortgage mandate does not give the lender the status of 7.6 What (if any) are the liabilities of the buyer (in addition preferential creditor. It shall contain triggering events upon which to paying the sale price)? occurrence the lender may convert the mandate into a mortgage; the borrower should immediately notify the lender of the occurrence of In addition to the purchase price, the buyer ordinarily has to pay the such event. costs related to the real estate transfer (e.g. notary fees, transfer tax, registration duties, etc.). 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 8 Finance and Banking In principle, the security cannot be avoided or rendered unenforceable.

8.1 Please briefly describe any regulations concerning However, a Belgian bankruptcy judgment may contain a the lending of money to finance real estate. Are the hardening period of a maximum of (in principle) six months prior rules different as between resident and non-resident to the bankruptcy judgment. Certain transactions (e.g. security persons and/or between individual persons and granted) that occur during this hardening period can be declared corporate entities? unenforceable against the bankrupt estate.

The Civil Code contains the main regulations on loan contracts and 8.7 What actions, if any, can a borrower take to frustrate securities. There are no different rules between residents and non- enforcement action by a lender? residents, but more protective rules exist in favour of consumers. In principle, there are no specific actions that the borrower can 8.2 What are the main methods by which a real estate take to frustrate an enforcement action by the lender. However, lender seeks to protect itself from default by the the borrower can always try to reach an amicable solution with borrower? the lender to stop the enforcement action or use regular procedural actions if it did comply with its own obligations. Lenders usually require a security to protect themselves. In Belgium, a limited mortgage over the property is often used in combination with a mortgage mandate for the remainder to lower 8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a the costs thereof. real estate lender? Other securities that may be used are pledges over receivables and bank accounts, share pledges, parent guarantees, etc. If the lender has taken out a security, the lender becomes a privileged creditor up to the amount of the security. See also question 8.6. 8.3 What are the common proceedings for realisation of If the debt of the borrower is larger than the secured amount and if mortgaged properties? Are there any options for a the debt (and secured amount) exceeds the proceeds of the secured mortgagee to realise a mortgaged property without good – or if the lender did not take out any security – the lender involving court proceedings or the contribution of the has no special position in the borrower’s insolvency procedure (for mortgagor? the excess) and shall be proportionally paid together with the other unprivileged creditors of the remaining proceeds of the bankrupt Mortgaged property can only be realised if (i) the debt is due, (ii) the estate. mortgagee has an executable title, and (iii) the mortgagee complies with the procedure of executive seizure of real property by which as final step the judge of seizure appoints a notary public who will be 8.9 What is the process for enforcing security over responsible for the (public) sale of the property. shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, Careful drafting of the mortgage title is essential as it can only serve can shares be appropriated when a borrower is in as an executable title if it contains all information to verify whether administration or has entered another insolvency or the debt is due. Otherwise, an additional court order is required reorganisation procedure? which slows down the realisation process. A share pledge can be realised at the occurrence of an event of 8.4 What minimum formalities are required for real estate default by the borrower. Such event shall usually be defined in the lending? share pledge agreement. In principle, and in accordance with the Financial Collateral Law of 15 December 2004, the realisation of There are no minimum formalities. However, often a lender shall the share pledge does not require a prior notice or judicial decision. require a mortgage and/or mortgage mandate which are authentic

30 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

If agreed by the parties and despite an insolvency procedure, an event of default may entitle the lender to appropriate the shares that 9.6 Is taxation different if ownership of a company (or constitute the security. other entity) owning real estate is transferred? The courts may retrospectively check the conditions for the Unlike an asset deal which is subject to transfer tax or VAT, there realisation of the security. is no specific tax (related to the underlying real estate) imposed on a share deal of a real estate SPV, exceptions to be made for special 9 Tax regimes such as Belgian REITs.

9.7 Are there any tax issues that a buyer of real estate

9.1 Are transfers of real estate subject to a transfer tax? Belgium should always take into consideration/conduct due How much? Who is liable? diligence on?

All real estate asset deals are subject to transfer tax or VAT. The tax aspect is an important element in deal structuring, e.g. choice The amount of the transfer tax is different for each region and between share or asset deal, split sale whereby one entity purchases depends upon the type of right being transferred: the bare ownership of the land (at 10%/12.5%) and another entity a ■ Full ownership: 10% in Flanders and 12.5% in the right in rem (at 2%), etc. Brussels Capital Region and the Walloon Region but more It is not uncommon to obtain a prior tax ruling from the tax advantageous regimes exist for, e.g. real estate developers, authorities in this regard if a less straightforward structure is used. individuals purchasing their own house, etc. ■ Right in rem: 2%. The agreement usually provides that the acquirer is liable to pay 10 Leases of Business Premises the transfer tax. However, all contracting parties are jointly liable towards the tax authorities. 10.1 Please briefly describe the main laws that regulate leases of business premises. 9.2 When is the transfer tax paid? Following the latest Belgian State reform, the Regions (Flanders, The transfer tax should be paid within four months after the sale the Walloon Region and the Brussels Capital Region) became and purchase of the property. In practice, it is paid at the time of the competent for commercial lease law. Until such regional regulations execution of the authentic deed before the notary. are adopted, the Federal law remains applicable. Currently, the following regulations are relevant: 9.3 Are transfers of real estate by individuals subject to ■ general Belgian lease law included in the Civil Code which is income tax? applicable to office leases; ■ Commercial Lease Act of 30 April 1951; and In general, a real estate asset deal by individuals is not subject to ■ Flemish Decree of 17 June 2016 and the Walloon Decree of income tax if the individual acts as a bonus pater familias and the 15 March 2018 on short-term commercial leases. transfer is part of the normal administration of its assets.

10.2 What types of business lease exist? 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? Belgian lease law provides a special regime for retail premises and for retail premises that are let for a short term. An asset transfer of ‘new’ constructions (as defined in the VAT The lease of any other business premises is subject to the general Code) is subject to 21% VAT (exceptions do exist, e.g. social lease law included in the Belgian Civil Code. housing at 6%), instead of transfer tax. The purchase price payable by the buyer is increased by VAT, subsequently the seller has to pay the VAT to the VAT administration. 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of If the new property is sold by one entity, the VAT is imposed on both term; (b) rent increases; (c) tenant’s right to sell or the new constructions, as well as the land. If the ownership of the sub-lease; (d) insurance; (e) (i) change of control of land and the constructions is split between different entities (e.g. by the tenant; and (ii) transfer of lease as a result of a means of a right to build), the land is transferred under transfer tax corporate restructuring (e.g. merger); and (f) repairs? and the constructions under VAT. In this section we will only describe the typical provisions (often 9.5 What other tax or taxes (if any) are payable by the reciting the mandatory law) included in retail lease agreements seller on the disposal of a property? subject to the Commercial Lease Act: (a) Length of term: usually entered into for nine years, as this is the The main tax cost in an asset deal is the transfer tax or VAT. mandatory minimum term under the Commercial Lease Act. Furthermore, there are the notary costs which also include the (b) Rent increases: lease agreements are generally subject to transcription and registration cost for the mortgage register. annual indexation on the basis of the official health index. At the expiry of every three-year period, each party is entitled to If the seller is a company, it shall be subject to corporate income tax request an adjustment of the rent before the Justice of Peace on the capital gain created by the disposal of the property. if it can be shown that the normal rent is at least 15% higher or lower than the contractually determined rent as a result of new circumstances.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 31 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

(c) Tenant’s right to sell or sublet: often contractually prohibited. Such prohibition is invalid if the tenant transfers or subleases 10.6 Does the landlord and/or the tenant of a business the lease agreement in full together with the transfer or lease cease to be liable for their respective sublease of its goodwill (the prohibition remains valid if the obligations under the lease once they have sold their landlord lives in part of the leased premises). interest? Can they be responsible after the sale in respect of pre-sale non-compliance? (d) Insurance: generally the tenant is required to take out the necessary insurances in relation to its own liability, its activity and the leased premises. If the leased premises are part of The Commercial Lease Act entitles the tenant to transfer its lease a larger complex, the landlord often takes out the insurance agreement together with its goodwill, but the original tenant shall policy for the building and charges the costs pro rata to the remain severally liable with the new tenant for the obligations that tenant. stem from the original lease (for its original duration). Belgium (e) (i) Change of control of the tenant: change of control clauses Assuming the landlord transfers the leased property by means of an are unusual. Proper wording would be essential as it may not asset deal, the landlord remains liable for any non-compliance prior impair the rights of the tenant under the Commercial Lease to the sale of the property. Act. The landlord’s obligations post-sale should be assessed in view of (ii) Transfer of lease as a result of a corporate restructuring (e.g. merger): usually commercial lease agreements do not (i) the lease agreement and whether it allows the assignment on contain a clause in this regard. behalf of the landlord, and/or (ii) the transfer agreement of the lease (especially if the tenant would be a party hereto). (f) Repairs: deviating from general lease law, the landlord often requires that any maintenance and repair works regarding the leased premises are borne by the tenant, except for works 10.7 Green leases seek to impose obligations on related to the structure of the building. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 10.4 What taxes are payable on rent either by the landlord briefly describe any “green obligations” commonly or tenant of a business lease? found in leases stating whether these are clearly defined, enforceable legal obligations or something Until recently lease agreements were, in general, exempt from VAT not amounting to enforceable legal obligations (for and subject to registration duties. However, there were always example aspirational objectives). exceptions such as the immoveable VAT lease, warehouse lease, business centres, etc. Green leases are not yet common practice and, if existing, they On 4 October 2018, the optional system for the application of VAT often concern new or newly renovated buildings. More often some on lease agreements for professional real estate as of 1 January 2019 clauses can be found where both sides, landlord(s) and tenant(s), was approved. cooperate to reduce the environmental footprint of the building and provide for an effort obligation on either side. For certain property types (e.g. residential premises, offices), an 10.5 In what circumstances are business leases usually information duty is imposed on the landlord who should provide its terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant with a valid energy performance certificate (EPC). In the near tenant to extend or renew the lease or for either party future, this obligation shall extend to other non-residential premises. to be compensated by the other for any reason on termination? 10.8 Are there any trends in your market towards more flexible space for occupiers, such as shared By law, the tenant under a commercial lease is entitled to terminate short-term working spaces (co-working) or shared the agreement at the expiry of every three-year period with six residential spaces with greater levels of facilities/ months’ prior notice. Therefore, agreements often expire either at activities for residents (co-living)? If so please provide their termination date or at the end of a three-year period. examples/details. The landlord may not terminate the agreement early unless explicitly provided for in the lease agreement and only to actually run a Recently, both the Flemish and the Walloon government have commercial activity in the premises itself or by a family member/ adopted a decree on short-term commercial leases which are subsidiary of the company. commonly referred to as “pop-up commercial leases”. If terminated because of a default of the tenant or landlord, the As stated before, the volume of flexible co-working space has termination of the agreement should be requested in court. doubled in 2018 and further volumes are to be expected. New co- living and working concepts are popping up on the market which The retail tenant has a preferential right to renew the lease agreement stem from the student housing concept. at its expiry. This right can be exercised three times for a period of nine years each. If the renewal is refused, the tenant is entitled to a lump sum indemnity varying between zero and three years’ rent, 11 Leases of Residential Premises depending on the reason for non-renewal. In other business leases, parties are free to stipulate termination 11.1 Please briefly describe the main laws that regulate modalities, be it that in practice a termination possibility at the end leases of residential premises. of each three-year period is most common, unless parties agreed on a longer fixed term. Residential lease law became a competence of the Regions. New regulations have been adopted in the Walloon Region and the

32 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

Brussels Capital Region and are expected soon to be adopted in Flanders (expected early 2019). 12 Public Law Permits and Obligations Currently, the main laws are: ■ Act of 20 February 1991 on lease agreements regarding the 12.1 What are the main laws which govern zoning/ main domicile of the tenant; permitting and related matters concerning the use, development and occupation of land? Please briefly ■ Brussels Ordinance of 27 July 2017 on the regionalisation of describe them and include environmental laws. the residential lease agreement; and ■ Walloon Decree of 15 March 2018 on the residential lease Following the Belgian State reforms, the Regions have become agreement. almost exclusively competent for zoning and environmental matters,

including granting permits and ensuring permit compliance. Belgium 11.2 Do the laws differ if the premises are intended for The most important regulations are: multiple different residential occupiers? ■ Flemish Decree of 25 April 2014 on the unique permit; ■ Brussels Town Planning Code of 9 April 2004; and The Brussels and Walloon lease regulations provide for additional rules for certain types of residential lease, such as co-tenancy. ■ Walloon Territorial Development Code of 20 July 2016.

11.3 What would typical provisions for a lease of 12.2 Can the state force land owners to sell land to residential premises be in your jurisdiction regarding: it? If so please briefly describe including price/ (a) length of term; (b) rent increases/controls; (c) the compensation mechanism. tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation Several expropriation regimes exist in Belgium (both Federal and to the property “costs” e.g. insurance and repair? Regional regulations). The Belgian Constitution establishes that expropriation may take place for public utility purposes only and in (a) Length of term: residential leases are generally entered into return for appropriate and prior compensation. for nine years. However, short-term leases with a maximum of three years are also possible. Furthermore, certain public authorities have a pre-emption right over certain properties. The price and sale conditions are most often (b) Rent increases/controls: rent is often subject to annual those agreed upon with the initial buyer who would purchase the indexation at the official health index. Although often not contractually defined, parties are entitled to request a rent property if the pre-emption right would not be executed. revision every three years. (c) The tenant’s rights to remain in the premises at the end 12.3 Which bodies control land/building use and/or of the term: for nine-year residential lease agreements, occupation and environmental regulation? How do it is mandatory law that if no notice is given prior to the buyers obtain reliable information on these matters? termination of the lease agreement, the agreement is automatically extended for another three years. Depending on the size of the permit (town planning and/or (d) The tenant’s contribution/obligation to the property “costs”: environmental), the permit is granted at the Municipal, Provincial or minor repair and maintenance works are borne by the tenant, Regional level. Infringements are detected and, where appropriate, other repair and maintenance works are the landlord’s sanctioned by the Regional inspection services. responsibility. The real estate property tax cannot be imposed on the tenant if the leased premises are the domicile of the Buyers can request the town planning information regarding the tenant. property, the content of which differs slightly between the Regions.

11.4 Would there be rights for a landlord to terminate a 12.4 What main permits or licences are required for residential lease and what steps would be needed building works and/or the use of real estate? to achieve vacant possession if the circumstances existed for the right to be exercised? Though slightly different between the Regions, in general, the following type of licences must be obtained: Except in case of a contractual default by the tenant, in which ■ Building permit. case the termination should be requested in court, the landlord is ■ Allotment permit (only when a division in plots of land is entitled – be it under variation in the three Regions – to terminate needed). the agreement: ■ Environmental permit (only when the construction relates to ■ at any time by giving six months’ prior notice, to occupy the classified installations). good itself or by its relatives; ■ For retail establishments or commercial complexes, a socio- ■ at the end of the first or second three-year period by giving six economic permit. months’ prior notice, to carry out major renovation works in the leased premises; and ■ at the end of the first or second three-year period by giving six 12.5 Are building/use permits and licences commonly months’ prior notice and paying compensation of, respectively, obtained in your jurisdiction? Can implied permission nine or six months’ rent. be obtained in any way (e.g. by long use)?

Town planning regulations are of public order, so if a permit is required no implied permission can be obtained. Carrying out such works without a permit, exposes the principal, as well as the architect and/or contractor(s) to penalties.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 33 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

Constructions that date back prior to the first Town Planning Act Other environmental clean-up measures (e.g. asbestos removal) of 29 March 1962 enjoy a presumption of permit. Some Regional may be required under the Well-being Act of 4 August 1996 if there legislation also provides in statute of limitation periods for certain is a risk to the well-being of the employees employed at the site. building infringements.

12.10 Please briefly outline any regulatory requirements 12.6 What is the typical cost of building/use permits and for the assessment and management of the energy the time involved in obtaining them? performance of buildings in your jurisdiction.

The principal cost in relation to the building permit is the fee of The three Regions have adopted a regional climate plan and the architect, whose assistance is mandatory for most permit implemented the Directive 2010/31/EU of the European Parliament Belgium applications. Furthermore, an administrative fee of which the and of the Council of 19 May 2010 on the energy performance of amount varies between the Regions is due. buildings (EPB). The time to obtain a permit varies between the Regions and depends Usually, the energy performance that is required, depends on the on the size of the project. The maximum time in first instance is 210 nature of the construction works (e.g. new construction, invasive days (this includes possible extensions). renovation, non-invasive renovation, etc.). The EPB that needs to be achieved also varies from the type of 12.7 Are there any regulations on the protection of historic construction (schools, offices, governmental buildings, etc.). monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use? 13 Climate Change

Protection of historic monuments is a competence of the Regions, 13.1 Please briefly explain the nature and extent of any who all have their own legislation. regulatory measures for reducing carbon dioxide The main obligations relate to the preservation of the monument, emissions (including any mandatory emissions as well as prohibitions to alter or damage the monument. In return, trading scheme). owners or users may be entitled to certain subsidies or fiscal advantages. The EU Directive 2003/87/EC has been transposed into Belgian law by means of several cooperation agreements between the Federal State and the three Regions, as well as by means of various regional 12.8 How can e.g. a potential buyer obtain reliable regulations, which, inter alia, include a mandatory emission trading information on contamination and pollution of real scheme. estate? Is there a public register of contaminated land in your jurisdiction? 13.2 Are there any national greenhouse gas emissions All Regions have legislation on soil pollution. reduction targets? In Flanders and Brussels, a valid soil certificate should be present at the time of the sale. In the Walloon Region, the notary public should In Belgium, the main focus in emission reduction targets are the consult the database on the soil condition in case of a transfer. This European and international goals (e.g. the Walloon Climate Decree database will only become operative as of 1 January 2019. of 20 February 2014 refers to such reduction targets as an objective).

12.9 In what circumstances (if any) is environmental clean- 13.3 Are there any other regulatory measures (not already up ever mandatory? mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? The Regional legislation on soil pollution contains different triggers that require a soil investigation, and where appropriate, clean-up Promoting sustainable development is key for the Federal State measures. The most important triggers are: and the three Regions. They all have comprehensive sustainable development programmes. Next to that, they advocate for sustainable ■ transfer of a right in rem; public tendering, which implies that sustainable development must ■ termination of a so-called risk activity (i.e. listed as potentially be taken into account when issuing a public tender. polluted); Several subsidies and tax cuts are in place which promote sustainable ■ (periodic) investigation if a risk activity is carried out; and development and construction. ■ occurrence of an event of damage.

34 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London ALTIUS Belgium

Lieven Peeters Kathleen Verbiest ALTIUS ALTIUS Havenlaan 86C B414 Avenue du Port Havenlaan 86C B414 Avenue du Port BE 1000 Brussels BE 1000 Brussels Belgium Belgium

Tel: +32 2 426 14 14 Tel: +32 2 426 14 14 Email: [email protected] Email: [email protected] URL: www.altius.com URL: www.altius.com Belgium Lieven is partner and heads the (corporate) real estate practice Kathleen has a strong focus on transactional real estate law. at ALTIUS. He is a renowned expert in the field of real estate and She advises both Belgian and international clients on a wide range construction has a deep knowledge of contracts law and general of real estate and regulatory matters such as drafting and negotiating commercial law. As partner, he heads the (corporate) real estate all types of agreements (sale and purchase agreements, contracting practice at ALTIUS. agreements, leases, etc.), construction matters, soil pollution, town Lieven advises his clients in all aspects of complex real estate planning issues, etc. transactions, including: the structuring of real estate projects; real Kathleen also has experience in appeal procedures against decisions estate M&A; sale-and-leaseback transactions; joint ventures; leasing; on permit applications, as well as in real estate-related litigation. and split structures. Lieven has advised on various major transactions in the Belgian market involving: large shopping centres and several logistic centres; office buildings; commercial properties; large inner- city (re-)developments; and on other real estate niche products (including senior citizens’ housing and mixed-use projects). Lieven is a member of various professional organisations in Belgium and is also MRICS. Lieven is recognised as a real estate expert in various directories and surveys.

ALTIUS’ real estate & regulatory practice gives our clients a clear advantage by using its in-depth sector know-how to advise on issues concerning private law (property issues, rights in rem, etc.) and public law (town planning and zoning rules, building and allotment permits, soil issues, expropriation and public domain issues). Our team assists in complex real estate transactions and (re-)structuring (divestitures, sale-and-leaseback, PPP and development contracts). Our clients come to us from across industry sectors for advice on various kinds of real estate transactions, structures and products. We focus on our clients’ objectives by proposing solutions, rather than focusing on problems. Our team brings a strategic perspective to help optimise deal benefits and to lead our clients through the entire property life cycle. We make sure that legal and commercial interests are protected and that risks are limited. Our team functions within a fully-integrated law firm.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 35 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 5

Brazil Maria Flavia Seabra

Machado, Meyer, Sendacz e Opice Advogados Juliana Ribeiro

1 Real Estate Law 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in There are no international laws competent to real estate in Brazil. response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in 2 Ownership response to questions in Section 9.

2.1 Are there legal restrictions on ownership of real estate The Brazilian Civil Code, which provides that the ownership of real by particular classes of persons (e.g. non-resident estate may be acquired by either acquisition, adverse possession, persons)? accession or succession rights. The Brazilian Civil Code also establishes other rights that are associated with real estate but Brazilian law imposes restrictions on the acquisition and lease of not based on any personal relationship (in rem rights), which are rural land in Brazil by foreigners. The Brazilian Foreign Ownership enforceable against third parties, such as surface rights, easements Land Control Law, which governs the acquisition and use of rural and usufruct. lands by: (i) foreigners who have permanent residency in Brazil; The Real Estate Development Law, which approaches two main and (ii) foreign legal entities authorised to operate in Brazil, shall subjects: the development of real estate enterprises composed by also apply to Brazilian companies controlled by foreigners. Federal autonomous units; and building condominiums. Act No. 5,709/1971 and its regulatory Decree No. 74,965/1974 The Land Statute regulates the use, occupation and rural land provide some of the restrictions applicable to the acquisition and relations in Brazil. The referred law provides for the State’s lease of rural property by foreign legal entities authorised to operate responsibility and obligation of guaranteeing the right of access to in Brazil. Acquisition or lease of rural land in violation of the such rural land for those who live and work there. restrictions is deemed as null and void and the State Public Notaries (responsible for drafting the title), as well as the Land Registry, are The City Statute provides for urban land policies in general, as well liable for the non-observation of them. as other instruments that aim to help the implementation of urban development. The Parcelling of Real Estate Property Law concerns urban spaces 3 Real Estate Rights that are destined for building and specifically targets the urbanisation of individual plots of land, by dividing or unifying them into parcels intended for the exercise of elementary urbanistic functions and 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual building. between the parties? Public Registry Law regulates any kind of public registry in Brazil, including the registration of real estate ownership by the Land Brazilian law recognises the owner’s rights over its own real estate Registry. (ownership and possession), rights over third parties’ real estate Certain real estate matters are regulated by either state or municipal (such as surface, easement and usufruct) and collaterals (such as laws, rather than by federal laws, such as real estate taxes, registry mortgage and conditional sale). proceedings, and zoning and environmental regulations. Possession is an exercise, complete or partially, of the powers inherent in ownership, which may arise from a purely contractual 1.2 What is the impact (if any) on real estate of local relationship between the parties (e.g. lease) or an in rem right (e.g. common law in your jurisdiction? ownership).

This is not relevant as our legal system is based on civil law.

36 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

3.2 Are there any scenarios where the right to land 4.4 What rights in land are not required to be registered? diverges from the right to a building constructed thereon? As a general rule, possession rights are not required to be registered.

Such scenarios exist in Brazil through surface and slab rights. The surface right entitles an individual with the right to plant or build 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first on a third party’s land for a determined period of time. After this registration or are there perhaps different classes period, the plantation and/or the building constructed on the real or qualities of title on first registration? Please give estate shall be incorporated and belong to the landowner (grantor), details. First registration means the occasion upon Brazil unless otherwise established by the parties. The Federal Law No. which unregistered land or rights are first registered 13,465/2017 establishes a new in rem right in the Brazilian Civil Code: in the registries. the slab right (direito de laje), which is an in rem and autonomous right to the upper or lower surface of a base-construction. It will be There is no probationary period for the registration of land or titles subject to a separate recording with the Land Registry and may be in Brazil. On the other hand, titles may be differently classified sold to third parties and even be subject to a security interest. according to the chronological order of their registration with the Land Registry, e.g. the first mortgage registered is deemed as a first degree mortgage whereas a mortgage registered right after is 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration deemed as a second degree mortgage, being the latter’s fulfilment consequences of any split? Are there any proposals subjected to the former’s. to change this? 4.6 On a land sale, when is title (or ownership) transferred There is no formal split between legal title and beneficial title in to the buyer? Brazil or proposal to change this scenario. However, the Brazilian Civil Code provides the usufruct, which is an in rem right similar The transfer of ownership is only perfected upon the duly registration to the title split, by which the right holder is entitled to possess, of the transfer title with the competent Land Registry. administer and gather the fruits and benefits arising from the real estate owned by a third party. 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later 4 System of Registration rights?

The date and order number given to the title by the Land Registry at 4.1 Is all land in your jurisdiction required to be the time of the filing for registration grants priority among different registered? What land (or rights) are unregistered? rights. In this sense, earlier rights, if duly registered, should be prioritised over those registered afterwards. Yes, it is. The Public Registry Law provides that each property must be recorded with the competent Land Registry. 5 The Registry / Registries 4.2 Is there a state guarantee of title? What does it guarantee? 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules Brazil does not have any state guarantee of title. In view of a real and requirements. estate transaction, the potential acquirer of rights shall perform a prior legal due diligence in order to verify material issues that may In Brazil, each judiciary district has at least one Land Registry affect the intended transaction. Moreover, the corresponding title Office, since each property must be recorded with the Land Registry must be registered with the competent Land Registry in order to be Office responsible for the area where the real estate is located. In effective against third parties. larger cities, the Land Registry is divided into several offices, as defined by the competent state law. 4.3 What rights in land are compulsory registrable? What Brazilian Registry Law regulates the general rules, but each (if any) is the consequence of non-registration? State, through its control agencies, may issue specific rules and requirements relating to the registration proceedings. The in rem rights over real estate, including ownership, must be registered with the competent Land Registry by the concerned party. 5.2 How do the owners of registered real estate prove In the event of lack of registration, the right should take effect only their title? between the contracting parties and, therefore, third parties will not be forced to comply with it. Ownership may be proved through the presentation of the title Moreover, according to Brazilian Lease Law, recording a lease certificate of the real estate with the relevant registration ofthe agreement on the respective real estate title certificate grants to owner’s right. This is because the Brazilian Civil Code binds the the lessee: (i) the right to maintain the lease in the event that the ownership’s effectiveness and enforceability against third parties to property is sold to a third party during the lease term, provided that the due registration of the acquisition title with the competent Land the agreement expressly sets forth the effectiveness clause; and (ii) Registry. in case of a breach of the lessee’s right of first refusal, the right to retrieve the leased real estate transferred to a third party.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 37 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

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

Transactions relating to real estate cannot yet be completed The Brazilian market has been stressed due to the economic electronically in Brazil. For the sale of real estate that is worth instability and the uncertain political scenario. As a result, real estate more than 30 minimum wages and/or the transfer of in rem rights transactions have been directly affected by high interest rates, the Brazil related to such real estate, it is necessary to enter into a public deed growth of inventories of repossessed properties and rescinded sales, executed by a Notary Public. diminishing governmental subsidies and the lack of credit. However, Usually, the required documents to be submitted to the Land Registry the devaluation of the Brazilian currency and the deterioration of are the ownership title, the personal documents of the parties the local market are making Brazil an attractive option to foreign involved, the debt clearance certificates of the real estate and its investors. transferor and the evidence of payment of the real estate transfer tax. It is only possible to obtain information on ownership of registered 6.4 What is the appetite for investors and/or developers real estate electronically in certain judiciary districts (e.g. Land to invest in your region compared to last year and Registries of the States of São Paulo and Rio de Janeiro). what are the sectors/areas of most interest? Please give examples.

5.4 Can compensation be claimed from the registry/ The appetite of investors and developers has been increasing since registries if it/they make a mistake? the first quarter of 2018, especially in comparison of the same period in 2017. The increase in the number of real estate developments If there is any proven damage, compensation can be claimed due to launched (due to lower interest rates in comparison to those applied in registries’ civil responsibility on the conduction of their works and 2017) and commercial transactions published recently demonstrates eventual damages suffered by third parties. that the real estate crisis in Brazil is gradually decreasing. Currently, long-term leases of commercial real estate and low- 5.5 Are there restrictions on public access to the income housing projects still represent the major number of register? Can a buyer obtain all the information he transactions in the real estate sector. might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved by a search of the register? If not, what additional 6.5 Have you observed any trends in particular market information/process is required? sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? There are no restrictions on public access to the register in Brazil and Please give examples. it is possible to obtain the principal information related to the real estate (e.g. if there are any liens or encumbrances over it) through The Brazilian real estate market has been affected by the economic the analysis of the relevant title certificate issued by the competent crisis, as discussed in question 6.3 above. In the current scenario, Land Registry Office. it is possible to indicate that the sub sector most affected is the development of residential and some kinds of commercial buildings. There is a lack of credit for this sector, the buyers are 6 Real Estate Market more conservative and the number of repossessed properties and rescinded sales have been growing due to the indebtedness of the middle class. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally Moreover, it is possible to indicate that the lease market of corporate be involved in a real estate transaction in your buildings and office spaces is also slowing down due to the low jurisdiction? Please briefly describe their roles and/or demand and the high cost of vacant properties. duties.

It depends on the complexity of the transaction. In general, a broker, 7 Liabilities of Buyers and Sellers in Real a technical team responsible for construction issues of the building, Estate Transactions and an environmental team are involved.

7.1 What (if any) are the minimum formalities for the sale 6.2 How and on what basis are these persons and purchase of real estate? remunerated? The acquisition title must be recorded with the competent Land The commission of the broker is normally a percentage of the price, Registry, and for the sale of real estate worth more than 30 minimum payable by the seller at the closing, unless otherwise agreed by the wages, the title must be a public deed executed by a Public Notary. parties. With respect to the technical and environmental teams, the Moreover, it is necessary to present the evidence of the collection of price of their services is normally based on the size and complexity the real estate transfer tax and the required certificated related to the of work, as well as the characteristics of the real estate. real estate and the seller.

38 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

■ The Housing Finance System (“SFH”) is designed to facilitate 7.2 Is the seller under a duty of disclosure? What matters and promote the construction and acquisition of home ownership must be disclosed? with lower interest rates, focusing on the low-income population. The financing funds within the scope of the SFH originate There is no specific legal provision in this regard. However, primarily from the Employee’s Time-In-Service Guarantee Fund according to the good faith principle, which governs all negotiations and from savings account deposits. It may be used in transactions in Brazil, the seller should fully disclose to the buyer all facts and/ where: (i) borrowers themselves will be the users of the financed real estate; (ii) the unit value of each loan, covering principal or acts that may affect the value, use and/or the ownership of the and auxiliary expenses, is limited to 80% of the value of the real estate. In general, the disclosures involve environmental property; and (iii) the maximum appraisal value of the real damages, encumbrances and liens, claims, construction issues and estate must be R$1,500,000 (depending on the State where the Brazil the existence of third parties occupying the real estate. real estate is located and the date of the financing transaction). ■ The Real Estate Financing System (“SFI”) provides for the 7.3 Can the seller be liable to the buyer for granting, acquisition and securitisation of real estate loans. misrepresentation? The SFI is more flexible as it is directed to every kind of real estate financing, not only to individuals housing as is the case with the SFH. The seller can be liable for misrepresentation if, as a result, the buyer suffers a loss. 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the 7.4 Do sellers usually give any form of title “guarantee” borrower? or contractual warranties to the buyer? What would be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, The financial institution must previously conduct the evaluation to give information)? Would any such guarantee or of the transaction risk, which includes ensuring the securities are warranties act as a substitute for the buyer carrying sufficient and the borrower’s capacity to pay the debt. out his own diligence?

8.3 What are the common proceedings for realisation of Usually, sellers grant contractual warranties to the buyer relating mortgaged properties? Are there any options for a to title, past use of the real estate, licensing status, the lack of third mortgagee to realise a mortgaged property without party rights over the real estate, tax and environmental issues. involving court proceedings or the contribution of the The purpose of the warranties is to provide information to the mortgagor? parties and to apportion risks between them. However, since the representations and warranties provide a limited amount of The enforcement of mortgage is always conducted in a court information, they are not a substitute for the buyer’s due diligence. proceeding but does not depend on the contribution of the mortgagor. In such proceeding, the property will be sold at a public auction conducted by the judge. On the other hand, the creditor of a fiduciary 7.5 Does the seller retain any liabilities in respect of the assignment of real estate enforces its security by means the promotion property post sale? Please give details. of up to two non-judicial auctions for the sale of the property.

No, once the main obligations that bind the real estate to its fulfilment are: the payment of real estate taxes; collaterals; and those 8.4 What minimum formalities are required for real estate deriving from environmental responsibility, which have propter rem lending? nature (i.e. directly with regards to the real estate and not its owner). Nevertheless, Brazilian legislation entitles the damaged party who Please refer to the answers to questions 8.1 and 8.2. Additionally, has not given rise to the liability with the right of recourse against real estate lending follows the legal requirements established for the party who did it. any lending transaction, such as the execution of a lending contract between a lender and a borrower.

7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other In addition to paying the sale price and the real estate transfer tax, creditors? the liabilities and obligations of the buyer can all be agreed upon by the parties in the acquisition title. Real estate lenders normally have more protection from claims against the borrower or the real estate asset by other creditors whenever the documents executed in the lending transaction 8 Finance and Banking comply with the law and regulations, including requirements for the validity of the documents, as capable parties, or for the perfection of securities over real estate property, including registration with 8.1 Please briefly describe any regulations concerning the competent Land Registry, as mentioned below in question 8.6. the lending of money to finance real estate. Are the rules different as between resident and non-resident persons and/or between individual persons and 8.6 Under what circumstances can security taken by a corporate entities? lender be avoided or rendered unenforceable?

There are two main current systems created by Brazilian and they Both the mortgage and the fiduciary assignment of real estate are only available for residents. property are perfected upon the registration of the relevant document

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 39 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

with the relevant Land Registry. Generally, security taken by a The major advantage of fiduciary assignments when compared to lender can be avoided or rendered unenforceable when formality pledges consists in the remedy of restitution available in an insolvency requirements are missing in the creation document or the security is event: the creditor benefiting from a fiduciary lien may claim its not duly registered with the relevant Land Registry. rights in respect of the asset and foreclose on it directly, without the need to take part in the insolvency procedure, although the Brazilian Bankruptcy Law sets forth a 180-day stay period, during which 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? certain capital assets must remain with the debtor, as explained above.

The borrower can always undertake judicial measures to discuss or 9 Tax Brazil attempt to stop enforcement action by lender. Notwithstanding this fact, precedents have been developed in courts in order to avoid merely postponing the acts of borrowers. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable?

8.8 What is the impact of an insolvency process or a The transfer of real estate is subject to the Real Estate Transfer Tax corporate rehabilitation process on the position of a (“ITBI”), which is charged on the remunerated transfer of a real real estate lender? estate or in rem rights related to a real estate, with the exception of collateral. The ITBI is a municipal tax, which is a percentage of the It will depend on the type of collateral taken by the lender to transaction or the appraised value of the property, usually from 2% guarantee its credit. The most common types of collateral used to 5%, as defined by each Municipality. The ITBI shall be borne by in Brazil in real estate transactions are mortgage and fiduciary the buyer, unless agreed otherwise by the parties. assignment. If transfer results from legal or testamentary inheritance and In a bankruptcy scenario, mortgage enforcement will be subject donations, the transaction is subject to the Inheritance and Donations to the bankruptcy automatic stay. However, credits secured by a Transfer Tax (“ITCMD”). The ITCMD is a state tax and its rates mortgage have privilege over unsecured creditors. On the other usually vary from 1% to 8% of the assessed value of the transferred hand, if the guarantee is a fiduciary assignment, in the event asset. The ITCMD shall be borne by the grantee of the right. of bankruptcy of the debtor the fiduciary owner is entitled to consolidate full ownership over the collateral and must then sell such collateral and apply the proceeds arising from such a sale to 9.2 When is the transfer tax paid? satisfy the secured debt obligation. As a general rule, enforcement of a fiduciary assignment should not be prevented or stayed by the Usually, the ITBI must be paid before the drawing up of the public filing or granting of a judicial recovery proceeding. In certain cases, deed by the Notary Office and the ITCMD must be paid up to 30 where the encumbered assets are deemed essential to the activities of days after the ratified decision that determines the payment, ina the debtor, the secured creditor may be prevented from foreclosing causa mortis transfer, or before the execution of the corresponding upon such assets during the judicial recovery stay. contract, in a donations transfer.

8.9 What is the process for enforcing security over 9.3 Are transfers of real estate by individuals subject to shares? Does a lender have a right to appropriate income tax? shares in a borrower given as collateral? If so, can shares be appropriated when a borrower is in If there is a difference between the asset’s sale price and its cost of administration or has entered another insolvency or acquisition, the seller is subject to income tax at a rate that varies reorganisation procedure? from 15% to 22.5% of such difference.

In Brazil, the most common forms of security interests over movable assets (such as shares) are the fiduciary assignment and the pledge. 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? The conditional ownership of the shares is transferred to a fiduciary owner in order to secure performance of an obligation, such as No, they are not. the payment of a debt. In case of a default, the fiduciary owner consolidates full ownership over the shares and must then sell such asset and apply the proceeds arising from such a sale to satisfy 9.5 What other tax or taxes (if any) are payable by the the secured debt obligation. Similarly to the real estate fiduciary seller on the disposal of a property? assignment, property of the shares given as collateral is not part to the bankrupt estate, and, therefore, it is not subject to the company’s In addition to the ITBI or ITCMD, if the seller is a Brazilian company, bankruptcy and related stay. it will be subject to Corporate Income Tax and Social Contribution In the pledge, if the debtor fails to pay the relevant secured obligation, on Net Profit, generally charged at a joint rate of 34%. Additionally, the creditor will have the right to sell the encumbered asset through a depending on the activity of the company, the purpose of the asset private or judicial sale and use the proceeds to satisfy the unpaid debt. and company’s tax regime, PIS/COFINS may also be charged. A private sale is indeed possible, if the parties contractually agree to On the other hand, if the seller is an individual or a non-resident in it. In principle, pledge agreements cannot provide for creditors to Brazil, it will be subject to Income Tax. keep pledged assets if the debtor fails to pay the secured obligation.

As a general rule, credits secured by pledges will have preference 9.6 Is taxation different if ownership of a company (or over other credits in relation to any foreclosure on the encumbered other entity) owning real estate is transferred? asset. But there are exceptions to the rule, especially in the event of bankruptcy. There is an exception for the ITBI if a property is transferred to the

40 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

assets of a legal entity as paid-in capital, or rights resulting from (e) Change of control of the tenant and transfer of the lease as a a spin-off, merger, consolidation, or dissolution of a legal entity, result of a corporate restructuring: except if, in such cases, the buyer develops a real estate activity as Provisions regarding change of control and transfer of the lease are its main business. commonly negotiated by the parties according to their specific case. (f) Repairs: 9.7 Are there any tax issues that a buyer of real estate According to the Brazilian Lease Law, improvements performed in should always take into consideration/conduct due real estate may be classified as (i) necessary (for safety purposes), diligence on? (ii) useful (to improve the use of the property), or (iii) decorative (superficial or for decorative purposes). The tax arising from the ownership of urban and rural real estate Brazil As a rule, (i) necessary improvements shall be reimbursed by the should always be taken into consideration. lessor, even when performed without prior authorisation, (ii) useful improvements are only reimbursed when previously authorised 10 Leases of Business Premises by the lessor, and (iii) decorative improvements are not subject to reimbursement by the lessor, but may be removed by the lessee upon expiration of the agreement. Different conditions may be 10.1 Please briefly describe the main laws that regulate established by the parties. leases of business premises. Please note that Built to Suit Agreements and lease of spaces in shopping malls, as indicated in the answer to question 10.2 above, Real estate urban leases are regulated by Federal Law No. are subject to specific rules. 8,245/1991 and the possession of third parties’ real estate for promoting rural activities is regulated by Federal Law No. 4,504/1964, as well as by the general rules of the Brazilian Civil 10.4 What taxes are payable on rent either by the landlord Code. Property leases may be executed either in writing or verbally. or tenant of a business lease?

The lessors are required to pay income tax on the profits of the lease. 10.2 What types of business lease exist? Lessees, on the other hand, do not pay any taxes. Legally, current owners are liable for real estate property tax, but lease agreements There are either residential leases or commercial leases. With may establish that the lessee shall be responsible before the lessor respect to commercial leases, the Brazilian Lease Law provides for payment during the term of the lease. specific rules for leased properties constructed or refurbished by the lessor in accordance with the needs and specifications of the lessee (Built to Suit Agreements) and Shopping Centre leases. 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a 10.3 What are the typical provisions for leases of business tenant to extend or renew the lease or for either party premises in your jurisdiction regarding: (a) length of to be compensated by the other for any reason on term; (b) rent increases; (c) tenant’s right to sell or termination? sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a Considering commercial leases executed for a specific period of corporate restructuring (e.g. merger); and (f) repairs? time, the lessee has the right to early terminate the lease at any time, upon a 30-day prior notice period and the payment of a penalty (a) Length of term: proportional to the remainder of the term of the lease agreement. Lease agreements may be entered into for definite or indefinite terms. Moreover, the lessee has the right to obtain, by means of a judicial (b) Rent increases: procedure, the compulsory renewal of the lease agreement, if the Although not mandatory by law, rents in Brazil are usually paid on requirements provided by Brazilian Lease Law are complied with. a monthly basis and must be established in the Brazilian national In case of commercial lease agreements entered into for indefinite currency (Reais). terms, each party may terminate the agreement without any penalty Lease agreements are usually readjusted on an annual basis, vis-à- by means of 30 days prior written notice. vis the variation of an official consumer or a market price index. Regardless of any price adjustment mechanisms provided in the 10.6 Does the landlord and/or the tenant of a business agreement, Brazilian Lease Law provides that, after three years into lease cease to be liable for their respective the agreement, the lessee and lessor may each judicially request the obligations under the lease once they have sold their interest? Can they be responsible after the sale in rent to be reviewed in order to reflect current market prices. respect of pre-sale non-compliance? (c) Tenant’s right to sell or sub-lease: As a rule, the assignment of the lease agreement and the sublease In case of sublease by the lessee to a third party, the lessee shall of the leased real estate depend on prior and written approval of remain liable before the lessor for the obligations arising from the the lessor. lease agreement. (d) Insurance: As a rule, the lessor must get insurance against fire and other damages for the leased property. It is, however, common to contractually establish that the payment of such insurance shall be made by the lessee during the lease term.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 41 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

The rules that govern the rent increases/controls: the tenant’s 10.7 Green leases seek to impose obligations on contribution/obligation to the property “costs”, e.g. insurance and landlords and tenants designed to promote greater repair, are the same as those applied to commercial leases, which are sustainable use of buildings and in the reduction of detailed in the answer to question 10.3. the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly found in leases stating whether these are clearly 11.4 Would there be rights for a landlord to terminate a defined, enforceable legal obligations or something residential lease and what steps would be needed not amounting to enforceable legal obligations (for to achieve vacant possession if the circumstances example aspirational objectives). existed for the right to be exercised? Brazil Commercial buildings in Brazil have been adopting a more green The residential lease agreement with a term of less than 30 months and sustainable approach. However, there are not yet any legal can be terminated by the lessor for their own use, or their spouse, responsibilities provided in Brazilian legislation related to such ascendant or descendant, that does not have its own residential real “green obligations”, which are usually connected to international estate and if the uninterrupted term of the residential lease exceeds certificates of sustainability granted to the whole building and must five years. The steps that would be needed to achieve vacant be observed by all lessees. possession are: (i) send a 30-day prior notice to the lessee; and (ii) file an eviction lawsuit for their own use. 10.8 Are there any trends in your market towards more flexible space for occupiers, such as shared short-term working spaces (co-working) or shared 12 Public Law Permits and Obligations residential spaces with greater levels of facilities/ activities for residents (co-living)? If so please provide examples/details. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, development and occupation of land? Please briefly The inclination of the Brazilian market towards the co-working and co- describe them and include environmental laws. living tendency is very noticeable, especially in the big cities, where the costs for the acquisition and lease of spaces is higher. Users are Zoning and related matters concerning the use and occupation of interested in the decrease of costs, on the networking experience and in land are governed by the competent state laws, municipal zoning the multiplicity of structures, suitable for different kinds of purposes. regulations and by local building codes. Each Municipality, therefore, has its own regulations and specifications. 11 Leases of Residential Premises Regarding environmental laws, Complementary Law No. 140/2011 and Resolution No. 237/1997 may be deemed the main regulations at the Federal level. 11.1 Please briefly describe the main laws that regulate leases of residential premises. According to Complementary Law No. 140/2011, the jurisdiction of the Federal environmental agency, the Brazilian Institute of the Environment and Renewable Natural Resources applies to the Leases of residential premises in Brazil are regulated by the same licensing of the activities with significant environmental impact on legislation as commercial leases. a regional or international level, or located in certain protected areas such as indigenous land and territorial waters, among others. The 11.2 Do the laws differ if the premises are intended for municipal environmental entities, on the other hand, are responsible multiple different residential occupiers? for the licensing of undertakings, which have a local impact. The state environmental authorities have subsidiary jurisdiction to No, they do not. conduct the licensing process of activities the impact of which is restricted to their territory, as well as to impose the pertinent 11.3 What would typical provisions for a lease of conditions, restrictions and control measures. residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the 12.2 Can the state force land owners to sell land to tenant’s rights to remain in the premises at the end of it? If so please briefly describe including price/ the term; and (d) the tenant’s contribution/obligation compensation mechanism. to the property “costs” e.g. insurance and repair?

According to the Brazilian Federal Constitution, the real estate must There is no provision in the Brazilian legislation regarding a specific respect its social function. Therefore, if the social function of the term for residential leases. However, Brazilian Lease Law grants the real estate becomes of public or social concern, the State is entitled to tenant certain protections in residential lease agreements executed expropriate it upon the payment of the corresponding indemnification for a minimum of a 30-month term. to the owner of the land. The State is also entitled to use private real Tenant’s right to remain in the premises at the end of the term: estate in case of imminent public danger. In this case, in the event of for residential lease agreements executed for a minimum of 30 any damages, the owner should be properly compensated. months, at the end of the agreed lease term, the lessor can recover the property without stating reasons and is not obligated to renew the contract. However, if the lessee remains in the property after 12.3 Which bodies control land/building use and/or such a term for more than 30 days without being given notice to occupation and environmental regulation? How do buyers obtain reliable information on these matters? leave by the lessor, the lease is automatically renewed, but with an indefinite period. Land/building use and/or occupation regulations are governed by

42 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

the Municipality. The buyer must request the necessary permits and licences to build, remodel the building and/or operate in the 12.9 In what circumstances (if any) is environmental clean- competent Municipality according to the specific zoning rule. As up ever mandatory? per the environmental regulation, the Complementary Law No. 140/2011 established the main aspects of the environmental licensing In case contamination is identified in an area, remediation is jurisdiction. Therefore, the entity that controls the environmental mandatory due to the Brazilian civil liability legal framework. licensing (federal, state or municipal) will depend on the specifics of the project, including the activities that will be performed and the 12.10 Please briefly outline any regulatory requirements location thereof. for the assessment and management of the energy

performance of buildings in your jurisdiction. Brazil 12.4 What main permits or licences are required for building works and/or the use of real estate? There are no regulatory requirements in Brazil for assessment and management of the energy performance of buildings. A municipal licence to construct (Work Permit), the Municipal Work Conclusion Certificate certifying the compliance of the building 13 Climate Change with the Work Permit, the Fire Department Inspection Notice, and the Municipal Business License authorising the exercise of certain activity in certain zoning area. 13.1 Please briefly explain the nature and extent of any Regarding the environmental aspects, the licences required depends regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions on the intended construction and the environmental aspects that it trading scheme). may cause. It is possible to highlight the preliminary, installation and operation licences, which are necessary for each phase of In line with the policies outlined by the United Nations Framework a potentially polluting enterprise; special authorisations for the Convention on Climate Change, as well as according to the goals interference in Permanent Preservation Areas and to handle established when the Kyoto Protocol was put into force, Brazil has archaeological and historical/cultural heritage assets; among others. developed its own guidelines and objectives on the reduction of greenhouse gas emissions, mainly by means of the National Policy 12.5 Are building/use permits and licences commonly on Climate Change. The legislation in force provides for specific obtained in your jurisdiction? Can implied permission guidelines on air emissions, as well as on emission standards, be obtained in any way (e.g. by long use)? however, no emissions trading scheme has been implemented so far by the public authorities. Yes, building/use permits and licences are commonly obtained Additionally, during the environmental licensing process, the in Brazil, as per questions 12.1 and 12.4. There is no implied competent authorities may require the adoption of control measures permission. by the entrepreneurs, the improvement of existing equipment and the periodic monitoring of the emission of gases. 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? 13.2 Are there any national greenhouse gas emissions reduction targets? The answer to such matter varies in each different state and Municipality, as well with the complexity of the intended enterprise. The National Policy on Climate Change sets as target the decreasing of projected greenhouse gas emissions from 36.1% to 38.9% by 12.7 Are there any regulations on the protection of historic 2020. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use? 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? There are restrictions applied to the possession, maintenance, construction and activities developed in the real estate. Conditions to establish more efficient water use systems are being imposed by environmental agencies in the environmental licences 12.8 How can e.g. a potential buyer obtain reliable of potentially polluting enterprises, amongst others. information on contamination and pollution of real estate? Is there a public register of contaminated land in your jurisdiction? Acknowledgment The authors would like to acknowledge the assistance of their Certain states have public registries of contaminated areas. In the colleagues Caio Fernandes and Thais de Gobbi in the preparation State of São Paulo, for example, the state environmental agency of this chapter. provides a list of contaminated areas that can be accessed online.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 43 © Published and reproduced with kind permission by Global Legal Group Ltd, London Machado, Meyer, Sendacz e Opice Advogados Brazil

Maria Flavia Seabra Juliana Ribeiro Machado, Meyer, Sendacz e Opice Machado, Meyer, Sendacz e Opice Advogados Advogados Avenida Brigadeiro Faria Lima, 3144 Avenida Brigadeiro Faria Lima, 3144 São Paulo, SP São Paulo, SP Brazil Brazil

Tel: +55 11 3150 7428 Tel: +55 11 3150 7641 Email: [email protected] Email: [email protected] URL: www.machadomeyer.com URL: www.machadomeyer.com Brazil

Maria Flavia Seabra is Partner and Head of the Real Estate practice. Juliana Ribeiro is a specialist in structuring real estate business She is a specialist in real estate law, provides legal assistance in general, as well as in the analysis of risks related to real estate in the structuring of several real estate business, such as property assets and collaterals in M&A transactions and capital markets. Her acquisition operations, leasings, built to suit, and investments in practice encompasses a range of real estate businesses, such as the real estate sector of the country, as well as in the structuring of due diligence for the acquisition of rural and urban properties, drafting real estate development, regularisation of properties, financing and purchase contracts (purchase and sale commitment, final deed, guarantee in structured operations. She has extensive experience in exchange instruments and payment in kind, among others), providing registry matters. Is a member of the Diversity Committee of Machado legal assistance for the implementation and development of projects Meyer, leading the group’s initiatives in the office. She is ranked, in through real estate development or land division registry, condominium the 2018 edition, as one of the best lawyers in Real Estate Law by the incorporation, and disposal of further units, in addition to the provision publication Chambers Latin America. According to this guide, Maria of legal assistance on a range of matters related to real estate contracts Flavia has demonstrable strengths in real estate development and and in rem rights, including registry matters. She has previous registry matters. Sources describe her as “an extremely talented and experience in areas of knowledge such as developers and construction knowledgeable lawyer” who “is consistently doing high-quality work”. companies, hotel industry, investment funds, banks, and retail.

We have been building our history for 45 years, inspired by sound ethical principles, the technical skills of our professionals, and a close relationship with our clients. We are ranked as one of the major law firms in Brazil, with over 700 professionals. We have chosen our focus: business. It is in this segment that we use our legal potential, always looking for innovative solutions, capable of anticipating scenarios and making business possible. An integrated service that combines expertise in various areas of law. Broad knowledge of legislation and a thorough understanding of business, which go beyond simple problem-solving to create and preserve value for companies. We work doggedly to offer intelligent legal solutions that contribute to the business growth of our clients and transform realities.

44 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 6

Costa Rica Hernan Cordero B.

Cordero & Cordero Abogados Rolando Gonzalez C.

an individual right strongly protected by our Constitution. This same 1 Real Estate Law protection is also granted by the Constitution to non-resident persons and/or foreigners. The only exception to the general rule is with 1.1 Please briefly describe the main laws that govern regards to shoreline property. The Maritime Zone Law specifically real estate in your jurisdiction. Laws relating to limits ownership of properties located within the first 200m adjacent leases of business premises should be listed in to the shoreline for: i) foreigners that have not resided in the country response to question 10.1. Those relating to zoning for at least five years; ii) corporations with bearer shares; iii) and environmental should be listed in response to corporations registered or established abroad; iv) corporations and/ question 12.1. Those relating to tax should be listed in or entities constituted or established by foreigners; or v) corporations response to questions in Section 9. in which more than 50% of the stock capital is owned by foreigners.

The main laws that govern real estate in Costa Rica are: a) the Civil Code; b) the Notarial Code; c) the National Registry Regulations; d) 3 Real Estate Rights the National Cadastral Law; e) the Transfer Tax Law; f) the General Law of Urban and Sub-Urban Leases; g) the Adverse Possession Law; h) the Maritime Zone Law; i) the Regulatory Law of the 3.1 What are the types of rights over land recognised in Touristic Gulf of Papagayo; and j) the Income Tax Law. your jurisdiction? Are any of them purely contractual between the parties?

1.2 What is the impact (if any) on real estate of local In Costa Rica, the types of rights available are: a) ownership rights: common law in your jurisdiction? those that have been formally registered before the Property Registry and are subject to transfer, mortgage and liens, guarantees and The impact is low. Local custom is a non-written source of our legal development possibilities such as subdivisions and condominium; system, which shall only be used to make interpretations, to limit b) possession rights: those acquired through an occupation of rights and/or integrate the recognised written sources. Judicial precedent that can also be transferred following formalities, but which have or “jurisprudence”, as it is commonly known in our system, is not no public effect in front of third parties. Such possession has to be a source of our private law legal system, which is primarily based proven as being public, pacific and without interruption for more on statutory law. than 10 years; and c) use rights: those which grant only the use and enjoyment of a property, such as i) “usufruct” in which the person 1.3 Are international laws relevant to real estate in your that uses the property is not the owner but has a right to use and jurisdiction? Please ignore EU legislation enacted benefit during a certain defined timeframe, ii) “lease agreements” locally in EU countries. in which someone has right to use the property by means of a formal rental relationship with the owner, iii) transformation and International laws are not directly relevant to real estate in our disposition of the right, and iv) exclusion and defence rights. The jurisdiction. However, international treaties duly approved by the usufruct and the lease right are both contractual between the parties. Costa Rican Congress rank higher than local laws, thus they should be considered (if applicable). There are also international laws that 3.2 Are there any scenarios where the right to land may become relevant, especially those related to taxes. diverges from the right to a building constructed thereon? 2 Ownership Yes, there are several scenarios where the right to a real estate diverges from the right to a building constructed thereon. The first example 2.1 Are there legal restrictions on ownership of real estate is pursuant to the “Accession Right”. This right establishes that by particular classes of persons (e.g. non-resident property does not limit itself to the land, as it also extends to whatever persons)? is located above or below it. It allows the owner or a third party to build whatever is legally authorised on the land and it shall belong to The general rule is that there are no legal restrictions on ownership of the land where it was built. If a third party builds something on such real estate by particular classes of persons. Real estate ownership is land, the construction belongs to the land on which it was built.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 45 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

Another example is pursuant to a registered “Usufruct Right” over a property where the real estate diverges from the right to a building 4.3 What rights in land are compulsory registrable? What constructed. Thus the owner of the absolute fee simple title over the (if any) is the consequence of non-registration? land may grant a third party the usufruct right in order for this third party to use and enjoy the land and/or the construction thereon as In general, all rights in land are compulsorily registrable to have his/hers, for a specific time period or for his undetermined lifetime. legal effect against third parties. Article 459 of the Civil Code establishes the following rights in land as compulsorily registrable: a) titles of dominion over property; b) all liens, encumbrances or 3.3 Is there a split between legal title and beneficial title rights that limit property, such as usufruct rights, easements and in your jurisdiction and what are the registration any other real estate rights or limitations that affect land; c) lease consequences of any split? Are there any proposals agreements (may be registered); d) condominium or co-property

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

46 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

5 The Registry / Registries 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and 5.1 How many land registries operate in your jurisdiction? other rights affecting real estate and is this achieved If more than one please specify their differing rules by a search of the register? If not, what additional and requirements. information/process is required?

As established in question 4.5 above, the official registration of There are no restrictions on public access to the information in the real property is made through one centralised Registry System that National Registry. A buyer can in fact obtain all the information is administered by the Real Property Registry of the Costa Rican they might reasonably need regarding encumbrances and other

National Registry. This system applies to the entire territory and rights affecting real estate by a search of the Register. Costa Rica therefore all properties must be registered in it.

6 Real Estate Market 5.2 How do the owners of registered real estate prove their title? 6.1 Which parties (in addition to the buyer and seller Owners of registered real estate prove their title by means of a and the buyer’s finance provider) would normally certification that can be issued either by the Real Property Registry be involved in a real estate transaction in your or by a Notary Public. Properties are identified before the Real jurisdiction? Please briefly describe their roles and/or Property Registry through a specific real estate number (“folio real” duties. in Spanish). A certification (consultation document issued by the Real Property Registry) of the real estate number will provide all Other parties involved in real estate transactions are: (a) Notaries the information pertaining to the property, such as, but not limited Public (which are, as indicated above, registered attorneys-at- to location, current owner, boundaries, registered area, cadastre plat law): responsible to execute the purchase and sales deed which number, as well as all rights and liens affecting the property. This is registered before the National Registry; (b) attorneys-at-law: real estate number certification and the information it contains is execute the due diligence process and provide legal advice on legal publicly available information and can be obtained physically at the matters and make disclosures that may affect the transaction. Both National Registry and/or electronically. Notaries Public and attorneys-at-law are usually the same person and/or work together; and (c) Real Estate Brokers: assist both the Based on the above, the Real Property Registry does not issue a buyer or seller or both, to buy or sell a property. It is customary physical title document to the owners of a registered real estate; for Brokers to provide advice and/or services related to: fair market however, upon request, it can issue a real estate number certification value; inspection of the property; follow-up on closing details, etc. together with the above-indicated information, including the owner and relevant information and this is how owners prove their title. 6.2 How and on what basis are these persons remunerated? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration (a) Notaries Public are remunerated at closing. Their legal fees of ownership right? Can information on ownership of are established pursuant to a pre-established table and are registered real estate be accessed electronically? approximately 1% of the real estate transaction amount; and (b) Real Estate Brokers are also remunerated at closing, pursuant Unfortunately, at this moment in time, transactions relating to the to a previously negotiated real estate commission. Although this real estate commission is not legally established, it is registration of real estate cannot be completed electronically. However, normally between 5% and 6% of the real estate transaction this is expected to become a reality soon. A pilot programme was amount. It is also customary that the Real Estate Broker recently conducted in which, a selection of notaries were allowed receives from the parties the equivalent to 13% sales tax for to electronically file and electronically complete some transactions the real estate commission, which he collects and pays to the related to the registration of real estate. Some areas of the National Government. Registry are exclusively working with electronic documents already.

In order to register ownership rights before the National Registry, 6.3 Is there any change in the sources or the availability a true first copy of the purchase and sales deed executed byand of capital to finance real estate transactions in between the parties before a Notary Public should be filed, along your jurisdiction, whether equity or debt? What are with confirmation of payment of the applicable transfer tax and the main sources of capital you see active in your registration fees. Court rulings or resolutions which grant ownership market? to a specific party are documents that also have to be filed for real estate-related rights to be recorded. There is no change in the sources or the availability of capital to As indicated above, information on ownership of registered real finance real estate transactions. In general terms, the main sources estate can be obtained both physically and electronically. for real estate financing are: (a) Public and Private Banks and other supervised financial institutions; (b) Private Lenders (not registered as banks or financial entities); and (c) Private Funds or Investors. 5.4 Can compensation be claimed from the registry/ The main source of capital in our market is without a doubt our registries if it/they make a mistake? banking system (Public and Private Banks along with other supervised financial institutions); however, in some areas where the Yes, compensation can be claimed from the National Registry if it predominant buyers are foreigners, that source is Private Lenders, makes a mistake. All compensation claims need to be filed through who offer loans to buyers or developers in order to acquire the land an Administrative Law Suit against the National Registry.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 47 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

or finance part of the acquisition of real estate. These funds from Private Lenders are usually targeted to foreigners and/or unqualified 7 Liabilities of Buyers and Sellers in Real buyers, who do not have access to capital – readily available – Estate Transactions through the local banking system, due to the highly strict regulations applicable to Public and Private Banks. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and The minimum formalities for the sale and purchase of real estate what are the sectors/areas of most interest? Please are: both buyer and seller should have sufficient power of attorney give examples. to sell and buy, respectively; and they must execute a transfer deed

Costa Rica before a Notary Public. The transfer deed needs to be executed in Commercial and rental property has been more likely to sell due Spanish, and it shall include the following basic information: proper to a section of the population, jointly with an important foreign identification of the parties; description of the transaction; purchase investment component, looking to expand their real estate price; and a complete description of the property’s information. portfolio abroad. The current economy encourages taking risks, This transfer deed shall represent both parties’ clear intent to sell and turning markets like ours into a very appealing alternative. As buy the property, respectively. Once the transfer deed is executed, well as Costa Rica having been known worldwide mainly for its the Notary Public shall file a copy before the National Registry. All stable democracy that abolished its army in 1948, the country has transfer taxes and registration fees must be duly paid in order for the welcomed foreigners, is located three to five hours away from transfer to be recorded. most major U.S. cities, has a low property tax compared to other countries, and has a very good quality of life. With institutions like 7.2 Is the seller under a duty of disclosure? What matters PROCOMER (public institution devoted entirely to International must be disclosed? Trade) and CINDE (Costa Rican Investment Promotion Agency), our government makes a solid effort to present our country to the The seller is not under a duty of disclosure. Notwithstanding the world as the perfect place to invest. The sectors/areas that have been above, real estate transactions are based on a principle of “good of the most interest recently are Free Trade Zone System Regimes faith” that applies to both parties of the transaction. and second homes in the Guanacaste province, specifically near the coastline. 7.3 Can the seller be liable to the buyer for misrepresentation? 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in Yes, the seller can be liable to the buyer for misrepresentation. terms of their attractiveness to investors/developers? Please give examples. 7.4 Do sellers usually give any form of title “guarantee” Since the crisis of 2008, the real estate market in Costa Rica has or contractual warranties to the buyer? What would be the scope of these? What is the function of any been undergoing a slow but steady recovery process. In most such guarantee or warranties (e.g. to apportion risk, market sub sectors, we have seen important growth in the past to give information)? Would any such guarantee or few years. Nevertheless, due to significant development in the warranties act as a substitute for the buyer carrying Greater Metropolitan Areas where the capital of San José is located out his own diligence? (“GAM”), specifically in the housing, commercial, office and retail submarkets, some of these areas are experiencing excessive Sellers do not usually give contractual warranties to the buyer. supply and as a result, some slowdown is being perceived. This is Based on our civil law legal system, warranties are usually found particularly true with regards to the commercial, office and retail in the law. Nevertheless, these warranties are never a substitute submarkets. Nevertheless, there is still a mild appetite for these sub for the buyer to carry out their own due diligence, which begins sectors, but with a higher dose of caution. by retaining the services of a reputable real estate attorney before In areas outside of the GAM, such as the Central Pacific entering into an agreement. (“Puntarenas”) or North Pacific (“Guanacaste”), there has also been a slowdown in submarkets such as housing (second homes) and 7.5 Does the seller retain any liabilities in respect of the leisure (hotel and resort development). Nonetheless, this slowdown property post sale? Please give details. has not been due to excessive supply or lack of appetite but instead due to a lack of new products because of a lack of infrastructure Yes. The seller warrants that the buyer will enjoy legal possession such as roads, water and aqueduct systems. Thus, there is still of the property in an undisturbed and unpossessed way. This can be an increase of investors from abroad looking for these products, inferred as a “warranty of good title”. The seller also warrants that both for investment purposes and for retirement purposes. The the property is sold and transferred free of hidden effects. These are government is investing important resources in a long-term solution warranties that are found in the Costa Rican Civil Code. for the water issues that have been affecting some of most attractive areas in the North Pacific. The Daniel Oduber International Airport 7.6 What (if any) are the liabilities of the buyer (in addition located in Liberia, Guanacaste has been expanded and is receiving to paying the sale price)? more international flights than last year. The buyer’s only responsibility is to come up with funds for the closing to pay for the sale price. Those funds must come from a legal source and must present documentary evidence of source of funds.

48 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

The buyer also needs to execute an affidavit in front of a Notary agreeing to this type of guarantee, the lender usually requests Public indicating under oath where those funds come from. The a formal appraisal on the property, in order to identify the buyer must act based on the established principle of “good faith”. approximate value of the property. Once the lender has this information, he will be able to determine in accordance with loan politics the amount that he should lend. In any of the 8 Finance and Banking above-indicated securities, the lender is not allowed to take automatic possession on the assets mortgaged or pledged if the borrower is at default. In such cases, the lender has to 8.1 Please briefly describe any regulations concerning execute the guarantee through an established judicial process. the lending of money to finance real estate. Are the c) Guarantee Trusts: According to the Costa Rican Commercial rules different as between resident and non-resident Code, all legal assets or rights that are subject to commerce may persons and/or between individual persons and be placed in a trust. Under this structure, a third-party Trustee Costa Rica corporate entities? shall hold the title of the assets placed in trust and shall execute the Trust Agreement according to the instructions expressly The main regulation concerning lending money to third parties for indicated in such document. There are new legal guidelines real estate purposes is the Civil Code of Costa Rica. Additionally, that apply for Trust Guarantees, which will affect if these could other parties such as SUGEF (Regulatory Bureau for Financing be used as a guarantee on behalf of a Private Lender. Entities) and the Central Bank of Costa Rica (regulator of all exchange and interest rates in Costa Rica) may also apply. There 8.3 What are the common proceedings for realisation of is no legislation that regulates lending specifically to finance real mortgaged properties? Are there any options for a estate. Basic lending guidelines and regulations that SUGEF mortgagee to realise a mortgaged property without applies to financial institutions are going to apply to any typeof involving court proceedings or the contribution of the financing. In addition, there are no specific differences in these mortgagor? lending guidelines (between residents and foreigners) even though during the last few years, lending institutions have tightened their Once the lender has secured securities such as a Common Mortgage, internal procedures to lend to foreigners as a result of the 2008 a mortgage certificate, or a pledge over registered assets and the economic crisis and increasing compliance rules and regulations. borrower breaches the terms and conditions established in the loan This will also apply to individual and corporate entities. agreement, the lender shall then execute each collateral or security according to the established procedure in the Collection Law (Ley de Cobro Judicial). This law establishes a summary proceeding 8.2 What are the main methods by which a real estate for these types of securities in which the lender will not have the lender seeks to protect itself from default by the borrower? right to take direct or automatic possession over the assets given as collateral. Instead, they will have to request the execution of a public auction and shall obtain payment from the funds obtained at There are several ways in which a lender can take securities or the auction(s). With regards to Guarantee Trusts, the trust agreement collateral in Costa Rica in order to guarantee a loan. Some of the itself shall create the enforcement procedure in case a borrower most common securities or collaterals are described as follows: breaches the terms of the loan agreement. For this purpose, the a) : The borrower provides a property as Common Mortgages Guarantee Trust shall validly create an execution proceeding similar a security for a specific loan. In the mortgage agreement, to that established in the Costa Rican Collection Law; however, it the lender and borrower agree on all terms such as: mortgage grade; lender’s name; borrower’s name; loan amount; term; being executed directly by the same Trustee. This procedure shall advance payment penalty; interest; loan currency; place of take less time than the regular enforcement of a registered security. payment; waiver of previous proceedings in case of an auction; As mentioned above, there are recently approved legislations and and the characteristic contractual clauses that will govern guidelines that prevent all lending transactions from using Guarantee the operation. The mortgage lien imposed over a registered Trusts as a security. This would require further analysis in order to property is also recorded before the National Registry in verify who is the lender, who is the creditor and who is the borrower. the Mortgage Section of the Real Property Registry. The mortgage will be recorded and it will appear on the property’s real estate number certification and the recording will last until 8.4 What minimum formalities are required for real estate it is either: a) cancelled by the lender due to full payment from lending? the borrower; or b) adjudicated by a Judge due to a foreclosure process in which it is legally proven that the borrower has not The minimum formalities to secure a real estate loan – if formally paid or has violated any of the loan terms. secured – shall be according to the Civil Code and Property Registry b) Mortgage Certificates: A mortgage certificate has the same which requires signing and constitution, in favour of the lender, a legal force as a Common Mortgage. The Real Property Common Mortgage, a Mortgage Certificate imposing a lien on Registry issues the mortgage certificate that identifies the the property offered as a first degree guarantee, or transferring the amount for which the certificate is issued and unlike the property into a Guarantee Trust guarantee that will hold such real Common Mortgage where there is an established lender, estate in “fiduciary ownership” during the length of the loan. these certificates may be transferred by mere endorsement. In such cases, the mortgage certificate will also appear as a Other formalities include that the owner of the property should have lien on the property’s ownership entry. This type of guarantee sufficient power of attorney to impose such lien on the property, and is used mainly for bank transactions due to the fact that the must execute a deed before a Notary Public as established above. “Certificates” can be exchanged as commodities, meaning that The deed needs to be executed in Spanish, and it shall include the any person that holds such title when the loan term expires is following basic information: loan amount; payment information; the entitled to collect the amount owed. It is important to note lender’s information; and a complete description of the property’s that mortgage certificates have a 10-year statute of limitations, information. Once the deed is executed, the Notary Public shall file which needs to be reviewed in time in order to avoid a non- a copy before the National Registry. All taxes and registration fees payment from the borrower. There is no limit as to the amount on a Common Mortgage or a mortgage certificate. Before must be duly paid in order for the lien to be recorded.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 49 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

may be forced to contribute to expenses related to collaterals and, 8.5 How is a real estate lender protected from claims proportionally, to those made in the common interest of all creditors. against the borrower or the real estate asset by other creditors? 8.9 What is the process for enforcing security over The real estate lender is protected from claims based on the registration shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, proceedings and recording in the Registry. Formalisms and proper can shares be appropriated when a borrower is in documents – when the loan is granted – are mandatory and the administration or has entered another insolvency or guarantee deeds shall be registered in order to have legal effect before reorganisation procedure? third parties. This means that if the lien (Common Mortgage, Mortgage Certificate) is duly registered, the lender shall have a priority interest The lender is not allowed to dispose or take control of the shares Costa Rica over any other lender. Notwithstanding the above, there are certain unless the established execution process is followed. In order for this legal liens, which might have priority interest over a secured loan, such execution to be valid, it should follow the established due process. as liens imposed due to taxes and/or condominium fees in arrears. Any agreement that violates the above due process is considered null and void. Nevertheless, in case there is a non-fulfilment on behalf 8.6 Under what circumstances can security taken by a of the debtor, the lender can enforce the security either through a lender be avoided or rendered unenforceable? court of law or through a private executor (“corredor jurado”) and recover regular and delayed payment interest. The main circumstances are those directly linked with mistakes In addition, collateral security can be taken over shares through a of procedure or defect of form in which the correct process is not trust agreement. As established above, the shares are transferred to drafted, executed or followed correctly. the Trustee who will execute the trust agreement according to the In Costa Rica, all documents that need to be recorded for publicity instructions expressly indicated in such document. purposes such as, but not limited, to mortgages, trust property or other warranties, shall follow formalities to comply in a form 9 Tax of a public deed. If the deed is not drafted fulfilling the specific requirements that the law indicates, or if it does not comply with the correct formalities, including bad legal advice or lack of registration, 9.1 Are transfers of real estate subject to a transfer tax? these could cause the lender to proceed and claim defects, demurrer How much? Who is liable? or exceptions of different kinds. Proper notification procedures may also cause delays or even In accordance with the Transfer Tax Law, transfers of real estate are in extinguishment of the right to collect or claim such security. It is fact subject to a transfer tax equal to 1.5% levied on the highest of: a) recommended when lending or granting securities to foreigners to the fiscal value of the property; and b) the established sales price. The have a valid notification domicile in Costa Rica. seller and buyer are both liable in equal parts. However, payment of transfer tax is commonly part of the negotiation between the parties.

8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 9.2 When is the transfer tax paid?

The main actions would be those related to procedural deferments or The transfer tax shall be paid within 15 business days of the date and delays that cause an impossibility to notify the defendant, ruled by the time of the transfer deed (taxable event). Judicial Notification Law “Ley de Notificaciones Judiciales Ley 8687”.

Another action would be a defect or lack of formalities on the 9.3 Are transfers of real estate by individuals subject to notification, causing the borrower to file for an invalidity or income tax? nullity of such notification, according to Article 9 of the Judicial Notification Law. Transfers of real estate by individuals are not subject to income The third type of actions are those such as exceptions regulated tax, unless the business activity of the individual is to buy and sell within Article 298 of the Costa Rican Civil Code, such as real estate habitually and/or that individual has taken advantage of prescription, payment exemption, expiration, and others. These can depreciation as a deductible expense. cause a delay in any foreclosure process.

9.4 Are transfers of real estate subject to VAT? How 8.8 What is the impact of an insolvency process or a much? Who is liable? Are there any exemptions? corporate rehabilitation process on the position of a real estate lender? Transfers of real estate are not subject to VAT.

The official declaration of an insolvency process or a corporate rehabilitation process has, among others, two very specific effects: 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? a) cease of common and moratorium interests and; b) all financial obligations become due. A real estate lender that has a registered mortgage lien against a property has a privilege over “common” No other taxes are payable by the seller on the disposal of a property creditors. It is deemed as a preferred or preferential creditor. These in our jurisdiction. creditors take precedence over common creditors. One aspect that In Costa Rica, capital gains are not taxed except when the activity is worth mentioning is that the base for the public auction must be that generates the income is “habitual”, or the gain is generated as a established by an appraiser appointed by the court regardless of what result of the transfer of assets subject to depreciation for corporate was agreed upon in the mortgage document. Real estate lenders income tax purposes.

50 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

be determined by the parties. All types of increases are authorised, 9.6 Is taxation different if ownership of a company (or always with a reasonable limit to avoid abusive increases; (c) an other entity) owning real estate is transferred? express authorisation from the landlord is required for the tenant to sub-lease. However, it is possible for the tenant to transfer their lease The taxation is identical if ownership of a company (or other entity) rights if they sell the business through a “commercial establishment owning real estate is transferred. sale”, following all the formal legal requirements established by the Commercial Code; (d) insurance: parties to the contract are allowed 9.7 Are there any tax issues that a buyer of real estate to determine who shall be responsible for insurance; (e) if the tenant should always take into consideration/conduct due is an entity, chance of control of the entity shall not affect the lease diligence on? agreement; for all legal effects, the entity remains the tenant. If the tenant is an individual, they will not be allowed to assign or Costa Rica When executing a due diligence, buyers, depending on their sublet without the previous and express authorisation from the nationality, should take several important considerations, such as, landlord, unless this possibility has been included as a provision but not limited to: in the lease agreement; and (f) repairs. The landlord has the legal ■ In the case of Nationals of Costa Rica, they shall consider if duty to provide to the tenant a peaceful enjoyment of the premises they plan on renting (leasing) the property or not, developing and to keep it this way. All required repairs to keep this condition it or remaining as raw land and any other possible use of shall be performed by the landlord. These repairs are known as the real estate. Additionally, it is important to determine if “required”. Parties to the contract are allowed to determine who such property will be generate a “deductible” expense for shall be responsible for repairs that are required due to ordinary tear the owner and its implications within time, such as possible and wear but this obligation must be stated in the contract, otherwise capital gains or not, repayment of the investment, expenses to it will become the landlord’s responsibility as well. be deductible – if applicable – towards income tax. ■ In relation to foreigners, in addition to the above-mentioned – when applicable – it is important to understand each country’s 10.4 What taxes are payable on rent either by the landlord requirements for filing tax information forms, pass through or tenant of a business lease? or check-the-box benefits – if applicable – topics such as repatriation of funds and capital gains, withholding taxes and Income tax is to be paid on income generated by rent by the landlord dividend taxes when sending funds back to their home country. of a business lease. The landlord must also pay property or real Another topic that is important to take into account relating to taxes estate taxes. is a proper preparation of estate planning, as this will impact any acquisition and should be included as part of the due diligence. 10.5 In what circumstances are business leases usually It is important for foreign investors to check with their local advisors terminated (e.g. at expiry, on default, by either party and correspond with Costa Rican attorneys to make sure that the etc.)? Are there any special provisions allowing a correct acquisition vehicle is used. tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination? 10 Leases of Business Premises Commercial leases are usually terminated upon expiration of the term and/or by either party. There are circumstances in which payment 10.1 Please briefly describe the main laws that regulate default forces early termination of a lease. Provisions related to leases of business premises. extensions or renewals are typically included in the lease agreements.

The main law that regulates lease of business premises is the 10.6 Does the landlord and/or the tenant of a business General Law of Urban and Sub-Urban Leases. Our Civil Code is lease cease to be liable for their respective supplementary to this law. It is important to understand and to take obligations under the lease once they have sold their into consideration that there are a vast number of rules in the General interest? Can they be responsible after the sale in Law of Urban and Sub-Urban Leases that cannot be waived, even if respect of pre-sale non-compliance? the parties agree to do so. Moreover, all rights granted by this law in favour of the tenant cannot be relinquished. Yes, the landlord and/or the tenant of a business lease cease to be liable for their respective obligations under the lease once they have 10.2 What types of business lease exist? sold their interest, if they have sold following the legal procedures established by law. Nevertheless, they will be liable for pre-sale non-compliance even after the sale. The General Law of Urban and Sub-Urban Leases is applicable to commercial leases, industrial leases, etc. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater 10.3 What are the typical provisions for leases of business sustainable use of buildings and in the reduction of premises in your jurisdiction regarding: (a) length of the “environmental footprint” of a building. Please term; (b) rent increases; (c) tenant’s right to sell or briefly describe any “green obligations” commonly sub-lease; (d) insurance; (e) (i) change of control of found in leases stating whether these are clearly the tenant; and (ii) transfer of lease as a result of a defined, enforceable legal obligations or something corporate restructuring (e.g. merger); and (f) repairs? not amounting to enforceable legal obligations (for example aspirational objectives). Typical provisions for lease of business premises are: (a) length of term: a minimum three-year term in favour of the lessee (able to Green provisions are not typically part of lease agreements in our terminate the lease with a three-month notice); (b) rent increases: to jurisdiction. However, parties to a lease agreement could include

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 51 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

them at will. Recently, these have been included on land subject to of the rent. The necessary steps to achieve vacant possession if the wind and solar projects in accordance with Energy Law No. 7200. circumstances existed for the right to be exercised are outlined in Law No. 9160, which is a special law that contains the proceedings for small claims related to very specific matters related to leases. 10.8 Are there any trends in your market towards more flexible space for occupiers, such as shared There are only two reasons that will allow a landlord to access this short-term working spaces (co-working) or shared expedited process: a) expiration of the contract’s term; and b) lack of residential spaces with greater levels of facilities/ rent payment, utilities and/or Condominium Owners Association fees. activities for residents (co-living)? If so please provide Other rights must be exercised based on the Code of Civil Procedure. examples/details. Article 6 of Law No. 9160 indicates that once the Court has admitted the claim, the eviction order shall be issued along with the preventive Yes. There is a noticeable trend towards more flexible space for retention of the tenant’s assets if requested by the petitioner. Fifteen Costa Rica occupiers, especially for short-term working spaces. Meeting days will be granted to the defendant to present admissible, relevant rooms, offices, learning rooms, etc. are offered for rent even by the and useful evidence. The tenant must continue to deposit the rent hour. This trend is more noticeable in the Great Metropolitan Areas in the Court’s account. The defendant will only be authorised to than in the rest of the country. On the other hand, co-living has yet object to the claim based on payment, statute of limitations and non- to become a trend in our country. expiration of the contractual term. Within 15 days after the objection is filed, the Court must call for an oral hearing. This is considered as a very positive change versus the previous “paper” hearings. 11 Leases of Residential Premises

12 Public Law Permits and Obligations 11.1 Please briefly describe the main laws that regulate leases of residential premises. 12.1 What are the main laws which govern zoning/ The main laws that regulate lease of residential premises are: a) the permitting and related matters concerning the use, General Law of Urban and Sub-Urban Leases; b) the Civil Code; c) development and occupation of land? Please briefly Law No. 9160; and d) the Code of Civil Procedure. describe them and include environmental laws.

The main laws which govern zoning, permitting and related matters 11.2 Do the laws differ if the premises are intended for concerning the use and occupation of land are: the Constitution; multiple different residential occupiers? the Urban Planning Law; the Organic Environmental Law; the Expropriation Law; the Construction Law; the Condominium Law; No, the laws do not differ in cases where the premises are intended the Architectural Heritage Law; and local regulatory plans. In Costa for multiple different residential occupiers. Rica, the administrative organisation in charge of urbanism is the Urbanism Directorate (part of the National Institute of Housing 11.3 What would typical provisions for a lease of and Urbanism) and the Ministry of Planning. These two entities residential premises be in your jurisdiction regarding: have the legal power to elaborate the National Plan for Urban (a) length of term; (b) rent increases/controls; (c) the Development. However, the implementation of national policies is tenant’s rights to remain in the premises at the end of in fact developed at Municipal level. the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? 12.2 Can the state force land owners to sell land to (a) Length of term: the General Law of Urban and Sub-Urban it? If so please briefly describe including price/ Leases contains a mandatory term of a minimum of three compensation mechanism. years. This term must be interpreted in favour of the tenant, who is allowed to terminate the contract prior to the expiration Yes, the Government can force landowners to sell their land. of this mandatory term with written notice given to the Nevertheless, Article 45 of the Constitution includes an essential landlord three months in advance; and guarantee to one of the most relevant rights there is: private property. (b) rent increases/controls: when the rent is in foreign currency, the This Article reads: “Property is inviolable; no one may be deprived rent must remain the same for the whole term of the contract. of its property except for a legally proven public interest upon prior When the rent is in Colones, the rent will be revised at the end compensation in accordance with the law...”. The price set-up of each year of the contract, based on the rules contained in mechanism is established by law based on certain appraisals executed Article 67 of the General Law of Urban and Sub-Urban Leases. in accordance with the standardised price table issued by the Tax In general terms, if the accumulated inflation rate of the 12 months prior to the expiration of each year of the term of the Administrator. The owner of a property, who is being expropriated contract is equal to 10% or less in that country, the landlord can by the Government, in accordance to the General Administrative increase the rent up to 10% per year. If the rate is above 10%, a Public Law and its by-law, can challenge such appraisal. Such law Government office shall determine the increase but it cannot be will also regulate the process and the way in which the landowner a) less than 10%, or b) more than the inflation rate. gets paid once the final resolution is issued. Due to the established Constitutional right, these processes normally take significant time. 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed 12.3 Which bodies control land/building use and/or to achieve vacant possession if the circumstances occupation and environmental regulation? How do existed for the right to be exercised? buyers obtain reliable information on these matters?

Yes, there would be rights for a landlord to terminate a residential For the most part, real estate and construction departments of the lease. The main or principal right would be lack or non-payment Municipal Governments are in charge of controlling land/building

52 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

use and/or occupation. The National Institute of Housing and Urbanism is the entity that controls land/building use at national 12.9 In what circumstances (if any) is environmental clean- level. Environmental regulations are overseen by the National up ever mandatory? Environment Technical Secretariat (“SETENA”) and the Ministry of Environmental and Energy (“MINAE”). According to SETENA and MINAE, any party that affects the environment is subject to strong sanctions and fines. Clean-up requirements and procedures are issued and enforced by these 12.4 What main permits or licences are required for two entities and it is mandatory to compensate for any pollution, building works and/or the use of real estate? economically or through the restitution of damaged areas.

The main permit required for building works would be a building permit. Requesting and obtaining a zoning authorisation from the 12.10 Please briefly outline any regulatory requirements Costa Rica Municipal Government is the way to start. A water availability letter for the assessment and management of the energy performance of buildings in your jurisdiction. from the Water Department is also indispensable. Special licences may be required if a commercial activity is to be developed on the real estate. The Health Department must issue a sanitary permit for The new Code of Construction issued by the Engineering and the Municipal Government to issue a business licence, and liquor Architectural Bureau regulates and enforces new constructions based licences are required for sale of liquor. on their environmental impact, including energy-saving measures and security patterns. Additionally, there are new electric guidelines on interconnection to the grid based on the Distributed Energy by- 12.5 Are building/use permits and licences commonly law, which was recently introduced, allowing net metering though obtained in your jurisdiction? Can implied permission self-generation of solar and wind renewable energy. be obtained in any way (e.g. by long use)?

Yes, building/use permits are commonly obtained in this jurisdiction 13 Climate Change and granted by the local Municipality, including zoning and final construction permits. Implied permission cannot be obtained in any way. 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions 12.6 What is the typical cost of building/use permits and trading scheme). the time involved in obtaining them? Costa Rica has adopted an Open Government Policy. The National The building permit fee is 1% of the project value. The time involved Environmental Information System (“SINIA”) was created under in obtaining a building permit is generally within four weeks of the National Geo-Environmental Information Center (“CENIGA”) the initial application. This timeframe extends considerably if the of the Ministry of Environment and Energy, with the goal to promote approval of SETENA is required. an open data policy for all relevant climate information available for any citizen. The Paris Agreement, coming out of COP21, will be legally binding for Costa Rica starting in 2020. Under the aforesaid 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how Agreement, our country will be part of, starting in 2016 and until are they likely to affect the transfer of rights in real 2020, a process of legal, institutional and organisational change. estate or development/change of use? Costa Rica has internationally committed to have a National Adaptation Plan ready by 2018. Yes, there are regulations on the protection of historic monuments in this jurisdiction. The National Museum of Costa Rica through 13.2 Are there any national greenhouse gas emissions its Archaeology Department, the National Environment Technical reduction targets? Secretariat and the Ministry of Environmental and Energy regulate all matters concerned with historical monuments. This can affect the Yes, there are national reduction targets for greenhouse gas emissions. transfer of real estate or the development of such property. There is On September 30th, 2015, under the United Nations Convention a by-law that establishes the process to request an inspection from framework for Climate Change, Costa Rica submitted its Intended the National Museum in order to verify if the historical monument Nationally Determined Contribution with an unconditional target to can be saved or preserved. By law, all property that is affected by keep net greenhouse gas emissions below 9.37 MtCO2e emissions historical monuments is subject to a lien and prohibited from being by 2030. Costa Rica reconfirmed its aspirations to become carbon developed unless authorised by such entity. neutral by 2021.

12.8 How can e.g. a potential buyer obtain reliable 13.3 Are there any other regulatory measures (not already information on contamination and pollution of real mentioned) which aim to improve the sustainability of estate? Is there a public register of contaminated land both newly constructed and existing buildings? in your jurisdiction? Yes, there is a new Code of Construction issued by the Engineering Information pertaining to contamination and pollution of real estate and Architectural Bureau which regulates and enforces new is not easy to obtain. Perhaps an Environmental Impact Assessment constructions based on their environmental impact, such as energy- (“EIA”) process is the proper way to obtain this kind of information. saving measures, water consumption components, waste treatment The main objective of an EIA is to determine the environmental plant requirements and the possibility to reuse water through feasibility and impact of the project. There is no public register of recollection of rainwater procedures. contaminated land in our jurisdiction.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 53 © Published and reproduced with kind permission by Global Legal Group Ltd, London Cordero & Cordero Abogados Costa Rica

Hernan Cordero B. Rolando Gonzalez C. Cordero & Cordero Abogados Cordero & Cordero Abogados Terraforte Tower, 2nd Floor Plaza Futura, Office 8, st1 Floor PO Box 5998-1000 Liberia Escazu, San José Guanacaste Costa Rica Costa Rica

Tel: +506 2201 6640 / +506 2668 1717 Tel: +506 2668 1717 Email: [email protected] Email: [email protected] URL: www.corderoabogados.com URL: www.corderoabogados.com

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

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

54 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 7

Cyprus

Mantis & Athinodorou LLC Michael Mantis

1 Real Estate Law 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in International laws are not relevant to real estate in Cyprus. response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in 2 Ownership response to questions in Section 9.

2.1 Are there legal restrictions on ownership of real estate The Immovable Property (Tenure, Registration & Valuation) by particular classes of persons (e.g. non-resident Law, Cap. 224 addresses matters concerning the tenure, registration, persons)? disposition and valuation of immovable property. The Acquisition of Immovable Property (Aliens) Law, Cap. 109, According to the Acquisition of Immovable Property (Aliens) outlines the restrictions placed on non-EU citizens. Law, Cap. 109 any foreigners, including foreign companies, as well The Immovable Property (Transfer and Mortgage) Law, No. as companies controlled by foreigners, who are not citizens of a 9/65 regulates mortgages of immovable property and sales of country within the European Union are limited to owning only two mortgaged property. properties in the form of: a) an apartment; b) a house; c) building plot or land; or d) commercial property. The total area for either one The Rent Control Law, No. 23/83 protects the rights of tenants or both forms of real estate should not exceed 4,014 square metres. from the European Union and in some cases lessees. Additionally, Non-European Union nationals must apply and secure The Sale of Immovable Property (Specific Performance) Law a permit from the District Officer for the acquisition of Immovable of 2011 provides remedies for buyers which protect against the Property. The said permit is easily secured within one to two months seller transferring the property elsewhere or refusing to transfer the and, in practice, has become somewhat of a formality. property altogether. Many Non-Europeans wishing to acquire more than two properties, The Compulsory Acquisition of Property Law, No. 15/1962 register a company in Cyprus which allows them the flexibility to outlines the conditions under which the state may acquire property, purchase as many properties as they like. the relevant compensation and return of acquired property if it is not realised. Department of Lands and Surveys (Fees and Charges), Cap. 219. 3 Real Estate Rights Immovable Property (Fees and Charges) Law, Cap. 219 as amended. 3.1 What are the types of rights over land recognised in Streets and Buildings Regulation Law, Cap. 96 as amended. your jurisdiction? Are any of them purely contractual between the parties?

1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? The following types of rights over land are recognised under Cyprus law: Cyprus is a commonwealth country and based on the English (a) Freehold ownership – the owner has the right to use land common law system with influence from the laws of neighbouring for any lawful purpose and sell it when and to whom they choose. countries. Common law does affect real estate to a certain extent. However, the existing laws are comprehensive allowing the court to (b) Leasehold ownership – the lessee has the right to possess interpret but not create judgments that would influence the rights on and use the immovable property for a fixed period as per the terms of the lease agreement executed with the lessor. immovable property.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 55 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

(c) Licence – the licensee has the right to use the property as per the terms of the licence executed with the licensor. 4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? (d) Easements – the right which an owner of land has over another piece of land which is not his, for, e.g. right of way, use of well, etc. There are no compulsory registrable rights for land, some rights may (e) Adverse possession – a special right obtained through open, be registered such as easements, mortgages, life interests, contracts, continuous, and uninterrupted possession despite the real leases over 15 years, right of ways, right of use of wells, etc. owner’s title of private land. The consequence of not registering your rights where possible, is (f) The parties can contractually have certain rights which are that an individual’s legal position is weakened. created by contracts such as: Cyprus i. Mortgage. 4.4 What rights in land are not required to be registered? ii. Lodgement of a contract of sale. iii. Rent charge. Options, licences and pre-emption rights in land are valid but are not In addition to the above, there are other rights such as options, required to be registered by the Land Registry Department. licences and pre-emption rights which are valid but are not registered by the Land Registry Department. 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first 3.2 Are there any scenarios where the right to land registration or are there perhaps different classes diverges from the right to a building constructed or qualities of title on first registration? Please give thereon? details. First registration means the occasion upon which unregistered land or rights are first registered in the registries. No, there is no divergence of rights. The owner of any given land is the owner of any building constructed on it. This is not applicable.

3.3 Is there a split between legal title and beneficial title 4.6 On a land sale, when is title (or ownership) transferred in your jurisdiction and what are the registration to the buyer? consequences of any split? Are there any proposals to change this? If there is a separate title deed available on the date of the sale of the Generally, there is no split between the legal title and beneficial title. land, then the title deed is transferred to the buyer simultaneously with the full settlement of the price between the two parties (or their However, an individual can form a trust and deposit the trust deed legal representative being present). with the Land Registry. In such a case, any purchase of immovable property can occur on the name of the trust and the individual can If the land is a component of an undivided piece of land requiring be the beneficial owner. The title deed expressly states that the subdivisions they can either acquire share of the bigger land or they property is held in trust. can transfer title deeds at a later stage once division has occurred. Additionally, it can be argued that a life interest is a form of beneficial ownership. One can register a title deed on another name, 4.7 Please briefly describe how some rights obtain e.g. one of his heirs and retain a right on the title deed of exclusive priority over other rights. Do earlier rights defeat later use and exploitation until his/her death. This means they are not the rights? legal owner, but they can rent, construct or live in the property with an absolute right. This is a course of action which many parents can The priority of rights in Cyprus is straightforward. They follow the use when transferring immovable property to their children but also date of creation, i.e. earlier rights defeat later rights. wish to have some security. 5 The Registry / Registries 4 System of Registration 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules 4.1 Is all land in your jurisdiction required to be and requirements. registered? What land (or rights) are unregistered?

There is only one registry under the name of Department of Lands All land in Cyprus is registered. and Surveys. It has district offices in each of the districts of Cyprus but operates as one organisation. Therefore, there are no differing 4.2 Is there a state guarantee of title? What does it rules and requirements. guarantee?

The state does not guarantee a title. The owner of the land is 5.2 How do the owners of registered real estate prove their title? provided with a title deed and they are considered to be the undisputed owner. The only exemption to this is the power of the The registered owners receive, as proof of their ownership, an Land Registry Department to correct omissions or errors. official title deed document.

56 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

Furthermore, the Department of Lands and Survey maintains a ■ When appropriate, a surveyor might be involved to assess the record and allows you to search by area in case you are unsure about structural checks of the property. which properties are registered in your name. 6.2 How and on what basis are these persons 5.3 Can any transaction relating to registered real estate remunerated? be completed electronically? What documents need to be provided to the land registry for the registration Real Estate Agents will usually be paid a percentage of the value of of ownership right? Can information on ownership of the transaction, this is usually agreed with the seller of the property. registered real estate be accessed electronically? Lawyers will either be paid based on an hourly rate or a fixed lump

sum fee. Cyprus A transaction relating to registering real estate cannot be completed electronically. Surveyors are usually paid a fixed fee. The documents that must be provided for the transfer of ownership include: 6.3 Is there any change in the sources or the availability a) Certain forms issued by the land registry. of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the b) A tax clearance certificate regarding the specific sale. main sources of capital you see active in your market? c) Evidence from the Sewerage department regarding full settlement of pending bills. After 2013, all transaction have primarily been capital centric. d) Proof from the local municipality where the property is However, as the Cyprus economy has been improving the banks located that all taxes and dues have been paid. have restarted giving loans. Recently, some information is available online regarding registered users, but the ownership data is considered confidential information 6.4 What is the appetite for investors and/or developers and cannot be accessed unless there is authorisation from the owner; to invest in your region compared to last year and or a person who has an interest in the property; or a court order. what are the sectors/areas of most interest? Please give examples. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? The majority of the investors in Cyprus are foreigners. After the economic success in the early 2000s, Cyprus faced three to four There is no statutory provision for compensation from the Registry. years when the economy slowed down. The economic situation has However, the option of a court claim is available when a government improved significantly over the past two years and there is a rapid official or department has made an error. increase in demand. Individuals, primarily from the United Kingdom and Russia, looking for a second home or a holiday home are the main drivers 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he of the economy. An additional source is the investment programme might reasonably need regarding encumbrances and which allows individual to acquire citizenship or residency through other rights affecting real estate and is this achieved investment. by a search of the register? If not, what additional information/process is required? 6.5 Have you observed any trends in particular market You can secure all information regarding ownership and sub sectors slowing down in your jurisdiction in encumbrances from the Departments of Lands and Surveys. terms of their attractiveness to investors/developers? Please give examples. However, such information is considered as confidential information and will only be given to the owner of the property, or an individual There have not been any negative trends observed in Cyprus. The holding a Power of Attorney on behalf of the owner. main activity is still the purchase of villas and apartments; however, As such, in a transaction, the buyer requests the seller to provide him there is increasing interest from investors for hotels and land for with an official search from the land registry, proving the ownership development of housing projects. and any encumbrances. As stated in question 6.3, the economy has been doing exceptionally well the past couple of years and I expect it to continue to do so. The 6 Real Estate Market GDP of the country has grown about 3% each year in the past two years, and there is about 15–20% increase in sales.

6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally be involved 7 Liabilities of Buyers and Sellers in Real in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duties. Estate Transactions

The parties that are usually involved in addition to the buyer, seller 7.1 What (if any) are the minimum formalities for the sale and buyer’s finance are listed below: and purchase of real estate? ■ Real Estate Agent – who will make the introduction of buyer and seller and they will negotiate the commercial terms of the The minimum formalities for the sale and purchase of real estate is a transaction. signed contract in writing, witnessed by two individuals. ■ Legal representative of the parties – who conduct the Additionally, the contract must then be stamped and lodged at the due diligence, draft contracts and negotiate the property documents. Department of Lands and Surveys.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 57 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

7.2 Is the seller under a duty of disclosure? What matters 8.2 What are the main methods by which a real estate must be disclosed? lender seeks to protect itself from default by the borrower? There is no statutory provisions requiring the seller to make any kind of disclosure. The lender will primarily consider the income of the borrower The buyer must request information and ask for warranty clauses to before providing a loan. be incorporated in the contract. In addition to this, some securities are provided, such as: a) A minimum out of pocket contribution of 30% of the total value of the purchase. Cyprus 7.3 Can the seller be liable to the buyer for misrepresentation? b) A mortgage is registered as a charge of the property at the Department of Lands and Surveys. The seller can be liable for misrepresentation. Section 19 c) Guarantors might be requested. of the Contract Law, Cap. 149, makes specific provisions for d) If the borrower is a company, a floating charge will be misrepresentation. Despite the above, the buyer must always carry out registered at the Registrar of Companies. their own due diligence, this is because, according to the law, the buyer is responsible for seeking the relevant information if it is available. 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without 7.4 Do sellers usually give any form of title “guarantee” involving court proceedings or the contribution of the or contractual warranties to the buyer? What would mortgagor? be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or The procedure for realising a mortgage always involves the court. warranties act as a substitute for the buyer carrying In the past few years, the parliament and the government have out his own diligence? enacted laws to make the procedure much quicker. The new procedure enables the mortgagor to auction the property and achieve The seller does give several contractual warranties. Such warranties a much quicker result. include, warranty of ownership, warranty that no options have been given, warranty for no encumbrances such as mortgages or other charges, warranty regarding construction if the property is newly 8.4 What minimum formalities are required for real estate built and warranty for the transfer of the title deed. lending? The above warranties are over and above the due diligence but The minimum formalities for real estate lending include: cannot substitute them. a) The repayment ability of the borrower. b) A 30% minimum contribution on the sale price or valuation 7.5 Does the seller retain any liabilities in respect of the price, whichever is lower. property post sale? Please give details. c) Registration of a mortgage on the property. The seller may retain some liabilities post contract but, generally, all liabilities are satisfied upon completion and transfer of the title deed. 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? The real estate lender is protected from claims against the borrower, by ensuring that the borrower receives independent legal advice, Other than the purchase price, the buyer has liability to pay the therefore they are unable to claim ignorance to any of the terms. transfer fees and the stamp duty and provide documents required Protection against other creditors is by registering the mortgage under the anti-money laundering regulations, proving source of charge with the Department of Lands and Surveys. funds, as requested by the financials institutions.

8.6 Under what circumstances can security taken by a 8 Finance and Banking lender be avoided or rendered unenforceable?

The mortgage or securities may be avoided or rendered unenforceable 8.1 Please briefly describe any regulations concerning if the mortgage documents are not stamped by the Tax office the lending of money to finance real estate. Are the rules different as between resident and non-resident department and registered at the Department of Lands and Surveys. persons and/or between individual persons and corporate entities? 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? There are no specific regulations regarding lending of money to finance real estate, other than the banks making full disclosure of the If a property is the primary residence of the borrower, the law makes information and the borrower receiving independent legal advice. specific provisions which do not allow the lender to realise the The loans are mainly governed by the internal procedures of the mortgage. Furthermore, if the borrower believes there is sufficient banks which are similar between resident and non-resident persons legal standing defending non-payment, they can secure a court order and/or between individual persons and corporate entities. to preventing action from the lender.

58 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

8.8 What is the impact of an insolvency process or a 9.5 What other tax or taxes (if any) are payable by the corporate rehabilitation process on the position of a seller on the disposal of a property? real estate lender? 20% Capital Gains Tax is payable, on the clear profit of the sale, by If a corporation becomes insolvent, the lender/financial institution the seller. must inform the designated authority in charge of the administration of the company, regarding the money that has been lent to attain a priority 9.6 Is taxation different if ownership of a company (or claim. It is often the case that the money lent is payable, immediately. other entity) owning real estate is transferred? Cyprus 8.9 What is the process for enforcing security over Taxation is the same for a company (or other entity) as it is for shares? Does a lender have a right to appropriate individuals that are transferring real estate they own. shares in a borrower given as collateral? If so, can shares be appropriated when a borrower is in administration or has entered another insolvency or 9.7 Are there any tax issues that a buyer of real estate reorganisation procedure? should always take into consideration/conduct due diligence on? If the shares are pledged, the lender may acquire the shares. At present, it is common practice for the lender to register a floating The other tax issue which a buyer should consider, is to establish charge on the company which enables the lender to appoint an if the property will be for private usage, for rental, for resale or for administrator for the company and acquire control to secure his development. interest on the money. Depending on a case-by-case basis, they may decide it is better to purchase the real estate under a company rather than as an individual. 9 Tax 10 Leases of Business Premises 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? 10.1 Please briefly describe the main laws that regulate leases of business premises. The transfer fee is the highest expense over and above the sale price that the purchaser bears, and is calculated as follows: The main law that regulates leases of business premises is the Rent ■ 3% on the €0 – €85,000 of the value of the property. Control Law, this only applies to citizens of the European Union. It ■ 5% on the €85,001 – €170,000 of the value of the property. has provisions for protecting tenants against eviction, controls the ■ 8% on any amount above €170,000 of the value of the adjustment of rent and regulates relations between landlords and property. tenants. If there are two purchasers buying one property, they will pay lower transfer fees as the value of the property is divided by two, 10.2 What types of business lease exist? calculated separately and then added together. Whatever the result of the above is, currently there is a 50% discount The lease can be for any type of business. It is based on contract law offered by the government on all transfer fees. which allows the parties absolute flexibility.

9.2 When is the transfer tax paid? 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or The transfer tax is paid simultaneously with the transfer of the title sub-lease; (d) insurance; (e) (i) change of control of deed on the buyer/s name. the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? 9.3 Are transfers of real estate by individuals subject to income tax? a) There are no provisions for the length of term, it may vary from days to months to years. The contracting parties have the full right to decide. Transfer of real estate by individuals in not subject to income tax. b) Rent increases, like length of term, depend on the parties. Usually there is a 5% biannually increase. By law, the 9.4 Are transfers of real estate subject to VAT? How increase in rent for properties under rent control, ranges from much? Who is liable? Are there any exemptions? 0% to 14% every two years. c) Usually landlords do not accept clauses in the contract that Resale properties are not subject to VAT. allow tenants the right to sell or sub-lease, but if the parties As of January 2018, plots of land may be subject to VAT but this is agree to this, it can be both included and enforced. assessed on a case to case basis and there is no general conclusion. d) There is no obligation by law to provide insurance, but the contract will define who will be liable. The landlord will be Newly built properties are subject to 19% VAT. For your first liable for the building insurance in most of the cases and the property, if you have not applied for an exemption in the past, you tenant for the contents and public liability. can apply to pay 5% VAT. However, the 5% only applies to the first 200 square metres of the property. Anything above 200 square metres is charged at 19% VAT.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 59 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

e) For both the: (i) change of control of the tenant; and (ii) transfer of lease as a result of a corporate restructuring, there 10.8 Are there any trends in your market towards more is no predefined route. The parties can agree their own terms, flexible space for occupiers, such as shared rights and restrictions. short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ f) The landlord will have the obligation to make repairs if there activities for residents (co-living)? If so please provide is a structural problem with the property. The tenant will be examples/details. liable for the aesthetics of the business.

There are no trends in the Cyprus market towards more flexible space. 10.4 What taxes are payable on rent either by the landlord Usually, businesses tend to lean towards having their own spaces. or tenant of a business lease? Cyprus

The landlord is liable to pay the following taxes: 11 Leases of Residential Premises 1) Personal income tax if the owner is a physical person, or corporate tax if the owner is a legal person. Physical person 11.1 Please briefly describe the main laws that regulate tax is based on various brackets with €19,500 being non- leases of residential premises. taxable. A company pays 12.5% of the gross income less a deduction of 20%. Please see our response to question 10.1 above. 2) Special defence contribution is 3% on 75% of the income.

11.2 Do the laws differ if the premises are intended for 10.5 In what circumstances are business leases usually multiple different residential occupiers? terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party There is no difference in the legislation for premises intended for to be compensated by the other for any reason on multiple different residential occupiers. termination? The only additional law applicable in such cases is for commonly owned buildings (such as apartments) which require the owner Usually the tenancy is terminated or renewed by a further to have approval from the building committee, in case the owner agreement. The most common reason for terminating a rental is the intends to have it for short-term holiday rentals. non-payment of the rent. Under the Rent Control Law after expiration of a term if the parties 11.3 What would typical provisions for a lease of have not made previous arrangements, a tenant renting business residential premises be in your jurisdiction regarding: premises may remain in possession of the premises becoming a (a) length of term; (b) rent increases/controls; (c) the “statutory tenant”. The statutory tenants can only be removed from tenant’s rights to remain in the premises at the end of the premises under specific conditions provided for in the law. the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair?

10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective Please see the response to question 10.3 above. obligations under the lease once they have sold their interest? Can they be responsible after the sale in 11.4 Would there be rights for a landlord to terminate a respect of pre-sale non-compliance? residential lease and what steps would be needed to achieve vacant possession if the circumstances According to law, the liabilities of the landlord and tenant terminate existed for the right to be exercised? once they have sold their interest. However, the contract between the parties may have made provisions to accommodate for pre-sale During the period that a tenancy agreement is still valid, then the non-compliance. termination will be governed by the terms of the contract. If the tenant has remained in possession without a valid contract, 10.7 Green leases seek to impose obligations on but on a month to month basis, then the Rent Control Law will landlords and tenants designed to promote greater be effective in areas which are under rent control and, on many sustainable use of buildings and in the reduction of occasions, it will be difficult to achieve vacant possession. the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly found in leases stating whether these are clearly 12 Public Law Permits and Obligations defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for example aspirational objectives). 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, Green leases are rare in Cyprus, with limited “green obligations” in development and occupation of land? Please briefly lease agreements. describe them and include environmental laws.

There are two main laws that govern zoning/permitting and related matters concerning the use, development and occupation of land: a) Town and Country Planning Law – this law makes provisions regarding development plans, designation of area, and environmental interests.

60 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

b) Road and Building Regulation Law – this is the main law e) A certificate of final approval takes between six and 18 which regulates the construction of all building and civil months to acquire. engineering works. f) A certificate of approval for the division permit takes about six months to acquire. 12.2 Can the state force land owners to sell land to The cost of securing the relevant permits involve the costs of it? If so please briefly describe including price/ architects and relevant consultant who must conduct studies. compensation mechanism. The cost payable to the authorities varies depending on size of construction and type of development. The state can force land owners to sell their land for public welfare, under the Compulsory State Expropriation of Land Law. Cyprus 12.7 Are there any regulations on the protection of historic The government announces the expropriation and then makes an monuments in your jurisdiction? If any, when and how offer to the owner. If it is not accepted, it can be challenged in court are they likely to affect the transfer of rights in real and provide evidence through independent valuers. estate or development/change of use?

12.3 Which bodies control land/building use and/or The Antiquities Law, Cap. 31 provides comprehensive protection occupation and environmental regulation? How do for historic monuments. During constructions in areas which are buyers obtain reliable information on these matters? believed to have ancient ruins, the archeological department is present and overlooks the initial stages of excavation. If a small The bodies which hold information about land/building use and/or ancient ruin is found, this may be transferred to the museum. If occupation and environmental regulation are as follows: the ruins are not transferable, the archeological department will ask ■ The Department of Planning and Housing. that the drawings are amended and the ancient ruins included in the ■ The District Office. development in a protected area. In general, local municipalities are responsible for issuing permits If there is a significant discovery, then the land will be expropriated and providing reliable information on these matters. by the government.

12.4 What main permits or licences are required for 12.8 How can e.g. a potential buyer obtain reliable building works and/or the use of real estate? information on contamination and pollution of real estate? Is there a public register of contaminated land in your jurisdiction? a) A town planning permit must be acquired by the owner or authorised representative to the Planning Authority. There is no register in Cyprus for contaminated land, therefore there b) A must be acquired from the appropriate building permit is no reliable information regarding this. local authority which differs by location. c) A division permit must be required if more than one type of property will exist on a specific land development. 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? d) After construction, if there have been amendments to the original design, a cover permit should be acquired for the town planning permit; and cover building permit should be An environmental clean-up can be requested by a government acquired for the building permit. department or through a court order. Although this is not standard e) A certificate of final approval should be acquired from the practice in Cyprus, as pollution is at very low levels. local building committee. f) A certificate of approval for the division permit once 12.10 Please briefly outline any regulatory requirements acquired will allow the property to be registered with the for the assessment and management of the energy Land Registry and for an application of title deeds. performance of buildings in your jurisdiction.

12.5 Are building/use permits and licences commonly The relevant law is the Energy Performance of Buildings Act of obtained in your jurisdiction? Can implied permission 2006. For any new construction, there are specifications which be obtained in any way (e.g. by long use)? must be fulfilled to ensure the energy performance of the building. Furthermore, according to the legislation, in real estate transactions In all cases of construction, the relevant permits must be obtained. the seller must provide an energy performance certificate of the If you do not follow the procedure, the authorities may issue a court property. order to demolish the construction. No implied permit may be given. 13 Climate Change 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? 13.1 Please briefly explain the nature and extent of any a) A town planning permit – legally the permit should be regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions issued in three months, but in practice can take between six trading scheme). to nine months to acquire and longer if there is a problem. b) A building permit can take between four to 18 months to Cyprus is a signatory of the Kyoto protocol of the United Nationals acquire subject to the location. framework Convention on Climate Change. The protocol was c) A division permit takes approximately six months to acquire. initially adopted in 1997. Cyprus ratified the protocol in national d) A cover permit takes approximately 12 months to acquire. law in 2003.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 61 © Published and reproduced with kind permission by Global Legal Group Ltd, London Mantis & Athinodorou LLC Cyprus

Notice 13.2 Are there any national greenhouse gas emissions The content is provided with the understanding that Mantis & reduction targets? Athinodorou LLC is not herein engaged in rendering legal advice and/ or legal services to the reader and any and all use of this content does Cyprus emitted 9.9 million tonnes of greenhouse gases in 2005. In not create an attorney-client relationship. Mantis & Athinodorou LLC line with European Union targets, the government has committed to makes no representations about the suitability, accuracy, completeness, reducing the emissions by 24% by 2030, i.e. to approximately 7.5 usefulness, appropriateness, timeliness, legality or ownership of any million tonnes. content, information and/or material presented. Mantis & Athinodorou LLC is not responsible or liable for any inaccuracies, errors or

Cyprus 13.3 Are there any other regulatory measures (not already omissions arising out of your use of the information or with respect to mentioned) which aim to improve the sustainability of the content. All content is distributed and transmitted “as is” without both newly constructed and existing buildings? any warranties of any kind, either express or implied, including without limitation, warranties of title or direct or implied warranties Other than the Kyoto Protocol in national law there are no other of merchantability or fitness for a particular purpose. Mantis & measures in place. Athinodorou LLC is not responsible for any direct, indirect, incidental, special or consequential damages, or any other damages whatsoever whether in an action of contract, negligence, tort or otherwise, that may arise from the use of the content.

Michael Mantis Mantis & Athinodorou LLC 101, Penelope’s Palace 14 Odos Nikolaou Nikolaidi Paphos Paphos, 8010 Cyprus

Tel: +35 726 934 277 / +35 799 339 339 Email: [email protected] URL: www.mantislaw.com

Michael is a partner at Mantis and Athinodorou, practising law in both Paphos and Limassol. He heads up the non-litigation branch of the firm and has represented private corporations and individuals in several multi-million transactions. Michael has an understanding of both business and legal aspects of transactions, having completed a Master’s qualification in Management further to attaining his Bachelor of Laws. Additionally, he has successfully executed several business ventures outside the firm, uniquely positioning him to counsel clients on their investments in light of their business needs. He is a seasoned lawyer in his field, and clients value his contribution, at a technical, business and practical level, as a result of his depth of knowledge and practical know how in his areas. He specialises in working with British and Russian clientele.

Mantis & Athinodorou LLC is a forward-thinking law firm, with a proud legacy. We were established in 1979 by Penelope Athinodorou-Mantis, the first female lawyer in Paphos, Cyprus. As of 2010, the law firm has morphed into a family-run business through the addition of Penelope’s sons, Nicolas Mantis and Michael Mantis, as Partners. This has reinvigorated the firm and enabled the application of innovative thinking to pre-existing and new services to include immigration services for the acquiring permanent residency and Cyprus citizenship by investment; and corporate law.

62 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 8 England & Wales Carol Hopper

Ropes & Gray International LLP Partha Pal

real estate interests are held in a joint venture or co-investment 1 Real Estate Law vehicle), (c) economic sanctions, and (d) data privacy laws.

1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to 2 Ownership leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to 2.1 Are there legal restrictions on ownership of real estate question 12.1. Those relating to tax should be listed in by particular classes of persons (e.g. non-resident response to questions in Section 9. persons)?

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 63 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

For both, the effect is that the transaction takes effect in equity, but 3.3 Is there a split between legal title and beneficial title not law. The failure to register means that the transaction could in your jurisdiction and what are the registration lose priority as against a subsequent transaction and may not bind consequences of any split? Are there any proposals successors in title. to change this?

Yes. The registration system to date has only been concerned with 4.4 What rights in land are not required to be registered? recording the details of the legal title to real estate. In the near future, the registration system will be amended such that the beneficial title The main ones are proprietary rights protected by actual occupation, to real estate will have to be registered where the beneficial title is customary and public rights and other rights established by long user held by an overseas entity (the “OEBO register”). It is expected that and leases for less than seven years. See the response to question 3.1. the OEBO register will become operational in 2021. This change is driven by the ever increasing desire for transparency in the global England & Wales 4.5 Where there are both unregistered and registered land fight against corruption and, broadly, it means that any overseas or rights is there a probationary period following first entity holding more than 25% of the shares (or rights to capital/ registration or are there perhaps different classes voting rights) or with control over the governance of the entity or or qualities of title on first registration? Please give significant control or influence will have to be disclosed onthe details. First registration means the occasion upon register and a failure to do so would result in criminal liability. which unregistered land or rights are first registered in the registries. However, on the transfer of a legal title, the beneficial title if divided from it, say because it is held on a trust, will be overreached. The In England and Wales there are four different classes of title. beneficiaries (the owners of the equitable title) will have rights in relation to the resulting proceeds from the sale but would not have Title absolute is the best quality of title and establishes the owner rights to overturn the sale. as having an indefeasible right to the legal estate described in the register (whether freehold or leasehold). The majority of titles are registered with title absolute. 4 System of Registration Possessory title is usually only granted where the person applying is either in actual possession of the land (or in receipt of the rents 4.1 Is all land in your jurisdiction required to be and profits from it) but where the title is based on a possessory claim registered? What land (or rights) are unregistered? rather than any documentary evidence. For more detail on claims based on adverse possession, see below. There is a compulsory registration system for land in England and Qualified title is very rare. It has a similar effect to title absolute Wales. This is triggered by any transaction involving the transfer or save for the part of the title that has been “qualified”; where the mortgaging of land (even if not already registered). The country- identified defect effectively falls outside the registered estate. wide compulsory registration system came into effect in 1990 (and Good leasehold title occurs only in leasehold titles where the Land for some areas pre-dated that date). Registry has not been able to approve the landlord’s title to grant Around 80% of land in England and Wales is registered and the the lease. remaining unregistered title is mainly in rural areas. Title based on adverse possession historically was established by proving at least 12 years’ adverse possession (that is, actual 4.2 Is there a state guarantee of title? What does it possession of the land in question or receipt of the rents and profits in guarantee? respect of it and a clear indication of the claim to ownership such as the erection and maintenance of boundary features). However, since Yes in effect for all registered titles, since the register can only be 2002 a completely new system has been established for registered altered in certain limited circumstances, in order to correct a mistake, land. In the case of a registered estate, however long the period of but any registered proprietor who suffers loss in consequence adverse possession may be, the only right a “squatter” has to register (assuming no fraud or lack of proper care) would be entitled to an any rights is a right to apply to be registered as proprietor after 10 indemnity from the Land Registry. years of adverse possession. If the registered proprietor objects then the application will be unsuccessful (save for very limited circumstances). Where a squatter’s application to be registered as 4.3 What rights in land are compulsory registrable? What proprietor of the property has been rejected the registered proprietor (if any) is the consequence of non-registration? must then evict the squatter (or legitimise their occupation by the grant of an appropriate interest) within two years, failing which the The transfer of any freehold interest and the creation or transfer squatter may re-apply and, provided he has continued in adverse of any leasehold interest where there is a seven-year or greater possession for those two years, his application will succeed. term remaining, as well as the creation of a legal mortgage are all compulsorily registerable. 4.6 On a land sale, when is title (or ownership) transferred The effect of non-registration is that: to the buyer? (a) for a freehold transfer the legal estate, is void and the legal estate reverts back to the seller who holds it on a bare trust for In the case of an unconditional contract for sale (with a later date set the buyer; and for completion), the equitable (or beneficial) title passes at exchange (b) for grant or transfer of a lease or the creation of a legal of contracts. mortgage, the transaction has effect as a contract made for valuable consideration to grant the lease or mortgage. If there is a simultaneous exchange and completion, the equitable (or beneficial) title passes at completion.

64 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

Legal title will only pass on completion of the registration of the transfer at the Land Registry. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he The main significance of this is that the property will be “on risk” might reasonably need regarding encumbrances and for a purchaser from the date on which the beneficial title transfers. other rights affecting real estate and is this achieved by a search of the register? If not, what additional information/process is required? 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later rights? There are no restrictions on access to the register (although some information in some registered deeds may have been obscured if Generally the priority of rights is determined by the date of creation. the party registering applied for it to be so and the Land Registry If, however, a right must be registered and it is not, within the accepted the reason for requesting that it remain confidential). priority period of a Land Registry search, a later right will not be A buyer will obtain a lot of key information from a search of the Land England & Wales subject to it. Register but would need to carry out other searches and enquiries In the context of legal and equitable rights, legal rights will to obtain all the information he would reasonably want to ascertain generally take subject to rights in equity that have already been regarding encumbrances and rights affecting any real estate. created therefore. There are exceptions to this. One of the main exceptions is that 6 Real Estate Market a later legal charge will rank ahead of an earlier equitable charge.

6.1 Which parties (in addition to the buyer and seller 5 The Registry / Registries and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or 5.1 How many land registries operate in your jurisdiction? duties. If more than one please specify their differing rules and requirements. Selling or letting agents who (depending on the type of transaction) market the land and negotiate the main commercial terms of the There is one registry for land ownership, known as the Land transaction with the buyer or the buyer’s agent. Agents usually Registry, and formerly known as HM Land Registry. operate on a commission or fixed fee basis (sometimes calculated by reference to the price) which is payable at completion. 5.2 How do the owners of registered real estate prove Lawyers who, for the buyer, carry out the title investigation their title? (including raising the necessary searches and enquiries) and, for both parties, who negotiate the legal documentation to give effect For registered land, this is by the details recorded on the land register to the transaction and attend to exchange and completion of that held by the Land Registry that is now electronically available documentation and all post completion matters. Lawyers are to anyone wishing to search it. For unregistered land, this is by remunerated on a time or fixed fee basis payable at completion. providing copies of the physical title documents that show a good Surveyors are usually engaged to carry out structural and condition root of title of at least 15 years. surveys of the property and possibly detailed environmental or other technical due diligence matters. They will generally be paid a fixed 5.3 Can any transaction relating to registered real estate fee on completion of their work. be completed electronically? What documents need Accountants may be instructed to advise on structuring and tax to be provided to the land registry for the registration mitigation matters (although often this will be dealt with by lawyers). of ownership right? Can information on ownership of registered real estate be accessed electronically? Notaries are not required in any real estate transactions in England and Wales. The intention for the future is for there to be electronic signatures and full electronic conveyancing to be available but currently, no deeds 6.2 How and on what basis are these persons can be completed electronically save for very limited exceptions, remunerated? such as for the discharge of a registered charge. Rules are in place to allow this in the future for legal charges also. See the response to question 6.1 above. Applications to register any completed transaction can be submitted electronically and most are. A copy of the document of transfer (on 6.3 Is there any change in the sources or the availability the correct Land Registry form), would be included in the application of capital to finance real estate transactions in together with appropriate statements from the solicitor submitting it your jurisdiction, whether equity or debt? What are as to possession of the original. The application must be submitted the main sources of capital you see active in your on the correct Land Registry form and must also include a certificate market? of payment of the stamp duty land tax triggered by the transaction. The registers at the Land Registry are fully accessible electronically. Data suggests that the London REF market remains the recipient of a high amount of inflow of foreign capital, with domestic capital flowing instead predominantly to the UK’s other regions and major 5.4 Can compensation be claimed from the registry/ cities. Investment value in the regions has increased by 58% over registries if it/they make a mistake? the past few years, in part due to investment in transport making cities such as Birmingham and Manchester more accessible to Yes. See the response to question 4.2 above. the capital. Nevertheless, the UK market is continuing to see an

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 65 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

increase in opportunities to lend in the UK from across the globe and as Sports Direct and Metro Bank, there is a finite number of sites the debt market remains strong. Whilst there has been a deceleration than can be taken. Knight Frank anticipate that there will be an in Chinese investment into the London REF market over the last increased demand in 2018 from Councils for High Street retail in year (partly due to pressure put on Hong Kong investors from the their own jurisdiction in light of political pressure to shift their focus Chinese government) there has been an increase in the diversity of from investing in out-of-town business parks. Nevertheless, whilst investors over recent years, particular with respect to the influx of many online retailers are choosing to remain online, the likes of Middle Eastern capital. Overseas capital continues to target the UK Made.com and Loaf (as just two examples) are launching physical London office market in particular and this accounts for more than stores to further promote their business. Notable transactions in 70% of purchases (the highest volume since 2014). 2018 include the acquisition of the Burlington Arcade in Mayfair by Motcomb Estates for £296.5 million and DTZ Investors acquisition of StopShop, Clapham Junction for £130 million. 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and Outside of the sectors identified in question 6.4, there is a current England & Wales what are the sectors/areas of most interest? Please perceived slow-down in activity in London created by the continuing give examples. uncertainty over BREXIT and it will be interesting to see the data on activity levels for the end of 2018 and Q1 2019 when available. The market continues to see a growing appetite in PRS, with “build to rent” development becoming increasingly popular and investment in UK PRS reaching £907 million in Q2 of 2018. Whilst PRS can 7 Liabilities of Buyers and Sellers in Real be a challenge in London due to the high price of land, regional Estate Transactions cities such as Manchester and Liverpool are increasingly attractive. For example, social housing developer United Living is currently 7.1 What (if any) are the minimum formalities for the sale developing a PRS scheme in the North West, having been granted and purchase of real estate? planning permission for a 125-home development at 4-26 Liverpool Street in Salford in April 2018 (having also submitted a planning A written contract must be exchanged that contains all the terms of application for a 156-unit scheme in Trafford earlier this year). In sale (either on its face or by identifying the document that contains addition, Leeds is becoming an attractive Build to Rent market with the remaining terms). The contract must be signed by both seller private rental properties accounting for approximately 75% of the and buyer (although this can be done in counterparts of the same circa 10,000 city centre residential properties. document and usually is). Industrial/logistics remains an area of real interest to investors, A transfer (and some other land documents) must be by deed duly especially in those areas able to deliver last-mile logistics and executed by the seller (and usually by the buyer who normally owner-occupation solutions, as new entrant to the UK market, Hines provides indemnity covenants on title matters). Where registered confirmed by its joint venture with Chancerygate and as did the land is involved the form of documentation must follow that Singaporean REIT (Ascendas) which acquired two large logistics required by the Land Registry. portfolios in 2018. To obtain a legal estate the transfer must be registered at the Land Other key areas of investment, continue to be in data centres and Registry within the correct priority period post completion. co-working space. Increasingly, the way office space is used and developed and the mix of office and other space is critical to investors (and occupiers) and the investment by the Hut Group of 1 million 7.2 Is the seller under a duty of disclosure? What matters square feet of office/studio space in two sites in the Manchester must be disclosed? Airport area, set to lead to an investment of over $1 billion over the next three years, is testament to this. As of course is the explosive There is no general duty of disclosure on a seller, but the buyer growth of the global co-working group WeWork in London, and it would usually raise enquiries of the seller and the seller would be is noticeable that they are now developing a significant presence under a duty not to give any misleading answers. The title covenants in Manchester and have expressed real interest in Edinburgh and imposed on a transfer also mean that the seller will be under a duty Glasgow in Scotland. Further interest in this sector is borne out by to disclose encumbrances of which it is aware and any defects in the high profile takeover bids in 2018 for IWG, the serviced office title not apparent on an inspection. giant, and that group’s development of 40,000 square feet of offices at London’s iconic Battersea Power Station. 7.3 Can the seller be liable to the buyer for misrepresentation? 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in Yes, if the untrue statement induced the buyer to purchase and the terms of their attractiveness to investors/developers? buyer suffers loss as a result. Please give examples.

The retail sector is becoming increasingly less attractive to investors, 7.4 Do sellers usually give any form of title “guarantee” driven by both the number of insolvency or restructuring processes or contractual warranties to the buyer? What would be the scope of these? What is the function of any involving increasingly high-profile retailers (such as big brand such guarantee or warranties (e.g. to apportion risk, names like House of Fraser) and the challenges established retailers to give information)? Would any such guarantee or face online. Cushman & Wakefield have reported that whilst retail warranties act as a substitute for the buyer carrying investment volumes reached £2.7 billion in Q2 of 2018 (Property out his own diligence? Data), this was 9% down from Q2 of 2017. That said, this was a 41% increase on Q1 2018 where investment was particularly low, On an asset purchase it would be unusual for the seller to give possibly due to slow GDP in the first quarter (0.2%). Whilst 2017 contractual warranties but there would be implied title covenants saw a number of prime freeholds being acquired by occupiers such confirming the seller has the title that it purports to hold and has not

66 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

encumbered it (save as disclosed) and the seller would reply to a usual For completeness, the lending of money to finance the purchase of comprehensive set of enquiries and be liable for any misrepresentation residential real estate assets is a regulated activity. in replying (see the responses to questions 7.3 and 7.5). If the entity that owns the real estate is acquired (rather than the 8.2 What are the main methods by which a real estate property itself) then it would be usual for contractual warranties to lender seeks to protect itself from default by the be given and these would cover title, ownership matters, disputes, borrower? notices, planning, and if the property is let, usual landlord and tenant matters. Warranties are designed to both allocate risk between the This depends on the approach the lender takes to risk management parties for some key elements but also to flush out information. (and different lenders adopt different approaches). However, the They are not considered a substitute for doing buyer due diligence most common ways are as follows: and a normal title investigation would also usually be carried out. Structure of the Transaction: lenders will generally require that the This would still be the case where warranty and indemnity insurance assets that they are financing are held by entities whose activities are is obtained in respect of the warranty protection provided (which is limited to owning, managing and financing those assets. By imposing England & Wales the norm in the market now). this limited purpose obligation on borrowing entities, lenders seek to minimise the risk that these entities will incur financial liabilities 7.5 Does the seller retain any liabilities in respect of the which are unrelated to the assets that they are financing. property post sale? Please give details. Security Package: there is a package of security interests that is generally required. The key elements of this are a charge by way Yes. In the implied title covenants on an asset sale. There are two of legal mortgage over the assets that are being financed (usually forms of statutory warranty. simply referred to as a “mortgage”) and a charge over all of the Full title guarantee, where the seller warrants he has the title he cash flow generated by the assets which must be collected into purports to sell and it is free from charges, encumbrances and third bank accounts which are controlled by the lender or the security party rights (other than those the seller does not know and could not agent appointed by it thus minimising the possibility that there is reasonably be expected to know about). cash flow leakage. In addition, the security package will include a charge over the ownership interests in the borrowing entity and a Limited title guarantee, where the seller warrants he has the title charge over contractual rights (particularly where the asset is subject he purports to sell and that he has not encumbered, charged or to a development or operating agreement). Occasionally, a lender created third party rights over it. will require a guarantee from the sponsor of the borrower or from a Most sales would be with full title guarantee. credit worthy third party or will require a cash reserve to be created On a sale of the entity owning the real estate asset it would be usual to cover a specifically identified risk. for the seller to warrant he is the legal and beneficial title holder Financial Covenants: generally, a lender will require that there free from encumbrances, charges and third party rights other than are financial covenants imposed on the borrower which relate to the as disclosed or he could not be reasonably expected to be aware of. financial performance of the asset which is being financed. The first type of covenant (known as an interest cover ratio or debt service 7.6 What (if any) are the liabilities of the buyer (in addition cover ratio) compares the income generated by an asset to the cost to paying the sale price)? of servicing debt, in each case over prescribed periods. The second type of covenant (known as a loan to value ratio) compares the It would be usual for a buyer to give indemnity covenants in relation principal amount of the debt to the asset being financed. A prudent to any ongoing liability that the seller has post sale, such as in lender will set both a default level test for the financial covenants (at relation to landlord covenants. which point a loan will default though there may still be sufficient cash flow/value for payment to be made in full) and a cash trap level test (at which point no surplus cash flow will be returned to the 8 Finance and Banking borrower but will be trapped in a cash reserve as additional security for the obligations in respect of the loan). In addition to these financial covenants, in relation to certain types of real estate assets 8.1 Please briefly describe any regulations concerning (particularly those with an operating element) lenders are starting to the lending of money to finance real estate. Are the rules different as between resident and non-resident use a “debt yield” test. This measures the income generated by an persons and/or between individual persons and asset compared to the amount of indebtedness. corporate entities? 8.3 What are the common proceedings for realisation of The lending of money in the UK for the purposes of financing mortgaged properties? Are there any options for a investment in commercial real estate is generally not subject to mortgagee to realise a mortgaged property without regulation. The exception to this is where the borrower is an individual. involving court proceedings or the contribution of the mortgagor? In these circumstances, the lending may be subject to the Consumer Credit Act, 2006, though there are a number of safe harbours that may apply to exempt such lending from regulation. In addition, lending In the UK enforcing security interests through court proceedings is institutions that are regulated by the Financial Conduct Authority, the exception and not the rule. Both under the applicable law (the one of the UK’s financial regulators, will be subject to undertaking Law of Property Act, 1925) and under the contractual instruments their business activities in accordance with the standards prescribed that create the security interests, the lender will have the right to it. Also, while not solely applicable to real estate lending, lending appoint a “receiver” following the occurrence of a default. The activity undertaken by banks and insurance companies is subject to receiver has the power to dispose of the asset and realise value for regulatory capital requirements and this can have a bearing on the the benefit of the lender. The receiver will have a similar power in nature and amount of lending undertaken by such entities. respect of the ownership interests of the borrowing entity. No court proceedings are required to do this. While the receiver is the agent

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 67 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

of the borrower, its primary duties are owed to the lender and it does action in respect of tenants, such as granting concessions in terms not require input from the borrower or orders from the courts in of rent, just to make the asset less attractive to a subsequent buyer. order to exercise the rights it has. As described further in question 8.8 below, a borrower may use a rehabilative insolvency process in a way that has an impact on lenders.

8.4 What minimum formalities are required for real estate lending? 8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a There are no formalities. The grant of security interests have certain real estate lender? formalities that must be complied with such as security documents having to be executed by way of deed rather than under hand and In the UK, insolvency processes are of two types. “Liquidation” having to be registered in accordance with applicable statutory is a distributive process, whereby the assets of an insolvent entity requirements. As described above, the provisions of the Law of are distributed amongst is creditors prior to the entity being wound- England & Wales Property (Miscellaneous Provisions) Act have to be adhered to in up. “Administration” is, in concept, a rehabilitive process though if undertaking any dealings in the context of real estate assets. rehabilitation is not possible it can be used as a distributive process as well. If a borrower enters administration, it is possible that the enforcement of security interests will be subject to a moratorium. 8.5 How is a real estate lender protected from claims However, this is purely a delay: an administrator will be bound to against the borrower or the real estate asset by other creditors? respect the security that has been granted.

As indicated above, the first protection is ensuring that the borrower 8.9 What is the process for enforcing security over is prohibited from having creditors that are unconnected with the shares? Does a lender have a right to appropriate ownership, management and financing of the assets. The second shares in a borrower given as collateral? If so, protection is managing the cash flows generated by the assets that can shares be appropriated when a borrower is in administration or has entered another insolvency or are being financed to ensure that liabilities that have arisen through reorganisation procedure? the borrower owning, managing and financing the assets are paid off before any surplus cash flow is released to the borrower. The third There are two approaches to share security. The first is the protection is the security package. The security package prevents “conventional” approach, which involves the grant of a “share other creditors from making claims in respect of the assets (though charge” or “share mortgage”. The typical remedy in relation to the not the borrower itself). conventional approach, as is the case for a mortgage over land, is the approach of a receiver over the shares. The receiver will, once 8.6 Under what circumstances can security taken by a appointed, be entitled to sell the shares to recover the secured debt lender be avoided or rendered unenforceable? and, pending such sale, will be entitled to exercise the rights of a shareholder. This is a tried and tested approach to enforcement. The There are several theories on which this can happen. The first is “less conventional” approach is through the appropriation remedy where a specific transaction avoidance theory applies (a transaction provided pursuant to the Financial Collateral Directive. In practice, avoidance theory is one which generally applies when a transaction in the UK, the availability of the receiver remedy makes the remedy is undertaken within a prescribed period of time before an borrower of appropriation less necessary than in continental jurisdictions becomes subject to an insolvency process). The most common of (where the typical enforcement process includes a sale of the shares these are (a) transactions at an undervalue, which could apply if through public auction). the security granted is disproportionate to the debt owed, and (b) preferences, which would apply if the security has been granted in favour of one creditor to benefit it over others. A security interest 9 Tax can also be avoided where it contravenes the principle of pari passu distribution (which would happen if the security came into 9.1 Are transfers of real estate subject to a transfer tax? existence only on the advent of winding up); if the security interest How much? Who is liable? was not registered in accordance with the applicable legislation; if the security was granted to defraud creditors; or if the security Buyers of land are required to pay stamp duty land tax (“SDLT”). secures an extortionate credit bargain. Generally, lenders obtain For leases, specific rules govern the calculation of SDLT by comfort through the financial and legal due diligence processes that reference to the rent due. The current SDLT rates for non-rental the circumstances which give rise to these situations will not apply. consideration for commercial or mixed use properties are:

Rate per band Consideration band 8.7 What actions, if any, can a borrower take to frustrate 0% £0–£150,000 enforcement action by a lender? 2% £150,001–£250,000 5% Over £250,000 In the UK, these are operational rather than legal in nature. The most common step that borrowers can take involves withholding For residential properties the rates of SDLT are: information that a lender may require in order to take enforcement action. For example, if the lender requires an up-to-date rent roll Rate per band Consideration band in order to start a sales process, the borrower may not provide this. 0% £0–£125,000 Another very common step that borrowers take is mismanaging the 2% £125,001–£250,000 asset by not complying with maintenance obligations or obligations 5% £250,001–£925,000 to collect rent or insure the asset. Finally, where the asset manager is 10% £925,001–£1,500,000 an affiliate of the borrower, the asset manager may take prejudicial 12% £1,500,001+

68 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

In addition, a supplemental 3% SDLT charge applies to each rate the transfer of property held as an investment. If property is held band for purchases of second or additional residential properties. as an item of trading stock, profits realised from its transfer will be A higher rate of 15% applies to residential purchases over £500,000 subject to corporation tax on income at the same rate. by certain corporate vehicles though a number of exemptions and Non-trading individuals who are liable to UK income tax at the top reliefs are available including, for example, for genuine property marginal rate and trustees pay capital gains tax at the rate of 28% investors, developers and traders. on residential property subject to applicable reliefs and exemptions In Scotland, SDLT was replaced with the similar Land and Buildings including private residence relief, and 20% on other chargeable Transaction Tax on 1 April 2015. In Wales, SDLT was replaced with assets (including commercial property). the similar Land Transaction Tax (LTT) on 1 April 2018. Non-UK residents At present, non-UK residents (companies or individuals) generally 9.2 When is the transfer tax paid? pay no tax on the disposal of a property where that property is held as

an investment, although: (i) disposals of high-value (over £500,000) England & Wales Currently, the time limit for submitting an SDLT return and making residential properties by non-UK companies and other corporate the payment is 30 days from the “effective date” of a transaction. vehicles may be subject to a type of capital gains tax (known as Draft legislation reducing this time limit to 14 days was recently ATED-related CGT), currently at the rate of 28%; and (ii) non- published by the government. The new time limit will apply to resident CGT applies to all sales of residential properties by non- transactions with an effective date on or after 1 March 2019. residents at the rate of 28% (19% for non-resident companies), in each case subject to various exemptions and relief and without double The effective date of a transaction is the earlier of completion of the counting if ATED-related CGT is payable as that takes priority. transaction or “substantial performance” of the contract (the point at which the buyer takes possession of the whole or substantially the However, the following proposed changes will take effect from whole of the subject matter of the transaction or where a substantial April 2019: amount of any non-rental consideration is paid or the first payment ■ Non-UK residents will become chargeable on all direct of rent is made). disposals of interests in UK land, extending the application of non-resident CGT to commercial as well as residential properties. 9.3 Are transfers of real estate by individuals subject to ■ Non-UK residents will become chargeable on disposals of a income tax? right or interest in a company where: (i) 75% or more of the company’s value derives from UK land; and (ii) the non-UK The transfer itself will not be subject to income tax, but if the resident has held a 25% or more investment in the company transfer represents a sale in the course of a trading activity then the in the preceding two years. individual is liable to pay tax on any profit made from the sale. ■ Gains made by non-UK resident companies, including on disposals of residential properties, will be taxed through corporation tax rather than non-resident CGT. 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? ■ The treatment of offshore collective investment vehicles remains under consideration but it is currently proposed that: (i) transparent offshore funds will default to being opaque for In general, supplies of commercial real estate are exempt from VAT. tax from the perspective of non-UK resident investors but An election can be made to opt to tax commercial real estate which they can elect to be treated as transparent; and (ii) offshore makes the property which is opted subject to VAT at the standard funds which are not close and which agree to reporting rate (currently 20%). Any sale of land which is subject to an option requirements will be eligible for exemptions from UK tax on to tax is subject to VAT. It is common practice for owners of UK gains from direct and indirect disposals of UK property. commercial real estate to opt to tax. Sales of incomplete commercial Following the implementation of these changes, the government buildings, and sales of new freehold commercial buildings (being is also intending to abolish ATED-related CGT to reduce the less than three years old) by persons who did not construct them, are complexity of the rules. automatically standard rated. Where VAT applies to a transaction, the consideration is usually expressed as exclusive of any VAT such that VAT is paid in addition to the consideration. The seller is 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? required to account to the UK tax authority for the VAT. Where a sale is of a commercial property which is let, the sale can Yes. Stamp duty at a rate of 0.5% is charged on a sale of shares in a be treated as being outside the scope of VAT by virtue of being a UK incorporated company. SDLT does not apply to indirect purchases transfer of a letting business as a going concern (commonly known of real estate (i.e. the purchase of shares in a corporate vehicle owning as a “TOGC”) provided that the buyer continues the letting business, real estate as opposed to a purchase of the real estate itself). VAT is not also opts to tax the property and notifies the UK tax authorities of payable on a share purchase. The taxation of any gain arising from a such option. disposal of a company rather than a property may also be different to Transfers of residential real estate, with a few specific exceptions, the taxation of a gain arising from a direct disposal of real estate. This are exempt from VAT. is subject to the proposed changes discussed at question 9.5 above.

9.5 What other tax or taxes (if any) are payable by the 9.7 Are there any tax issues that a buyer of real estate seller on the disposal of a property? should always take into consideration/conduct due diligence on? UK residents UK resident companies pay corporation tax at the rate of 19% (to be A buyer of real estate should always consider: reduced to 17% in April 2020) on any capital gain which arises from ■ the VAT position of a commercial property and its seller;

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 69 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

■ any capital allowances (the tax equivalent of depreciation for tenants are looking for shorter terms, including co-working space capital expenditure) that may be available to reduce future tax on very short-term arrangements. Retail, logistics, warehousing, on income; and industrial and others also might have a 10 or possibly a 15-year ■ SDLT. term but may negotiate break rights tied to rent reviews. These term lengths differ again, where the tenant is making any form of significant investment in the property. 10 Leases of Business Premises Rent reviews. These would typically be every five years on an upwards only basis to open market rent (but again it is becoming 10.1 Please briefly describe the main laws that regulate increasingly common to have annual increases tied to an inflationary leases of business premises. increase only). Fixed increases are also sometimes negotiated. Tenant’s right to sell. It would be very usual for a tenant to be able The gives security of tenure to Landlord and Tenant Act 1954 to sell the lease but for the landlord’s consent to be needed (not to be England & Wales occupying tenants of business premises at the contractual end date of unreasonably withheld). It is also usual for other conditions to be their lease. It allows an occupying tenant to remain in the business imposed on a sale and for most of these to be pre-agreed and set out premises and to call for a new lease of them, unless the landlord can in the lease – such as the rent being fully paid. show a limited number of grounds for requiring the property back. The main ground for a landlord in claiming back a property is because it Rights to sublet are often dictated by the size of the space, although wishes to redevelop the whole or a substantial part of the property and a right to sublet whole would be considered usual. Landlord’s needs vacant possession in order to do so. If the landlord successfully consent would again be required (not to be unreasonably withheld). proves that he is entitled to take the property back, the occupying tenant Again, pre-agreed conditions would be usual. has a right to compensation in most circumstances, but not where the Insurance. The normal position would be for the landlord to reason for the landlord succeeding is due to the tenant’s default. insure but then to recover the costs of doing so from the tenant(s). It is possible to contract out of the security of tenure regime Occasionally, in a lease of whole, the tenant may insure but then described above, provided certain procedures are followed, in which will also take on commitments regarding re-instatement and have case there is no right to remain or a new lease at the end of the term an unqualified obligation to repair. of the lease nor any right to compensation. Change of control. It would be very unusual for there to be any The Landlord and Tenant (Covenants) Act 1995 applies to all control or notice requirements on change of ownership of the tenant leases granted on or after 1 January 1996 (unless created pursuant to or merger activity. an agreement that pre-dates that date). Repairs. The tenant is likely to be responsible for all repairs if the It amends the previous “privity of contract” rule that made the letting is of whole or to be liable for the interior of its demise and original parties bound to the commitments entered into as landlord to contribute its fair contribution to these costs for the exterior and or as tenant for the duration of the lease term, even after they had structure, if it is a letting of part. sold their interest or those obligations had been varied. For so-called “new leases” any tenant is automatically released 10.4 What taxes are payable on rent either by the landlord from its obligations as tenant on a sale (provided, if landlord’s prior or tenant of a business lease? consent is required, it has been obtained) and a landlord would be released on a sale if it is reasonable in the circumstances and the VAT will be payable on rent by a tenant of a commercial property correct release procedure is followed. where the landlord has elected to waive the VAT exemption (that would otherwise apply to all land transactions). The landlord will be required Any outgoing tenant is likely to remain liable on the tenant covenants to account for such VAT to the UK tax authority. The tenant may be under a lease however until his purchaser sells (with landlord’s able to recover the VAT depending on its VAT recovery position. consent if this is required) as it is market practice for the outgoing tenant to guarantee the obligations of its purchaser until that point. Rent will be seen as income in the landlord’s hands and subject to UK corporation tax or UK income tax (as applicable). The rent should be a deductible expense for the tenant. 10.2 What types of business lease exist? SDLT is payable by the tenant assessed against the overall rental sum due but with a discount for later rent payments. Those with the benefit of security of tenure and those without. See the response to question 10.1 above. As to the form of lease, there is no “standard” and these are negotiated documents, although 10.5 In what circumstances are business leases usually market practice has evolved such that there are “typical” or market terminated (e.g. at expiry, on default, by either party standards. See the response to question 10.3 below. etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party to be compensated by the other for any reason on 10.3 What are the typical provisions for leases of business termination? premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or Business leases can be terminated by a landlord on default by the sub-lease; (d) insurance; (e) (i) change of control of tenant (subject to a general equitable right to make good the defect, the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? and resurrect the lease as a consequence, where the defect is capable of remedy). These default rights are usually tied to non-payment of “Typical” is very sector driven. It also reflects the age, type and rent, material tenant breach or tenant insolvency. condition of the property concerned. Tenants and (less often) landlords may negotiate a contractual right Length of term. Office leases are “typically” 10 years (sometimes to break a lease at specific points during the term. Tenant’s rights longer but no more than 15 years usually; possibly with break rights may be subject to some conditions such as prior notice and rent at fixed points) and sometimes shorter; increasingly more tech-based being paid up to date.

70 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

Otherwise, leases only terminate if a surrender is negotiated between (in which Blackstone bought a majority share in 2017, a deal which the landlord and tenant (which is likely to involve a payment by the valued the company at £500 million) and IWG, the service office tenant) or at the end of the term. Rights to renew are addressed in the provider who has recently announced that it will launch its No18 answer to question 10.1. members club for businesses in the remaining 40,000 square feet of offices within the Battersea Power Station development. There is also an increase in appetite towards co-living spaces with ‘The Collective’ 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective and “Lyvly” being well-known names active in this sector in the UK. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance? 11 Leases of Residential Premises

For an original landlord there is no automatic release; but for leases 11.1 Please briefly describe the main laws that regulate granted on or after 1 January 1996, there is a right to request a leases of residential premises. England & Wales release and, if reasonable, the tenant would be obliged to agree; but this may need court action to establish. The Rent Act 1977 (RA 1977), the Housing Act 1988 (HA 1988) For subsequent landlords, if the lease is granted before 1 January and the Housing Act 1996 (HA 1996) are the primary statutes that 1996 then liability remains only for the time that they are landlord. regulate leases of residential premises. Until January 1989 most For leases granted on or after 1 January 1996 the position is the residential tenancies were regulated by the RA 1977 and a tenant same as for an original landlord of such a lease. under the RA 1977 is a regulated tenant. Assured tenancies were introduced by the HA 1988 (which came into force on 15 January For a tenant, whilst there is an automatic release of the tenant’s 1989) and from that date, a tenancy was automatically an assured obligations qua tenant, market practice is such that most leases will tenancy if the conditions set out in the HA 1988 were met, though require the tenant to act as guarantor of the obligations of the buyer a landlord could serve notice on the tenant stating that the tenancy of the lease (until that buyer sells the lease with landlord’s consent would be an AST (assured shorthold tenancy, which is a type of to another if that consent is required). assured tenancy). The HA 1996 reversed the default position so that an assured tenancy granted after 28 February 1997 (when the HA 10.7 Green leases seek to impose obligations on 1996 came into force) would automatically be an AST. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 11.2 Do the laws differ if the premises are intended for briefly describe any “green obligations” commonly multiple different residential occupiers? found in leases stating whether these are clearly defined, enforceable legal obligations or something The Licensing of Houses in Multiple Occupation (Mandatory not amounting to enforceable legal obligations (for Conditions of Licences) (England) Regulations 2018 apply in example aspirational objectives). addition to properties that qualify as HMOs (House in Multiple Occupation), i.e. a house in which or more unrelated tenants live as Green lease obligations are not normal in the UK market, although at least two separate households, and where the tenants share basic some institutional landlords did require some provisions when the amenities such as a toilet, bathroom or kitchen facilities. environmental legislation regarding the CRC Energy Efficiency Scheme was first introduced. It may be that these provisions will increase, given that from April 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: 2019 legislation is to come into effect that will restrict lettings of (a) length of term; (b) rent increases/controls; (c) the buildings with energy performance certificates with F or G ratings. tenant’s rights to remain in the premises at the end of Some leases do seek to add restrictions controlling alterations the term; and (d) the tenant’s contribution/obligation that are considered to have an adverse impact on the rating of the to the property “costs” e.g. insurance and repair? building for both its EPC certificate and compliance with the CRC regime. (a) A tenancy can either be for a fixed-term (running for a set period of time) or periodic (running on a week-by-week or month-by-month basis). 10.8 Are there any trends in your market towards more (b) The RA 1977 set up a system for registering “fair rents” flexible space for occupiers, such as shared for residential properties. Fair rents are assessed by a rent short-term working spaces (co-working) or shared officer, who is an official with the Valuation Office Agency, residential spaces with greater levels of facilities/ and once a fair rent has been registered, it is the maximum activities for residents (co-living)? If so please provide rent that a landlord may charge for that property (even if a examples/details. tenancy agreement provides for a higher rent at the date it is entered into). Either the landlord or tenant can apply to Earlier this year, Cushman & Wakefield reported that 2.5 million the rent officer for a rent to be registered or they can apply square feet of space in Central London was leased to flexible jointly. Once a fair rent has been registered, it will apply workspace providers in 2017, a 190% increase on the previous year. until either party applies for a reassessment. The landlord can This trend seems set to continue with the regions also becoming apply one year and nine months after the effective date of the increasingly more attractive. WeWork (now noted as the biggest last registration but the new registered rent will not become private landlord in London and Manhattan) were the largest taker of effective until a two-year period has elapsed. An application space during 2012–2017, occupying 2,577,864 square feet (Cushman can be made at any time if it is made jointly by the landlord and tenant or there has been a change of circumstances that & Wakefield Research & Insight) and notable acquisitions include means the old rent is no longer fair. A fair rent may be lower the £580 million acquisition of Devonshire Square in London in than the market rent as the rent officer will assume that there December 2017. Other prominent names include The Office Group is no shortage of properties available to rent in the area.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 71 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

During the fixed term of an assured tenancy (including an AST), the amount of the rent will be governed by 12.2 Can the state force land owners to sell land to the terms of the lease. If the tenancy is periodic (either a it? If so please briefly describe including price/ contractual periodic tenancy or a statutory periodic tenancy), compensation mechanism. the landlord can propose an increased rent, except in the case of a non-statutory periodic tenancy if the agreement The Compulsory Purchase Act 1965 and the Acquisition of Land contains contractual provisions for increasing the rent. If Act 1981 outline the conditions under which a statutory body or the tenant disagrees with the proposed rent, the tenant may local authority may forcibly require land owners to sell their land. In ask the Residential Property Tribunal in England (or a rent order for a compulsory purchase order to be issued, the owner of the assessment committee in Wales) to assess the open market property must be fairly compensated and the acquisition of the land rent for the property. must be for the public benefit. Compensation is assessed based on (c) See the response to question 11.4 below. the market value of the land, though additional compensation may (d) Such costs will likely be borne by the tenant. Where a be available for losses to a home or for costs incurred in relocating England & Wales building comprises several flats or residential premises, the business premises. responsibility for conducting repairs of common areas or procuring insurance for the block may indeed fall on the landlord, but the costs will likely be divided amongst the 12.3 Which bodies control land/building use and/or tenants and recovered by the landlord via a service charge. occupation and environmental regulation? How do buyers obtain reliable information on these matters?

11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed Land use and occupation is primarily overseen by the local planning to achieve vacant possession if the circumstances authority (LPA), i.e. the relevant district, city or borough council existed for the right to be exercised? within which a property is located. In certain circumstances, the Secretary of State can ‘call in’ planning applications to make final At the end of the contractual term for a regulated tenancy, the decisions, but will likely only do so if the application conflicts tenancy will continue as a statutory tenancy. To recover possession, materially with national policy or it relates to a nationally significant the landlord must obtain a court order for possession. The grounds infrastructure project. Buyers can obtain information on planning for possession are set out in Schedule 15 to the RA 1977. Some of matters by raising enquiries electronically or in person of the the grounds are discretionary, so the court can only order possession relevant LPA. if the court considers it reasonable. The remaining grounds are The principal bodies responsible for the regulation, protection and mandatory, so the court must grant an order for possession if the general improvement of the environment include the Environment landlord can prove the ground. Agency (EA), the Natural Resources Wales (NRW), the Health At the end of a fixed term assured tenancy the tenant has the right to and Safety Executive and local authorities. Buyers can obtain remain in the property, unless the landlord can establish one of the information on environmental matters by searching records held by grounds for possession in Schedule 2 to the HA 1988. A court order the relevant local authority, but they may also choose to commission would be required to recover possession. independent surveys with environmental specialists depending on any risks identified. The landlord of an AST has the right to regain possession of the property at the end of the fixed term (or, if the fixed term is less than six months, six months after the tenancy began), as long as the 12.4 What main permits or licences are required for landlord gives two months’ notice. If a tenant remains in occupation building works and/or the use of real estate? of a property after the fixed term of an AST expires, a statutory periodic tenancy will arise. Planning permission is generally required for any “operational development” (that is building, engineering, mining or other operations in, on, over or under land, including demolition) or a 12 Public Law Permits and Obligations material change of use of land. Building regulations approval may be required to certify that the relevant works comply with construction 12.1 What are the main laws which govern zoning/ standards as provided for in the Building Act 1984. It is possible permitting and related matters concerning the use, that both or neither, if the criteria for exemption are met, may be development and occupation of land? Please briefly required. Some changes to the use of a building are permitted under describe them and include environmental laws. a general statutory order without the need for an express planning permission. A development consent order is required (rather than The Town and Country Planning Act 1990 and the Planning Act planning permission) for projects that are nationally significant 2008 set out a framework for maintaining planning control in infrastructure projects. England & Wales. The Planning (Listed Buildings and Conservation Where activities could potentially cause pollution or adversely Areas) Act 1990 imposes a stricter regime for the demolition of or affect the environment, an environmental permit may also be alterations to buildings with historic or architectural significance. required. These are most commonly issued by the EA and NRW; The Housing and Planning Act 2016 introduces various planning however, they may also be granted by a local authority depending reforms which simplify the requirements for neighbourhood and on the activity and potential pollution risk. local planning, thereby aiming to facilitate a quicker supply of housing, including introducing a concept of permission in principle. The Environmental Protection Act 1990 regulates the deposit, treatment and disposal of waste and imposes obligations in respect of contaminated land.

72 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

12.5 Are building/use permits and licences commonly 12.8 How can e.g. a potential buyer obtain reliable obtained in your jurisdiction? Can implied permission information on contamination and pollution of real be obtained in any way (e.g. by long use)? estate? Is there a public register of contaminated land in your jurisdiction? It is usual for planning permissions and building regulation consents to be obtained in England & Wales. If they are not, the Planning Local authorities are required to make publicly available a register of and Compensation Act 1991 specifies the period of time within identified contaminated land. Exclusion from the register is not by which planning control contraventions can be acted upon by a local any means an assurance that the land is not contaminated though as it authority. If no enforcement action is taken within these time limits may be that land has simply not been inspected. Buyers can carry out (which vary depending on the breach), the building will become desktop environmental searches, which will collate information from immune from further enforcement action upon expiry of the relevant publicly available sources and list current and past uses of the property period. For planning permissions those periods are: and neighbouring properties which might have led to contamination, England & Wales ■ four years for works carried out that constitute operational thereby helping buyers to determine whether more detailed independent development; surveys, e.g. of soil or groundwater, might be required. ■ four years for a change of use to a single dwelling house; and ■ 10 years for most other breaches, including breach of a 12.9 In what circumstances (if any) is environmental clean- planning condition or a material change of use. up ever mandatory?

Upon identification of contaminated land, water pollution or 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? environmental damage, the appropriate local authority will issue a remediation notice to the appropriate persons to enforce clean- up action. For the more serious infractions, the EA or NRW will The cost varies depending on the scale, complexity and nature usually enforce the clean-up action. It is a criminal offence not to of the work to be carried out, though the method for calculating comply with the terms of the notice once it has been served. A is provided for in the Town and Country Planning (Fees for planning authority may also impose it as a condition of a planning Applications, Deemed Applications, Requests and Site Visits) permission that environmental clean-up is carried out before a (England) Regulations 2012. development can proceed. The LPA should make all decisions within the statutory time limits, specified in the Town and Country Planning (Development Management Procedure) (England) Order 2015, unless a longer period 12.10 Please briefly outline any regulatory requirements is agreed in writing with the applicant. The more complex applications for the assessment and management of the energy performance of buildings in your jurisdiction. will include more evidentiary support thereby increasing the response time. The statutory time limit is usually 13 weeks for applications for major development and eight weeks for all other types of development An Energy Performance Certificate (EPC) is required for any (unless the works are likely also to impact the environment, in which property that is constructed, altered, sold or let. These are issued case a 16-week limit applies as the EA or NRW will also review the by commercial energy assessors and provide information about the application). Where a planning application takes longer than the energy efficiency of the premises and detail where improvements statutory period to decide and an extended period has not been agreed can be made to increase the rating and improve the energy efficiency with the applicant, the government’s planning guarantee requires the of the premises. It is mandatory for any building occupied by decision to be made within 26 weeks at the most. public authorities or institutions providing public services to show a Display Energy Certificate (DEC).

12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how 13 Climate Change are they likely to affect the transfer of rights in real estate or development/change of use? 13.1 Please briefly explain the nature and extent of any The Planning (Listed Buildings and Conservation Areas) Act 1990 regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions protects against the destruction or alteration of buildings that are trading scheme). considered of historical or architectural significance. Similarly the Ancient Monuments and Archaeological Areas Act 1979 prohibits The CRC (which stands for Carbon Reduction Commitment) the demolition, destruction, damage, removal, repair or alteration Energy Efficiency Scheme (CRC) obliges private and public sector of nationally important monuments, though certain works affecting organisations, primarily on the basis of whose energy consumption them may be permitted with the Secretary of State’s consent. qualifies as significant (amongst other inclusion criteria), to monitor Due to the limited ability to deal with listed buildings, historic and report carbon emissions and purchase carbon allowances for monuments and properties in conservation areas, their commercial every ton emitted. Following a UK government announcement in value will likely be affected, though the very nature of the real estate 2016, the scheme will cease to operate by 2019. It is not yet clear does not prevent it from being transferred. whether or not there is going to be a replacement for CRC.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 73 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ropes & Gray International LLP England & Wales

Some UK organisations are subject to participation in the EU Emissions Trading System (EU ETS). There is a collective cap 13.3 Are there any other regulatory measures (not already on the total amount of emissions allowed by all participants in the mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? system – members can purchase additional allowances from other members or take steps to reduce their carbon emissions. The Minimum Energy Efficiency Standards (MEES) Regulations came into force from 1 April 2016 and prohibit landlords from 13.2 Are there any national greenhouse gas emissions granting, extending or renewing any tenancy on or after April 2018 reduction targets? or continuing thereafter to let domestic and non-domestic private rented properties that do not comply with the regulations. The Climate Change Act 2008 provides a target to reduce greenhouse gas emissions when compared against 1990 baseline levels by at least 80% by 2050. England & Wales

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

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

Carol Hopper is a partner in Ropes & Gray’s real estate group in Partha Pal joined Ropes & Gray as a partner in the firm’s finance London with experience advising funds, investors, bank and non- practice group in April 2015. He specialises in banking and structured bank lenders and corporate clients on a wide variety of domestic and transactions, related restructurings, regulation and dispute resolution. international real estate based transactions. She has a breadth of Partha Pal is highly experienced in complex cross-border transactions experience acting for investors at all levels of the capital stack across having practiced in London, New York and Singapore. He is also the full risk spectrum and in a wide range of sectors from office, involved in the work of the Commercial Real Estate Finance Council industrial, residential, hotel and leisure to infrastructure and public/ and recently served as cochair of its Hedging Sub Committee. private finance transactions. Carol joined the firm in January 2015.

Ropes & Gray – one of the world’s premier law firms – has a leading international real estate practice advising investors and lenders on structuring and executing complex domestic and international transactions. Its real estate lawyers advise sophisticated investors, lenders and sponsors on a broad range of direct and indirect transactions across the risk spectrum from core to opportunistic.

74 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 9

Finland Matias Forss

Project Law Attorneys Ltd Sakari Lähteenmäki

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to Rights over land can be separated to title, special rights that can be question 12.1. Those relating to tax should be listed in registered, easements and mortgages. Purely contractual rights are response to questions in Section 9. recognised, but not given preference over registered rights. A lease on land is considered a special right that can be registered. Other The Code of Real Estate (Fi: maakaari) regulates the acquisition special rights include an agreement between the joint titleholders of and registration of real estate and liens on real estate. The Real a real estate on the possession of the real estate or the right to extract Estate Formation Act (Fi: kiinteistönmuodostamislaki) regulates mineral resources. the formation of real estate units, the creation of easements and other cadastral procedures. The Real Estate Register Act (Fi: Kiinteistörekisterilaki) regulates the real estate register. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed thereon? The Housing Companies Act (Fi: asunto-osakeyhtiölaki) regulates residential housing companies, but can be partially applied to other real estate companies. It is possible to register a delimitation on the components of real estate, so that a building or other construction does not belong to the The Act on Land Lease (Fi: maanvuokralaki) regulates the leasing real estate, but has a separate owner. If the divergence in ownership of land areas. is not registered, creditors have the right to assume that buildings belong to the real estate. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration Finnish real estate laws are codified and courts are under the duty consequences of any split? Are there any proposals to interpret the law. Some rights to natural resources (e.g. fishing) to change this? on government land have been recognised as local customary law. This split is not recognised under Finnish law. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 4 System of Registration

There are no relevant international laws. 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? 2 Ownership All land is required to be registered. All rights in land that bind third parties can be registered. 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident 4.2 Is there a state guarantee of title? What does it persons)? guarantee?

There are no restrictions on ownership outside the province of Åland There is no state guarantee of title, but the law confers public faith Islands, where ownership is restricted to residents of the province. in the land register. The state is liable for damages that have been caused by errors committed by officials in upholding land registries.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 75 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

properties. All of these registries are operated by the National Land 4.3 What rights in land are compulsory registrable? What Survey of Finland (Fi: maanmittauslaitos). (if any) is the consequence of non-registration?

A land lease right or other use rights pertaining to real estate 5.2 How do the owners of registered real estate prove their title? properties are compulsorily registrable if (i) the right is transferable to a third party without the permission of the landlord, (ii) there are buildings belonging to the tenant on the leased property, and (iii) The ownership of the seller is warranted by an excerpt from the land buildings may be built on the property by the tenant. register and all real estate transactions are verified and registered. Finland 4.4 What rights in land are not required to be registered? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration Rights such as easements, real estate liens (Fi: kiinnitys), joint of ownership right? Can information on ownership of possession (Fi: hallinnanjako) and joint arrangements (Fi: registered real estate be accessed electronically? yhteisjärjestely) are not required to be registered; however, it is highly recommended that such rights are registered in order to Electronic real estate transactions are executed by filling in a form at solidify their status and enforce the right against third parties. an online service provided by the National Land Survey of Finland. Transactions are verified by the parties of the transaction by using 4.5 Where there are both unregistered and registered land online bank user identification. The title to the property in question or rights is there a probationary period following first is transferred to the purchaser automatically and there is no need registration or are there perhaps different classes to file for the title. Electronic real estate transactions are, however, or qualities of title on first registration? Please give seldom used by real estate investors, construction companies and details. First registration means the occasion upon other professional operators. which unregistered land or rights are first registered in the registries. As all real estate transactions are verified, no further documents need to be provided to the land registry for registration. All land in Finland is registered. The information specified in question 5.1 can be accessed electronically.

4.6 On a land sale, when is title (or ownership) transferred to the buyer? 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? The title is transferred to the buyer by a deed of sale. The transfer of ownership (and possession) is regularly agreed on in a deed of There is a possibility of compensation for mistakes under certain sale, and usually involves a clause stipulating that ownership and/ strictly limited circumstances. or possession is transferred to the buyer simultaneously with the payment of the purchase price. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and 4.7 Please briefly describe how some rights obtain other rights affecting real estate and is this achieved priority over other rights. Do earlier rights defeat later by a search of the register? If not, what additional rights? information/process is required?

In general, it can be stated that earlier rights defeat later rights. There are no restrictions in terms of access to the relevant registers. In principle this also concerns registered rights, e.g. example The buyer has an opportunity to obtain relevant information without easements, real estate liens, joint possession (Fi: hallinnanjako) and the consent of the seller. Access to the relevant information is joint arrangements (Fi: yhteisjärjestely). achieved by a search of the register. Earlier mortgages pertaining to real estate properties have priority over mortgages registered later. However, the priority order of mortgage rights may be amended by an application which the 6 Real Estate Market mortgage holder has accepted.

Unregistered earlier rights do not obtain priority unless those who 6.1 Which parties (in addition to the buyer and seller invoke registered later rights have acted in bad faith. and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or 5 The Registry / Registries duties.

A real estate transaction must be verified by a notary. The notary’s 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules duty is to verify the sale and purchase agreement, the ownership/ and requirements. title of the property in question and the identity and the authority to execute of the signatory of each party. It can be said that there are three land registries in Finland. One for Typically, other parties involved in real estate transactions are the the title to the property, one for encumbrances (e.g. mortgages) and legal or other advisors of the seller and the buyer, and real estate one for easements, city plans and the origin and formation of the agents brokering the transactions.

76 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

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

The notary verifying the real estate transaction is entitled to receive In the Code of Real Estate, there is a general duty to disclose all a small remuneration for their services. matters that affect the sale price. Size and condition of buildings Legal advisors are often remunerated on an hourly basis. Real estate and structures are mentioned as examples. Information on land use agents often act on a commission basis. planning, building permits and restrictions on land use, liens and other restrictions on ownership are also specifically mentioned.

6.3 Is there any change in the sources or the availability Finland of capital to finance real estate transactions in 7.3 Can the seller be liable to the buyer for your jurisdiction, whether equity or debt? What are misrepresentation? the main sources of capital you see active in your market? Misrepresentation results, in general, in the liability to return part of the sale price as a price reduction or the whole sale price if the sale In the last few years the real estate market has revived itself and the is cancelled. The seller can also be liable for damages. The buyer is influx of capital, domestic and foreign, has meant that transaction entitled to demand cancellation if the misrepresentation is essential values and volumes have increased. This has seen new players, in view of the entire sale. A price reduction is calculated according to including domestic and foreign real estate funds, enter the market. the price that the object of sale should have had at the time of the sale.

6.4 What is the appetite for investors and/or developers 7.4 Do sellers usually give any form of title “guarantee” to invest in your region compared to last year and or contractual warranties to the buyer? What would what are the sectors/areas of most interest? Please be the scope of these? What is the function of any give examples. such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or Real estate investments are mainly concentrated in the capital warranties act as a substitute for the buyer carrying city area and a few other larger cities. Helsinki metropolitan area out his own diligence? is considered a primary real estate market and the Tampere and Turku regions are following behind as secondary markets. There is Seller’s warranties in real estate transactions cover various considerable interest from investors in secondary and even tertiary areas, such as environmental issues, lease agreements and other markets, but such investments rarely include international parties. agreements related to the property, easements and servitudes. The The housing and assisted living sectors have been relatively active purpose of the warranties given by the seller is to give information in the past few years as well as traditional commercial and office to the buyer and to protect the buyer from risks that may transpire. space areas. The hotel sector in the major cities is another active Sale and purchase agreements often include a clause wherein the area. buyer states that they have concluded a due diligence and have been given information on the property.

6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in 7.5 Does the seller retain any liabilities in respect of the terms of their attractiveness to investors/developers? property post sale? Please give details. Please give examples. The seller’s liabilities after the sale are often limited with contractual Investors and developers can be considered to be attracted to all clauses that protect the seller. The polluter of a property retains market subsectors. liability for the pollution of the soil regardless of ownership.

7 Liabilities of Buyers and Sellers in Real 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? Estate Transactions In a real estate transaction, the buyer is obligated to pay the transfer 7.1 What (if any) are the minimum formalities for the sale tax. and purchase of real estate? To obtain registration of title, the buyer should apply for it after the transaction has been completed. The Code of Real Estate regulates the formalities for the sale and purchase of real estate. A sale of real estate shall be concluded in writing and the deed shall include the following mandatory 8 Finance and Banking information: (1) the intent to convey; 8.1 Please briefly describe any regulations concerning (2) the real estate to be conveyed; the lending of money to finance real estate. Are the (3) the seller and the buyer; and rules different as between resident and non-resident persons and/or between individual persons and (4) the price or other consideration. corporate entities? In addition, each sale and purchase of a real estate is obligated to be verified by a notary. There are no regulations for real estate financing other than banking regulations.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 77 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

agreed upon in a lien commitment. It is common that if shares are 8.2 What are the main methods by which a real estate used as a security, the lender has the right to appropriate the shares lender seeks to protect itself from default by the in case of insolvency of the borrower. borrower?

A lien on the real estate is usually considered sufficient. 9 Tax

8.3 What are the common proceedings for realisation of 9.1 Are transfers of real estate subject to a transfer tax? mortgaged properties? Are there any options for a How much? Who is liable? mortgagee to realise a mortgaged property without

Finland involving court proceedings or the contribution of the mortgagor? Transfer of real estate is subject to a transfer tax, which is 4% of the purchase price. According to the Code of Real Estate, the buyer Common proceedings include the executive auction sale of real shall be liable for the transfer-of-assets tax levied on the sale. estate, but it is possible even after court proceedings to try to market the property as a regular object for purchase. Without the consent 9.2 When is the transfer tax paid? of the mortgagor, there are no options for enforcement other than court proceedings The transfer tax must be paid within six (6) months from the signing of the sale and purchase agreement. 8.4 What minimum formalities are required for real estate lending? 9.3 Are transfers of real estate by individuals subject to income tax? There is no specific regulation on real estate lending. The seller must pay an income tax for the profit, which is calculated 8.5 How is a real estate lender protected from claims either on the basis of the seller’s purchase price or on 60% of the against the borrower or the real estate asset by other purchase price for real estate that the seller has owned for more than creditors? 10 years. The capital gain tax rate is 30–34%, so the seller can pay up to 20% of the purchase price as income tax. The priority order of mortgage liens protects lenders. In case of a default and a resulting executive auction sale of real estate, the 9.4 Are transfers of real estate subject to VAT? How creditors are satisfied in the priority order set out in the register for much? Who is liable? Are there any exemptions? encumbrances. Transfers of real estate are not subject to VAT. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? Such circumstances are hardly imaginable. The borrower would have to claim fraud of the documents or similar circumstances. There are no other taxes.

8.7 What actions, if any, can a borrower take to frustrate 9.6 Is taxation different if ownership of a company (or enforcement action by a lender? other entity) owning real estate is transferred?

It is possible to appeal to the district court against measures taken The transfer tax for the transfer of ownership of a company is 2% by the bailiff; for instance on the grounds that the auction price was of the purchase price. Therefore, it may be tax-efficient to own considerably below market price. These kinds of appeals generally properties within a company and then transfer the ownership to the do not succeed, but have in some instances stalled enforcement for company. the duration of the process.

9.7 Are there any tax issues that a buyer of real estate 8.8 What is the impact of an insolvency process or a should always take into consideration/conduct due corporate rehabilitation process on the position of a diligence on? real estate lender? The owner of real estate must pay a yearly real estate tax that is The insolvency of the borrower does not impact the position of a based on the value of the land and buildings. The tax on buildings real estate lender in so far as the lender has lien on the real estate. is based on the type of building, i.e. the current use of the building and its size and amenities. If buildings have been converted to other 8.9 What is the process for enforcing security over uses, e.g. industrial to office, the tax administration might not be shares? Does a lender have a right to appropriate informed of the conversion, which may have resulted in too little shares in a borrower given as collateral? If so, taxes being paid. can shares be appropriated when a borrower is in administration or has entered another insolvency or reorganisation procedure?

Shares can be pledged as a collateral. The rights of the lender are

78 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

10 Leases of Business Premises 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a 10.1 Please briefly describe the main laws that regulate tenant to extend or renew the lease or for either party leases of business premises. to be compensated by the other for any reason on termination? Act on the Leasing of Business Premises (Fi: laki liikehuoneiston vuokrauksesta) comprehensively covers the basic requirements and Business leases are usually terminated mutually by the parties or at regulates the tenancy even if the parties do not themselves deem that the expiry of the lease term. it is necessary to record every term of the tenancy in an agreement. In case the tenant is declared bankrupt and the bankruptcy estate Finland has not underwritten the obligations of the tenant under the lease 10.2 What types of business lease exist? agreement, the landlord has the right to terminate the agreement. The bankruptcy estate is responsible for the obligations of the lease The Act on the Leasing of Business Premises covers all types of if they resume use of the leased premises. business leases, e.g. office spaces, business premises, restaurants and hotels. The legislation is flexible in terms of variety of the type 10.6 Does the landlord and/or the tenant of a business of premise leased. lease cease to be liable for their respective obligations under the lease once they have sold their interest? Can they be responsible after the sale in 10.3 What are the typical provisions for leases of business respect of pre-sale non-compliance? premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of The tenant shall not transfer his leasehold without consent expressed the tenant; and (ii) transfer of lease as a result of a in the lease agreement or given separately by the landlord. corporate restructuring (e.g. merger); and (f) repairs? Therefore, unless such consent exists, the tenant is liable for their obligations under the lease. (a) The length of the term of the lease is not regulated. The The landlord has a right to transfer the leasehold to a third party. length of the term may be either fixed or in force until further notice. (b) Rent increases are typically tied to the cost-of-living index of 10.7 Green leases seek to impose obligations on Finland. The rent is typically adjusted annually or bi-annually. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of (c) A common clause in a lease agreement is that the tenant the “environmental footprint” of a building. Please may not assign the lease, re-let or transfer the possession of briefly describe any “green obligations” commonly the lease to a third party (sub-lease) without the landlord’s found in leases stating whether these are clearly consent. defined, enforceable legal obligations or something (d) Most often, the lease agreement obligates the tenant to take not amounting to enforceable legal obligations (for out insurance against loss or damage, liability insurance and example aspirational objectives). loss of profits insurance, insuring the use of the object of the lease and the tenant’s property. The landlord shall have Green lease policies are becoming more common to property the property insured by conventional full value property owners and this is reflected in lease agreements. To accomplish the insurance. aspiration of sustainability, the terms and conditions of modern lease (e) (i) According to the legislation, the tenant, in case of a agreements regularly refer to the tenant’s obligation to ensure that transfer of business, has the right to transfer the lease right; all operations within the object of lease are carried out in compliance however, often the clause involving the restriction on the with environmental legislation and with other environmental right to transfer the lease or the possession of the object of recommendations and orders issued by the authorities that are the lease includes a stipulation whereby this also applies to a binding upon the tenant. transfer of business. (ii) In a corporate merger, lease agreements are transferred Eco-efficiency is promoted in lease agreements to ensure support by law to the recipient company. for sustainable development. It is common practice to attach environmental programmes to lease agreements. (f) Repairs and maintenance of the object of lease are agreed on a case-by-case basis. Usually a lease agreement involves a The enforceability of environmental and green policies given by a maintenance rent which covers most of the maintenance of the landlord has not quite yet been tested in Finland. object of the lease. Alternatively, the lease may be double net or triple net where the tenant shall assume some or even all of the maintenance costs. Typically, double or triple net leases 10.8 Are there any trends in your market towards more are involved in properties with a single or a few tenants. flexible space for occupiers, such as shared short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ 10.4 What taxes are payable on rent either by the landlord activities for residents (co-living)? If so please provide or tenant of a business lease? examples/details.

Rent is not generally subject to VAT. The parties can choose that Flexible space solutions are not very common in Finland. There are, the rent is subject to VAT in order to enable the landlord to deduct to certain extent, shared spaces in residential buildings and offices. VAT on input costs, if the business in the rented premises is subject to VAT.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 79 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

The landlord shall not rescind the lease agreement on grounds 11 Leases of Residential Premises referred to above, if he has not issued the tenant with a written caution. 11.1 Please briefly describe the main laws that regulate Should the tenant not move out of the leased premises once the leases of residential premises. agreement has been terminated appropriately, the landlord has to apply for a court order to evict the tenant. If the tenant resists, The lease of residential premises is regulated by the Act on enforcement of the court order can take months. Residential Leases (Fi: laki asuinhuoneiston vuokrauksesta). 12 Public Law Permits and Obligations Finland 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 12.1 What are the main laws which govern zoning/ Persons living together as spouses are jointly responsible for the permitting and related matters concerning the use, obligations of a lease agreement, even if the lease agreement has development and occupation of land? Please briefly been made in the name of only one of the spouses. describe them and include environmental laws. Otherwise, the law does not regulate multiple different residential The main law that governs zoning and permitting is the Land Use and occupiers. In general, this means that lease agreements are made Building Act, which governs the role of the state and municipalities jointly by the different occupiers. This can be accomplished by in land use planning and regulates permits for buildings. The Water entering into an agreement wherein all of the occupiers are tenants Act governs construction on water, use of ground or surface water or by entering into one main lease agreement, in which the main and other use of water-covered areas. The Nature Conservation Act tenant then sub-leases to the other occupiers. governs nature reserves and protected species. The Environmental Protection Act governs the permitting of activities that might result 11.3 What would typical provisions for a lease of in environmental degradation. The Land Extraction Act governs the residential premises be in your jurisdiction regarding: extraction of land for construction purposes. (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation 12.2 Can the state force land owners to sell land to to the property “costs” e.g. insurance and repair? it? If so please briefly describe including price/ compensation mechanism. (a) The length of the term of the lease is not regulated. The length of the term may be either fixed or in force until further notice. Municipalities or the state have, according to the Land Use and (b) Rent increases are typically tied to the cost-of-living index of Building Act, the right to expropriate land “when the general need Finland. Before the rent increase can take effect, the lessor so demands”. This right has been used, e.g. to acquire land for the shall notify the tenant in writing of the new rent and the date purposes of planning industrial premises or residential buildings on which it will take effect. on the land. This kind of expropriation is mostly used in areas (c) If a tenant with a non-fixed-term lease encounters substantial without a detailed plan, because then the expropriation price does difficulty in obtaining another dwelling by the removal date, not consider the planned future use of the expropriated land. The the court can, at the tenant’s request, defer the removal date expropriation price is determined according to the Expropriation by up to one year. Act and is calculated on the sale prices of properties of similar use. (d) The tenant typically has home insurance that covers the Municipalities have under the Land Use and Building Act various tenant’s liability for accidental damage caused to the powers to expropriate land to enable the execution of a local detailed premises. Usually the tenant has no obligation to repair the plan. The expropriation price is determined according to the local premises. All repairs, alterations or upkeep measures should be specifically agreed. detailed plan in question. Separately, the Pre-emption Act gives municipalities the right to buy any property that can be developed for residential or recreational use 11.4 Would there be rights for a landlord to terminate a at the same price at which the buyer is willing to buy. residential lease and what steps would be needed to achieve vacant possession if the circumstances existed for the right to be exercised? 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do The landlord shall have the right to rescind the lease agreement: buyers obtain reliable information on these matters? (1) if the tenant neglects to pay the rent within the time prescribed by law or agreed on; Municipalities have building inspectors that control permits, (2) if the leasehold is transferred or the apartment or part of it is use and occupation. Environmental regulation is controlled by otherwise assigned for another person’s use, contrary to the environmental authorities either on the municipal or state level. The provisions of this Act; municipal building authority (FI: rakennusvalvonta) is a reliable (3) if the apartment is used for any other purpose or in any other source of information on the current accepted use of buildings. manner than that provided when the lease agreement was made; 12.4 What main permits or licences are required for (4) if the tenant creates a disturbance with his or her way of life building works and/or the use of real estate? or allows others to do so in the apartment; (5) if the tenant fails to take good care of the apartment; or The main permit required for building works or other similar use (6) if the tenant violates provisions or regulations for the of real estate is a local detailed plan or a granted right to deviate maintenance of public health and order in the apartment. from it, or, absent a local detailed plan, a decision on the special

80 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

preconditions for granting a building permit according to the Land Use and Building Act. Building works also require a building 12.9 In what circumstances (if any) is environmental clean- permit, which is of a technical nature and only limitedly open to up ever mandatory? appeal. To change the use of a building requires a building permit if the change is considered significant. According to the Environmental Protection Act, clean-up is required when there is danger to health or the environment. The responsibility is primarily on the polluter and secondarily on the occupant of the 12.5 Are building/use permits and licences commonly contaminated area. obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 12.10 Please briefly outline any regulatory requirements Finland Building permits are obligatory and are also required to change the for the assessment and management of the energy main use of a building. Implied permission can have been obtained performance of buildings in your jurisdiction. in the first half of the 20th century before changes in legislation but is not obtainable any more. New residential or commercial buildings are under very strict requirements for energy efficiency. The energy efficiency of old buildings must be improved, if feasible, when carrying out repairs or 12.6 What is the typical cost of building/use permits and conversion of the building. The requirements are monitored during the time involved in obtaining them? the granting of building permits. The energy performance of a building is assessed via energy If a local detailed plan incurs significant value on real estate, certificates, which are mandatory for almost all residential and the owner is obligated to pay a percentage of it as development commercial buildings. compensation to the municipality. The development compensation is at maximum 60% of the added value. It is also possible to conclude a land use agreement between the real estate owner and 13 Climate Change the municipality on the details of the increase in building rights and the compensation due to the municipality. Changing a local detailed plan or obtaining a deviation from it takes at least a few months and 13.1 Please briefly explain the nature and extent of any involves significant planning costs. The costs of the permits are not regulatory measures for reducing carbon dioxide significant in comparison. emissions (including any mandatory emissions trading scheme). A building permit is typically obtained in a few weeks. The European Union Emissions Trading System is the primary 12.7 Are there any regulations on the protection of historic measure. There is complementary regulation and incentive monuments in your jurisdiction? If any, when and how programmes on energy efficiency and the use of renewable materials are they likely to affect the transfer of rights in real or sources of energy. estate or development/change of use?

Municipal plans may protect the facades of buildings. The Act 13.2 Are there any national greenhouse gas emissions on the Protection of Buildings (Fi: rakennussuojelulaki) regulates reduction targets? the protection of buildings and monuments with specific historical value, where protection can be extended to the interior. As change A goal set out in the Climate Act is to reduce emissions by 80% as of use usually requires a building permit, the property developer compared to 1990 levels by the year 2050. may be subject to extensive requirements to protect the building before the permit is obtained. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land There are no such measures. in your jurisdiction?

Environmental authorities have a public register on contaminated or potentially contaminated soil. Decisions and rapports by environmental authorities are also public and can be obtained by anyone.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 81 © Published and reproduced with kind permission by Global Legal Group Ltd, London Project Law Attorneys Ltd Finland

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

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

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

82 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 10

France

Tirard, Naudin Maryse Naudin

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to No legal restriction specifically applies to the ownership of real question 12.1. Those relating to tax should be listed in estate by particular classes of persons. response to questions in Section 9.

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

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

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 83 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

“privilege du prêteur de deniers” (lender’s pledges) is also determined 3.3 Is there a split between legal title and beneficial title depending on the date of completion of the purchase agreement. in your jurisdiction and what are the registration consequences of any split? Are there any proposals to change this? 5 The Registry / Registries

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

All lands, as well as all rights relating to French real estate (except 5.2 How do the owners of registered real estate prove lease agreements not exceeding 12 years) should be registered with their title? the “Cadastre de France” (land register) in order to be enforceable against third parties. Proof of real estate ownership is governed by the principle of freedom of evidence. The burden of proof is on the plaintiff in the claim action. 4.2 Is there a state guarantee of title? What does it guarantee? With respect to the modes of proof, the presentation of a title of ownership entails a presumption of property which can be reversed Strictly speaking, there is no state guarantee of title. by the contrary proof. For the courts, the proof can also be brought back by the legal presumption indicated in article 552 of the French Civil Code under 4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? which property of the ground carries the property of the top and the bottom. All rights listed in the answer to question 3.1 above are compulsorily It can also be constituted by indices such as the cadastre or the registrable, except lease agreements not exceeding 12 years. payment of property taxes. Ownership by virtue of possession (“Usucapion”) is also the most widely used means of reporting evidence of real estate ownership. 4.4 What rights in land are not required to be registered? Proof of usucapion may be established by any means. Lease agreements which do not exceed 12 years are not required to be registered. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration 4.5 Where there are both unregistered and registered land of ownership right? Can information on ownership of or rights is there a probationary period following first registered real estate be accessed electronically? registration or are there perhaps different classes or qualities of title on first registration? Please give The transfer of French real estate should be registered with the details. First registration means the occasion upon which unregistered land or rights are first registered register either by a French notaire in the case of a private sale or by in the registries. a French judge in the case of auction. The information on ownership of registered real estate cannot be There is no probationary period. accessed electronically.

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

Between parties, the ownership is transferred under the terms of the No compensation can be claimed from the registry if a mistake has sale agreement. As a general rule, however, it is enforceable against been made. However, in theory the notaire may be held responsible. third parties after the registration of the sale with the “Cadastre de France” (land register). 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he 4.7 Please briefly describe how some rights obtain might reasonably need regarding encumbrances and priority over other rights. Do earlier rights defeat later other rights affecting real estate and is this achieved rights? by a search of the register? If not, what additional information/process is required? The first registered buyer prevails over the others. Assuming different purchasers register on the same day, the first signed agreement One may obtain information relating to the transfer of French real prevails. The rank of priority relating to liens on the property, such as estate by gift, by death and by sale. The date and price of transfer,

84 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

as well as the identity of each new owner is provided. All mortgages and liens put on the property are also detailed, including their 6.3 Is there any change in the sources or the availability amounts, dates, beneficiaries and the levees’ date. of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the This information can be obtained by way of a request to a French main sources of capital you see active in your market? administration called “Service de la Publicité Foncière” using a form n°3233-SD. A stagnation can be observed in terms of commercial real estate investment volumes in France. Although such investments have been high over the last two years (around €25 billion), an estimated €25.5 6 Real Estate Market billion has been invested in 2017 (approximately the same volume

as in 2016). Insurers and SCPI-OPCI retail companies are the France 6.1 Which parties (in addition to the buyer and seller most active investors with each holding a 26% share of investment, and the buyer’s finance provider) would normally followed by the unlisted investment funds which have seen their share be involved in a real estate transaction in your of investment reduced from 29% in 2016 to 20% in 2017. jurisdiction? Please briefly describe their roles and/or Approximately four out of five acquisitions are financed by equity duties. capital. This proportion obviously varies depending on the size of the operation. Debt is involved in 25% of the transactions between Several parties may be involved in a real estate transaction in €30 and €50 million, 15% between €100 and €200 million, and 40% France. The real estate brokers are the first to appear on the scene. over €200 million. They allow potential purchasers and sellers to meet. They also provide all information on the property to the buyer. As opposed to the situation in the UK, no general survey on the property is, as 6.4 What is the appetite for investors and/or developers a general rule, carried out in France. It is the responsibility of the to invest in your region compared to last year and what are the sectors/areas of most interest? Please buyer to find out information regarding the property. Only a few give examples. compulsory survey certificates are issued before the acquisition. Avocats may be involved in the process of purchasing a property in Since the beginning of 2017, 33 transactions over €100 million were France, as well as the purchase of shares of a company which owns, recorded in commercial real estate in France. The total amount was directly or indirectly, French real estate properties. They represent €6 billion. their own clients during the negotiation period and the preparation Among the most prominent deals, notably there was the acquisition of the legal documentation. of 50% of the towers “Duo” in Paris by Natixis Assurances for €600 The French notaires are “officiers ministériels” (ministerial officers) million, and the acquisition of the building “In/out” by Primonial who benefit from a monopoly of executing and registering (with the Reim in Boulogne-Billancourt for €445 million. “cadastre”) all transfers of French properties. The sale of shares of As for last year, investors are particularly looking for new and companies (French or foreign) owning directly or indirectly French restructured office properties in Paris and its western suburbs. real estate having a market value exceeding that of their French movable assets, signed outside France, should also be reiterated with a French notaire. Other sales of shares are not in the scope of 6.5 Have you observed any trends in particular market the notaires’ monopoly. sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Real estate technicians can be appointed by the potential purchaser Please give examples. in order to carry out the non-compulsory survey and due diligence work on the property. Retail property market declined 47% during the first three quarters Finally, sales of properties by auction may be executed and of 2017. This can be explained by the scarcity of “prime assets” registered to the “cadastre” by a French judge. available in the market and by the sharp decline in the amounts invested in large deals.

6.2 How and on what basis are these persons As explained in Section 9 below, the Finance Bill for 2018 provides remunerated? for the abolition of the wealth tax and the implementation of a new tax based on the market value of real estate located in France for Fees of real estate brokers (between 1% and 5% depending on the non-resident tax payers and located worldwide for French resident nature and amount of the sale price) as well as those of avocats tax payers. As a consequence of this fundamental change in the tax (depending on their diligence) are negotiable. treatment of real estate investments, one may expect either a lack of interest of investors in French real estate or a new opportunity for Notaires receive compulsory fees determined by the law depending those who are confident that President Macron’s challenge will be on the market value of the property sold. A degressive rate scale successful. applies with a marginal rate of 0.814%. When two notaires are involved in the transaction, one representing the seller, the other representing the purchaser (this is our recommendation in order to 7 Liabilities of Buyers and Sellers in Real avoid a conflict of interest), compulsory fees are shared between Estate Transactions both notaires. Fees due to the notaires upon the reiteration of the sale of shares of a company owning a French real estate property signed abroad should, however, be negotiated. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate?

As explained above, the French notaires’ monopoly means that parties rely on them to execute the minimum formalities for the sale and purchase of real estate.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 85 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

The notaire should verify that: ■ the real estate property is duly owned by the seller. For 7.4 Do sellers usually give any form of title “guarantee” example, the apparent owner of the property could only own or contractual warranties to the buyer? What would be the scope of these? What is the function of any the usufruct and the bare-owners may not have been involved such guarantee or warranties (e.g. to apportion risk, in the negotiation process; to give information)? Would any such guarantee or ■ the mortgages registered on the property being sold do not warranties act as a substitute for the buyer carrying exceed the sale price of the property; and out his own diligence? ■ all compulsory certificates relating to the absence of legionella, woodworm, lead poisoning and asbestos, as well The contractual warranties appearing in the “standard” private as the conformity of gas and electrical fittings, etc., have been

France pre-purchase agreement of French real estate are, as a general provided by the seller. rule, very limited and should be checked before the signing of the The notaire should also exercise all formalities relating to pre- agreement in front of the notaire. They may concern, for example, emption rights that might apply as a result of the law to the town or the nature of the building (land to build), the possibility of obtaining other public authorities (e.g.: “droit de préemption urbain”, “droit a construction permit or purchasing a vacant building when it is still de préemption de la SAFER”). occupied. It should also allow the new purchaser to substitute the It may be appropriate to rely on the notaires for low value seller in order to benefit from any building guarantees previously transactions relating to French real estate; however we recommend granted. However, warranties are never a substitute for the buyer being assisted by a French avocat for larger scale transactions. carrying out his own due diligence. The notaire does not represent either the seller or the buyer, one of his main tasks being to make sure that taxes are paid. 7.5 Does the seller retain any liabilities in respect of the Assuming the shares of the company owning the real estate are sold, property post sale? Please give details. due diligence should be performed by parties in order to verify the situation of the French real estate and the financial situation of the The seller retains three mains liabilities in respect of the property company sold. These verifications are performed in practice by post sale: French avocats. ■ the guarantee for hidden defects (article 1641 of the French Civil Code); ■ the guarantee for non-conformity (articles 1616 to 1623 of 7.2 Is the seller under a duty of disclosure? What matters the French Civil Code); and must be disclosed? ■ the guarantee of quiet possession free from any claims by third parties (article 1626 of the French Civil Code). The seller has, as a general rule, very few duties of disclosure, and the notaire will not necessarily protect the purchaser. As explained The guarantee for hidden defects applies when the defect was before, it is the responsibility of the purchaser to investigate the hidden and not visible, when it rendered the product unfit for use and property to their satisfaction. This is always reiterated in the standard when it could not have been discovered by a reasonably thorough sales agreement proposed by the French notaires. This is why it is inspection before the sale. A replacement, a partial or total refund or recommended for both the seller and the buyer to engage their own the cancellation of the whole contract can be obtained. avocat to ensure that everything is carried out to their satisfaction. The guarantee for non-conformity in the sale of real estate property requires the delivery of a property whose area corresponds to that possibly indicated in the deed of sale. If the area does not 7.3 Can the seller be liable to the buyer for misrepresentation? correspond, the seller can suffer a diminution of the price received from the buyer. Moreover, in the case of the sale of a flat, the Loi Carrez provides that a seller must guarantee the surface area of the In France it is rare that a seller is held liable for misrepresentation flat sold. If the actual surface area is less than 1/20th of that declared relating to the acquisition of real estate. The buyer would need by the seller, he must if requested by the buyer, reduce the price pro to demonstrate that the essential reason he/she was interested in rata by the shortfall in the area. purchasing the property was misrepresented in order to invalidate the acquisition, according to the new article 1112-1 of the Civil Code. Finally, the seller must guarantee the buyer against any cause of Assuming the agreement was valid, it is voidable by application of the eviction (i.e. a non-declared mortgage on the property sold, the new article 1187 of the Civil Code if at least one condition precedent extension of the lease granted to the tenant by the seller without provided in the agreement was not met before the completion date. giving notice to the buyer). It should be noted that in France, as a general rule, a private pre- purchase agreement is signed between parties, providing several 7.6 What (if any) are the liabilities of the buyer (in addition conditions precedent which should be met prior to the signing of to paying the sale price)? the purchase agreement before the notaire. After the signing of this agreement, it becomes very difficult to challenge the validity of the In the case of the purchase of French real estate, the buyer is only purchase, except in case of fraud. liable for expenses mentioned in the agreement. Assuming the However, the seller’s liability is easier to challenge in cases of the shares of the company owning the French real estate are sold, the sale of shares of a company owning French real estate when the purchaser is liable for known and unknown debts of the company. share purchase agreement provides representations on the seller In order to prevent or limit the liable risk of the buyer, a liability which have not been met. The share purchase agreement can either guarantee clause along with an escrow clause should be provided in be null and not valid according to article 1112-1 of the Civil Code in the shares purchase agreement. case of misrepresentation, or voidable by application of article 1187 of the Civil Code (see above).

86 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

8 Finance and Banking 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the rules different as between resident and non-resident The real estate lender is protected against claims against the borrower persons and/or between individual persons and or the real estate asset by other creditors by registering a “privilège corporate entities? du prêteur de deniers” (lenders’ pledges) and/or a mortgage of first rank which will allow him to be paid before any other creditors, The Finance Bill of 2018 provides that loans granted by family including the French tax authorities. members to finance a French real estate property would only be France taken into consideration for real estate wealth tax (“IFI”) purposes 8.6 Under what circumstances can security taken by a (see Section 9 below) if the terms and conditions of the loan lender be avoided or rendered unenforceable? agreement are at arm’s length. This Finance Bill also provides that for tax payers having a real The only circumstance where a security taken by a lender can be estate wealth exceeding €5 million, deductible loans for IFI purposes avoided or rendered unenforceable is in case of fraud when the cannot exceed 60% of the value of the real estate. Only 50% of the lender helped the owner to organise his/her insolvency. amount exceeding this limit would be taken into consideration for the determination of the IFI taxable basis. 8.7 What actions, if any, can a borrower take to frustrate Finally, loan agreements providing for a “bullet repayment” at enforcement action by a lender? maturity (“Balloon Loans”) should be amortised over the duration of the loan for IFI purposes. The principal of the loan which should There is no action a borrower can take except, of course, to have been theoretically amortised is not deductible for the purpose demonstrate that the debts owed have been duly refunded to the of determining the net value of the taxable properties. lender.

8.2 What are the main methods by which a real estate 8.8 What is the impact of an insolvency process or a lender seeks to protect itself from default by the corporate rehabilitation process on the position of a borrower? real estate lender?

The traditional methods by which real estate lenders seek to protect As a general rule, in case of insolvency or corporate rehabilitation of themselves are the inscription of the “privilège du prêteur de the borrower, the real estate lender who has registered a “privilege deniers” (lenders’ pledges), registration of the mortgage within the du prêteur de deniers” (lenders’ pledges) or a mortgage on the “registre cadastral” and by means of a pledge on the shares of the real estate of first rank will be protected by the fact that hewill company owning the French real estate. be entitled to be paid on the sale of the real estate bought by the borrower before any other creditors. 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a 8.9 What is the process for enforcing security over mortgagee to realise a mortgaged property without shares? Does a lender have a right to appropriate involving court proceedings or the contribution of the shares in a borrower given as collateral? If so, mortgagor? can shares be appropriated when a borrower is in administration or has entered another insolvency or Conventional mortgages as well as “privilège du prêteur de reorganisation procedure? deniers” (lenders’ pledges) should only be registered in the “registre cadastral” (see above) by French notaires. There is no need to The most common forms of security over shares is the so-called involve court proceedings. “nantissement de parts sociales” (share pledge). One should also be aware that the French tax authorities are allowed The share pledge is granted over the shares of types of companies to put a legal mortgage on French real estate properties if they have other than joint stock companies such as “société à responsabilité reason to believe that their owners would not be able to pay their limitée” or “sociétés civiles immobilières”. This pledge covers taxes. the actual share which means that new additional shares are not automatically included in the scope of the pledge. 8.4 What minimum formalities are required for real estate As a general rule, a share pledge is enforced by its registration with lending? a commercial court registry. It is also recommended to register the share pledge with a French notaire in order to set the rank of the As already explained, the registration of a conventional mortgage pledge. should be executed by a French notaire. It is the same for the The lender has the right to appropriate shares in case of insolvency or registration of “privilège du prêteur de deniers” (lenders’ pledges). reorganisation procedure of the borrower. However, the strength of Pledges over shares should only be registered with the “registre du his right will depend on the rank of inscription of the share pledge. commerce et des sociétés” (Companies and Trade Registry). The cost associated with this is very limited in comparison to the fee for the registration of the mortgage.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 87 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

9 Tax 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property?

9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? Assuming the seller of the real estate is a company subject to French corporate tax, capital gains are subject to French corporation tax at a rate of 33.33%. The Finance Bill for 2018 provides for a As a general remark, the “Code général des impôts” (French tax progressive decrease of the corporation tax rate from 28% on the code) provides special treatment which is applied to real estate first €500,000 profits for 2018 to 25% on all profits for 2022. A 30% located in France and companies owning such real estate which flat tax applies from st1 January 2018 on the distribution of dividends

France is very different from the tax regime applicable to other assets or to French resident individuals. Except when a tax treaty provides a companies. The concept of “Société à prépondérance immobilière” lower rate, a 12.80% withholding tax would apply on distribution of (“SPI”) (a real estate company) has been introduced for French dividends benefiting to non-French resident individuals. tax purposes only, which allows France to apply a specific regime on qualified companies. The concept of SPI has a different Assuming the seller is a foreign company subject to corporate meaning depending on each tax involved. However, the common tax, a 33.33% withholding tax applies (for 2018) on capital gains characteristic of the different definitions (either those of the internal realised upon the sale of French real estate. One may expect that law or tax treaties) is that in order to be considered as an SPI, the this withholding tax rate would decrease (as from 2019) at the same company (French or foreign) which owns, directly or indirectly, pace as the decrease of the corporation tax rate. French real estate must have a market value which exceeds that of their movable assets. 9.6 Is taxation different if ownership of a company (or Transfer of real estate is subject to transfer duties at the rate of other entity) owning real estate is transferred? 5.81%, calculated on the purchase price of the property, and at the rate of 5% on the sale price of shares of an SPI. Transfers of shares of an SPI, when considered fiscally transparent Traditionally, transfer duties are due by the purchaser even if it may by an individual (resident or non-resident of France) are subject be provided otherwise in the sale agreement. Both the seller and to the same regime as described in the answer to question 9.3. purchaser are liable for their payment vis-à-vis the FTA. However, the taxable capital gain is obtained by finding the difference between the sale price and the purchase price of the sold SPI shares. The same exemptions for the duration of the ownership 9.2 When is the transfer tax paid? also apply (see the answer to question 9.3). Transfers of shares of an SPI subject to corporation tax by an The notaire levies transfer duties at the time as the property sale individual resident of France were subject in 2017 to progressive agreement is signed. Transfer duties on sale of an SPI’s shares income tax scale rates (with a marginal rate of 45%) and social should be paid within 30 days of signing the sale agreement. contributions at a flat rate of 15.5%. Some reductions amounting to 50% or 65% may apply, depending on the duration of ownership. 9.3 Are transfers of real estate by individuals subject to The 2018 Finance Bill provides for a flat rate of tax of 30% which income tax? applies to the sale by French resident individuals of shares of an SPI subject to corporate tax. However, allowances based on the duration Transfers of real estate are subject to income tax at a flat rate of of ownership will no longer be allowed. Non-French residents 19% and social security contributions at the rate of 17.20% for 2018 would still be subject to the same regime as those applicable in (15.50% for 2017). An additional tax at progressive rates varying cases of sale of shares of an SPI considered as fiscally transparent. from 2% to 6% also applies on capital gains exceeding €50,000. Finally, the special tax on real estate capital gains (ranging from 2% Finally, the exceptional contribution on high income may also apply to 6%; see the answer to question 9.3) also applies in all cases. at a rate of 3% or 4% depending on the annual income and capital The transfer of shares of an SPI (regardless their fiscal statute) by gains received by a tax payer during a said year. The marginal rate a company (French or foreign) subject to corporate tax is taxed at a of taxation for 2018 reaches 46.2%. standard rate of 33.33%. As explained above, the Finance Law for Exemptions apply depending on the duration of the ownership 2017 provides for a progressive reduction of corporate tax to 25% in of the property, under which a total exemption of income tax (at 2022. Foreign companies selling SPI shares are subject to a 33.33% the rate of 19%), an exceptional contribution on capital gains (at withholding tax levied upon the sale which can be imputed on the progressive rates from 2% to 6%) and an exceptional contribution corporation tax due. on high income (at the rate of 3% or 4%) is granted after 22 years of ownership. A total exemption from the social contribution (at the rate of 15.5% for 2017 and 17.2% for 2018) also applies after 30 9.7 Are there any tax issues that a buyer of real estate years of ownership. should always take into consideration/conduct due diligence on? The same regime applies for residents and non-residents of France. As explained above, the transfer of real estate is secured in France. 9.4 Are transfers of real estate subject to VAT? How However, it is important in our opinion to execute survey diligence much? Who is liable? Are there any exemptions? before purchasing even if it is, not yet, a common practice. Assuming the purchase of an SPI’s shares is contemplated, it is important to VAT may only apply (at a rate of 20%) on transfers of land to be conduct due diligence not only on the real estate but also on the tax built upon, on buildings under completion, and on new buildings and financial situation of the SPI. completed in the previous five years. All other sales of real estate and SPI shares are subject to transfer duties, as explained in the answer to question 9.1.

88 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

the “bail commercial” and the landlord should either authorise or 10 Leases of Business Premises participate in the sub-lease agreement’s signature. (d) Insurance 10.1 Please briefly describe the main laws that regulate Real estate is, as a general rule, insured by the landlord against leases of business premises. damage to the building and insured by the tenant again damage to the premises and equipment. The statute of “baux commerciaux” (leases of business) provided (e)(i) Change of control of the tenant by articles L.145-1 to R.145-37 of the “Code de Commerce” (trade code), is deemed to protect the tenant’s rights. It provides As a general rule the change of control of the tenant does not interfere with the “bail commercial”, except of course if it specifically

a minimum duration and allows the tenant the right to renew the France agreement at its term. It also makes it possible to limit the increase stipulates otherwise. in rental fees when the agreement is renewed. (ii) Transfer of lease as a result of a corporate restructuring The statute of “bail professionnel” (professional lease) provided by The “droit au bail” owned by a merged tenant is automatically article 57A of the law 86-1290 on 23rd December 1987 and article transferred to the absorber. 1713 of the Civil Code is applicable to professional activities other (f) Repairs than businesses. As a consequence, professional premises cannot be Important renovation work, such as structural and internal work used by a tenant running business activities. is the responsibility of the landlord, while other repairs are the responsibility of the tenant. 10.2 What types of business lease exist? 10.4 What taxes are payable on rent either by the landlord As explained above, two main types of business lease exist: or tenant of a business lease? ■ The “bail professionnel”, which applies to professionals running a civil activity (e.g.: lawyers, doctors…). The (a) Taxation of rental income professional lease is concluded for a minimum period of When the landlord is an individual, French income tax is due six years. It can be renewed for a six-year duration. Each on rental income on a cash basis. The determination of the party can refuse the renewal of the agreement by notifying tax basis is different if the building is rented out as furnished or the other party six months before its termination date and the tenant can terminate the lease with six months’ notice. unfurnished. Residents and non-residents are subject to income tax at progressive rates with a marginal rate of 45%. Non-residents are, ■ The “bail commercial” which applies to business activities however, subject to a minimum taxation amounting to 20%. Social creating a “fonds de commerce” is described below. contributions are also due at a rate of 17.2% for 2018. Finally, the contribution on high income amounting to 3% or 4% may also apply. 10.3 What are the typical provisions for leases of business Companies are subject to corporation tax on accrued rental income. premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or The determination of the tax basis is the same as for operational sub-lease; (d) insurance; (e) (i) change of control of companies. The depreciation of the building is deductible. the tenant; and (ii) transfer of lease as a result of a The standard rate for 2018 of corporate tax is 33.33%. It will corporate restructuring (e.g. merger); and (f) repairs? progressively decrease to reach 25% in 2022, according to the 2018 Finance Bill. As explained in the answer to question 10.2, only the aspects (b) VAT relating to the “baux commerciaux” will be discussed in these VAT is due when industrial and/or commercial buildings are rented answers. It applies to real estate where the “fonds de commerce” is out as furnished. The landlord of an industrial and/or commercial run. The “fonds de commerce” is characterised by the existence of building rented out as unfurnished may elect for VAT under certain a real and independent clientele owned by the tenant. The business circumstances. This election allows the VAT to be deducted on activity should be run by a tenant registered within the “registre du construction cost, expenses relating to renting out the property and commerce et des sociétés” (business registry). avoiding the “taxe sur les salaires” (tax on wages). VAT is never (a) Term due on residential buildings rented out unfurnished. The term of the “bail commercial” should be concluded for at least (c) French wealth tax and the new IFI nine years. However, the tenant can terminate the agreement at the Since 1981, wealth tax has been due every year by resident taxpayers end of each three-year period with a minimum of six months’ notice. on their worldwide assets (movable and immovable). Non-resident (b) Rent increases taxpayers are only taxable on their French assets including real The rental fees are freely determined between both parties upon the estate properties owned directly or indirectly through French or signature of the original “bail commercial”. As a general rule, rental foreign companies and/or trusts. Wealth tax is due when the net fees can be indexed but no increases may apply before a period of market value of taxable assets exceeds €1,300,000 for 2017. It is at least three years following the date of first use or of the renewal subject to progressive tax rates from 0.50% to 1.50% for 2017. of the lease agreement. In addition, the increase is limited in order The 2018 Finance Bill replaced the wealth tax with a new wealth to protect the tenant. tax only due on real estate properties called “Impôt sur la Fortune (c) Tenant’s right to sell or sub-lease Immobilière” (“IFI”). IFI is due by resident taxpayers on the When business premises are let with a lease to operate a certain worldwide real estate properties owned directly or indirectly, and by type of business, the tenant has the right to sell his right to the non-resident taxpayers only on their real estate properties located lease (“droit au bail”). Depending on the provision of the “bail in France, owned directly or indirectly through French or foreign commercial” the landlord should either agree or participate in the companies or trusts. The rules governing IFI are largely inspired sale of the “droit au bail”. The sub-lease should be provided by by the wealth tax regime with new amendments deemed to avoid

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 89 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

what the FTA considered as tax avoidance. Among a few other exemptions, participation in a French or foreign operating company 10.7 Green leases seek to impose obligations on owning real estate which does not exceed 10% would be exempted landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of from IFI. As already explained, some limitation of deduction of the “environmental footprint” of a building. Please debts is also provided. briefly describe any “green obligations” commonly (d) French gift and inheritance tax found in leases stating whether these are clearly French gift tax and inheritance tax are due on worldwide assets defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for by resident tax payers and only on French assets by non-resident example aspirational objectives). tax payers. Shares of French or foreign companies qualifying as

France a “société à prépondérance immobilière” (see question 9.1) and The French Construction Code provides for numerous environmental French real estate owned directly or indirectly by a French or foreign requirements (“green obligations”) relating to leases, such as the company (or a trust) more than 50% of which is owned by the same requirement to include an energy diagnosis performance with all family are, among others, considered French assets. lease agreements, with the exception of agricultural and seasonal The rate at which French gift tax and inheritance tax are due lease agreements (article L.1343-1). depends on the relationship between the donor (deceased) and the As of 1st January 2011, all rental (and sale) adverts must also contain donees (heirs). A full exemption of inheritance tax applies between the energy performance grade (from A to G) of the building (article spouses. A similar progressive rates scale applies (from 0 to 45%) R.134-5-1). to donations between spouses and to donations and successions th between parents and descendants. A flat tax of 60% applies between Since 14 July 2013, leases relating to offices or commercial unrelated persons. The same regime applies when assets are owned buildings with a surface area larger than 2,000 m² must contain a through a trust. “green appendix” (“Annexe environnementale”, article L.125-9 of the French Environmental Code). This green appendix contains (e) Reporting obligations comprehensive information in respect of the energy equipment of In order to allow France to levy its taxes and duties, French or the building (e.g. waste treatment, heating and lighting system, foreign companies, as well as trustees of trusts owning French water consumption). assets, including real estate located in France, have a duty to report changes in ownership. 10.8 Are there any trends in your market towards more The identity of the ultimate owners of French or foreign companies, flexible space for occupiers, such as shared regardless of their activities, registered within the French company short-term working spaces (co-working) or shared and commerce registry should be disclosed. residential spaces with greater levels of facilities/ An annual 3% tax is due by French or foreign companies owning activities for residents (co-living)? If so please provide directly or indirectly real estate properties located in France. examples/details. Companies disclosing the identity of their owners benefit as a general rule from an exemption. No, there are not. An 80% penalty is due on eluded income tax, wealth tax, IFI tax, and gift and inheritance tax when the trustees of a trust indirectly 11 Leases of Residential Premises owning assets subject to those taxes fail to report the identity of the settlors and beneficiaries as well as all events affecting the trust. 11.1 Please briefly describe the main laws that regulate leases of residential premises. 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a Land use regulation in France is complex. As explained in question tenant to extend or renew the lease or for either party 1.1, the current frame of the regulation is set out in the Construction to be compensated by the other for any reason on Code, the Urban Planning Code, and the Environmental Code. termination? On 20th September 2017, The French Minister of territories’ cohesion set forth a “housing strategy” (“Stratégie du logement”) As explained above, business leases are usually terminated by the which provides for numerous propositions aiming at promoting tenant at the end of a three-year period (see questions 10.2 and and simplifying real estate development. It notably includes a 10.3). The landlord could also terminate a business lease at the end commitment not to create any new “technical standards” in building of a six-year period (“bail professionnel”) or of a nine-year period legislation and to create a better management of improper claims (“bail commercial”). The parties may always decide to extend and against construction permits. renew the lease. The landlord should compensate the tenant if he terminates the lease before or at its expiry. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective The laws do not differ if the premises are intended for multiple obligations under the lease once they have sold their different residential occupiers. Some rules are, however, organised interest? Can they be responsible after the sale in respect of pre-sale non-compliance? for multiple different residential occupiers which should be agreed to and followed by new occupiers (i.e. “Règlement de co-propriété”). They should be attached to all purchase and lease agreements in the Landlords are no longer liable for their obligations once they have form of an appendix. sold their real estate. However, the tenants remain responsible if they have sold their interest or sub-leased the real estate.

90 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

11.3 What would typical provisions for a lease of 12.2 Can the state force land owners to sell land to residential premises be in your jurisdiction regarding: it? If so please briefly describe including price/ (a) length of term; (b) rent increases/controls; (c) the compensation mechanism. tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation The local authorities, and under certain circumstances the State, to the property “costs” e.g. insurance and repair? may exercise their pre-emptive rights upon the sale of real estate properties as already mentioned above. (a) Term They can also force land owners to sell their land. The expropriation The term of the “bail d’habitation” should be at least six years. procedure is provided by an ordinance dated 4th November 2004. However, the tenant can terminate the agreement at the end of each France It should, however, only be applied for public utility purposes. three-year period with a minimum of six months’ notice. Evicted land owners receive full compensation, determined either (b) Rent increases by a contractual agreement or settled by the judge. The rental fees are freely determined between both parties upon the signature of the original “bail d’habitation”. As a general rule, 12.3 Which bodies control land/building use and/or rental fees can be indexed but no increases may apply before a occupation and environmental regulation? How do period of at least three years following the date of first use or of the buyers obtain reliable information on these matters? renewal of the lease agreement. In addition, the increase is limited in order to protect the tenant. Lands and building use are under the control of local administrative (c) Tenant’s right to sell or sub-lease authorities. The “Maire” (Mayor) ensures the town planning and As a general rule, the tenant cannot sell its rights. The sub-lease grants the “permis de construire” (“prior construction permits”). should be provided by the “bail d’habitation” and the landlord The “Préfet de région” (“regional prefect”) may also be involved should authorise signature of the sub-lease agreement. in specific circumstances. Other administrative authorities may also (d) Insurance be included in the process, for example, for historical monuments or for environment concerns. As a general rule, the landlord insures the property against damage to the building and the tenant insures against damage to the premises and equipment. 12.4 What main permits or licences are required for (e) Change of control of the landlord building works and/or the use of real estate? As a general rule a change of control of the landlord does not Various permits granted by the administrative authorities are required interfere in the “bail d’habitation”. in France for building works as well as for the use of real estate. (f) Repairs Prior construction permits as well as specific authorisations should Important renovation work, such as structural and internal work, be obtained for constructions exceeding 20 m2. Any modification of is the responsibility of the landlord, while other repairs are the the use of buildings should also be authorised. responsibility by the tenant.

12.5 Are building/use permits and licences commonly 11.4 Would there be rights for a landlord to terminate a obtained in your jurisdiction? Can implied permission residential lease and what steps would be needed be obtained in any way (e.g. by long use)? to achieve vacant possession if the circumstances existed for the right to be exercised? Compulsory regulations which should be complied with in order to The protection of the tenants is a very serious issue in France, obtain building/use permits are, as a general rule, well-known by and therefore strictly regulated. A landlord wishing to terminate a architects. As a consequence, preparing the request for a building residential lease should indemnify the tenants. permit is not particularly difficult. Nevertheless, any obtained administrative permit can be challenged by third parties if they are effected by the contemplated project. As a consequence, it can take 12 Public Law Permits and Obligations time to obtain a favourable decision, which is finally given by an administrative judge.

12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, 12.6 What is the typical cost of building/use permits and development and occupation of land? Please briefly the time involved in obtaining them? describe them and include environmental laws. As any administrative authorisations for building/use permits are As already explained, the “Code de l’urbanisme” (“Planning free of charge, the cost of their request is, as a general rule, included Code”) provides rules harmonising the use of the French territory. in the architect’s fees. When the building permit is challenged before It governs the location, size and main characteristics of buildings. It the administrative court, its cost may become more substantial also provides zoning rules. depending on the importance of the project. The “Code de la Construction et de l’habitation” (“Construction As a general rule, the time necessary to obtain the building permits and Housing Code”) gathers together construction, development is relatively short. A two-month period is required for ordinary and social housing rules. It provides compulsory specifications and building permits, three months for construction-development proper use of buildings. permits and six months for high-rise or public access buildings. They The “Code de l’environnement” (“Commercial Code”) provides, can be challenged by third parties within two months following their among others, rules prohibitions, and requirements for buildings display on the building site. contractors and owners.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 91 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

12.7 Are there any regulations on the protection of historic 13 Climate Change monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use? 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions As already mentioned, several regulations apply allowing for trading scheme). the protection of historic monuments. However, they only apply on renovation work of the building which is considered either France transposed the European Directive 2003/87/EC of 13th as historic or located in an historic area. However, there is no October 2003 establishing a scheme for greenhouse gas emission France regulation limiting the transfer of the ownership of such buildings. allowance trading. The French environmental code therefore provides for a mandatory emissions trading scheme applicable to 12.8 How can e.g. a potential buyer obtain reliable energy production activities, civil aviation activities, production information on contamination and pollution of real of paper and carbon, the mineral industry and the production and estate? Is there a public register of contaminated land processing of ferrous metals. in your jurisdiction?

Careful investors must exercise due diligence and request a pollution 13.2 Are there any national greenhouse gas emissions reduction targets? diagnosis from the vendor based on environmental documents. Investors can also ask the “DREAL” (a French public body) for the Law n° 2009-967 of 3rd August 2009 (the “Grenelle 1” Act) aims relevant documentation, or consult databases such as “BASOL” and at reducing greenhouse gas emissions to a quarter of current levels “BASIAS” which notably identify sites and soils which are polluted by 2050. or may potentially be polluted.

13.3 Are there any other regulatory measures (not already 12.9 In what circumstances (if any) is environmental clean- mentioned) which aim to improve the sustainability of up ever mandatory? both newly constructed and existing buildings?

Environmental clean-up is mandatory in case of risk to human health, The “Grenelle 1” Act encourages the construction of “low energy security and the environment. Public authorities can automatically consumption” buildings (i.e. less than 50 KWh/m²/year) and proceed with the clean-up if a formal demand was unsuccessful. requires a reduction of energy consumption by 38% by 2020 in the The person responsible for such pollution must bear the cost. existing building stock. By 2020, all new buildings should produce more energy than they use. 12.10 Please briefly outline any regulatory requirements Law n° 2010-788 of 12th July 2010 (the “Grenelle 2” Act) completed for the assessment and management of the energy and implemented the “Grenelle I” Act, notably by introducing performance of buildings in your jurisdiction. specific requirements such as the completion of an energy performance diagnosis as of 1st January 2017 for buildings which A diagnosis of energy performance (so-called “DPE”) must be have heating or cooling systems, and the requirement to carry out attached to the deed transferring the real estate ownership or to the works to increase the energy efficiency of buildings for commercial lease agreement (either residential or commercial). use before 1st January 2020.

92 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France

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

Tel: +33 1 53 57 36 00 Email: [email protected] URL: www.tirard-naudin.com France Maryse Naudin is a member of the Paris Bar and the co-founder in 1989 of Tirard, Naudin. She now has more than 35 years’ experience in advising and defending a varied clientele, from multinational corporations to high net worth individuals, in relation to cross-border tax and estate planning issues. She has a particular expertise in negotiating real estate transactions. She has advised many foreign corporate or private investors acquiring French real estate property, as well as French clients with foreign interests. Maryse Naudin is also very experienced in setting up and structuring multinational large and medium-sized groups establishing in Europe and have a proven expertise in comparative corporate taxation of trading and holding companies within the EU. She is a member of the International Academy of Estate and Trust Law, the co-founder and former secretary of the French branch of STEP, and a former chairman of the “International Estate Planning” commission of the Union Internationale des Avocats. She is a member of the International Academy of Estate and Trust Law.

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 93 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 11

Germany Dr. Florian Kirchhof

Kapellmann Dr. Max Mommertz

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to German law distinguishes between different types of ownership or question 12.1. Those relating to tax should be listed in similar rights in real estate: response to questions in Section 9. a) Exclusive ownership of a piece of land is also referred to as full ownership (Volleigentum). If two or more legal entities The main provisions of real estate law are governed by the Civil jointly own a piece of land, this is referred to as co-ownership Code (Bürgerliches Gesetzbuch). In addition, there are various (Miteigentum). other ancillary laws that govern special subjects, such as the b) The ownership of a single condominium in a building is Land Register Act (Grundbuchordnung), which governs the referred to as condominium ownership (Wohnungseigentum). content and keeping of the land register, the Hereditary Building Ownership of non-residential areas of a building, in Rights Act (Erbbaurechtsgesetz), which governs the content and connection with the co-owned share of the common extent of heritable building rights and the Condominium Act ownership, is referred to as partial ownership (Teileigentum). (Wohnungseigentumsgesetz), which contains regulations on the c) German law also provides for the possibility of owning a ownership of individual apartments or properties. heritable building right (Erbbaurecht). In addition, land ownership can be further enhanced by rights in 1.2 What is the impact (if any) on real estate of local rem. The most important are the following: common law in your jurisdiction? ■ Easements (Grunddienstbarkeiten) or limited personal easements (beschränkt-persönliche Dienstbarkeiten) entitle Common law actually has no significant influence on real estate in other legal entities to rights in the property (e.g. walking and Germany. Real estate is extensively governed by the Civil Code and driving rights; laying and maintenance of supply lines). other ancillary acts. The courts apply these acts and interpret them. ■ Mortgages (Grundschulden) or accessory mortgages (Hypotheken) can be granted as security for a property. 1.3 Are international laws relevant to real estate in your ■ Through a right of first refusal (Vorkaufsrecht), a third jurisdiction? Please ignore EU legislation enacted party can enter into a contract of sale through a unilateral locally in EU countries. declaration towards the seller by a buyer. ■ Through a usufruct right (Nießbrauchsrecht), the rightholder As far as real estate is concerned, international laws are not relevant can benefit from the usufruct of a property. for our jurisdiction. The above rights are rights in rem entered in the land register. Registering a right in rem has the effect of making it effective in relation to any person. 2 Ownership

3.2 Are there any scenarios where the right to land diverges 2.1 Are there legal restrictions on ownership of real estate from the right to a building constructed thereon? by particular classes of persons (e.g. non-resident persons)? According to German law, the ownership of land also includes all essential components constructed thereon, in particular buildings. In Germany, every legal entity (natural or legal person) is entitled The ownership rights to a piece of land and to a building thus to own real estate. In particular, non-resident persons may also own coincide. However, in the case of a heritable building right, the real estate in Germany. beneficiary does not acquire ownership of the relevant land but an ownership-equivalent right to the building.

94 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

entry of a priority notice (Vormerkung) in the land register to secure 3.3 Is there a split between legal title and beneficial title the acquisition of ownership for the benefit of the purchaser. Due to in your jurisdiction and what are the registration the procedure described above, it often takes several months before consequences of any split? Are there any proposals the actual transfer of ownership takes place in the land register. to change this?

Under German law, there is no split between legal and beneficial 4.7 Please briefly describe how some rights obtain title. There are also no proposals to change this. priority over other rights. Do earlier rights defeat later rights?

4 System of Registration The priority of a right over other rights results from the registered rank in the land register. The rank generally depends on the time of Germany registration. Earlier registrations therefore have priority over later 4.1 Is all land in your jurisdiction required to be registrations. The rank of each registered right can be seen in the registered? What land (or rights) are unregistered? land register. The beneficiary of a prior right may also grant priority to a beneficiary of a right that is actually subordinate. Every change Land and rights in rem are registered in the land register. Contractual in rank must be entered in the land register. agreements that have no effect in rem (e.g. rental agreements) are not registered in the land register. 5 The Registry / Registries 4.2 Is there a state guarantee of title? What does it guarantee? 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules There is no state guarantee of title under German law. However, and requirements. there is the principle of public faith (Öffentlicher Glaube) in the land register. This principle describes a refutable presumption regarding There is no central land registry in Germany. The individual land the legal situation that actually exists. Public faith protects the registries are located at the lower district courts (Amtsgerichte). confidence of legal transactions in the accuracy of publicly kept The territorial responsibility of the land registry offices is thus registers, such as the land register. All entries in the land register basically determined by the district of the respective district court. are thus regarded as correct. However, the same legal provisions apply to all land registry offices, in particular, the provisions of the German Land Registration Code 4.3 What rights in land are compulsory registrable? What (Grundbuchordnung). (if any) is the consequence of non-registration? 5.2 How do the owners of registered real estate prove All rights in rem must be entered in the land register. Otherwise their title? they will not have any effect in rem. In Germany, no manual title is issued to real property owners. 4.4 What rights in land are not required to be registered? However, the owners may request an extract from the land register (Grundbuchauszug) of the respective real estate from the relevant Any contractual provisions, insofar as they are not intended to land registry office. This extract in turn provides information have any effects in rem, do not have to be registered. For example, about the registrations in the respective land register page provisions stipulated in lease agreements are not registered. (Grundbuchblatt), for example whether a transfer of ownership has already taken place.

4.5 Where there are both unregistered and registered land or rights is there a probationary period following first 5.3 Can any transaction relating to registered real estate registration or are there perhaps different classes be completed electronically? What documents need or qualities of title on first registration? Please give to be provided to the land registry for the registration details. First registration means the occasion upon of ownership right? Can information on ownership of which unregistered land or rights are first registered registered real estate be accessed electronically? in the registries. At present, it is not possible to transfer real estate completely Under German law, there is no probationary period following first electronically. However, it is possible to view extracts from the land registration, neither are there different classes or qualities of title on register electronically. first registration. The documents which need to be provided for the transfer of ownership of real estate depends in part on where the real estate 4.6 On a land sale, when is title (or ownership) transferred is located and whether the rights of third parties must be taken into to the buyer? account in the transfer, for example in the case of a right of first refusal. In general, the following documents must be submitted in The actual transfer of ownership of land takes place only at the time any case: when the purchaser is registered as the new owner in the land register. ■ Conveyance (Auflassung), requires the notarial declaration of The registration is usually carried out by the land registry office at conveyance. the instigation of a notary. The registration is usually initiated only ■ Declaration by the relevant public authorities that no pre- after the full purchase price has been paid. In turn, the purchase emptive right exists or is exercised for the property in price is only paid if certain conditions have been fulfilled, e.g. the question.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 95 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

■ Presentation of a tax clearance certificate (steuerliche Unbedenklichkeitsbescheinigung). By submitting this 6.3 Is there any change in the sources or the availability certificate, the tax office confirms that there are notax of capital to finance real estate transactions in objections against the entry of the new owner in the land your jurisdiction, whether equity or debt? What are register. the main sources of capital you see active in your market?

5.4 Can compensation be claimed from the registry/ Still, most properties are sold to open-ended funds and special funds. registries if it/they make a mistake? Also, a lot of foreign investors still regard Germany as a “safe haven” for investments which leads to a significant portion of foreign capital If a party suffers damage in the event of mistakes made by the being invested in the German real estate market, e.g. through private Germany land registry office, for example, incorrect registrations in the land equity funds, pension funds or sovereign wealth funds. register, there is the option of asserting an official liability claim (Amtshaftungsklage). 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and 5.5 Are there restrictions on public access to the what are the sectors/areas of most interest? Please register? Can a buyer obtain all the information he give examples. might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved Although we faced developments from 2015 to 2017 which may by a search of the register? If not, what additional information/process is required? have been seen to indicate a “bubble”, the market dynamic remained very high in 2018. The economic situation, which is still very good, favours urbanisation, residential real estate and the office segment; Access to a land register requires proof of a legitimate interest however, there are also very attractive niche markets such as care (Berechtigtes Interesse). The responsible land registry office decides homes, hotel products or logistics property. whether such an interest exists. Such a legitimate interest exists, for example, in the case of: ■ experts (e.g. surveying the property boundaries); 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in ■ creditors for execution; terms of their attractiveness to investors/developers? ■ owners; Please give examples. ■ tenants (for example, to verify the landlord); and ■ mortgage creditors, such as real estate and construction It still looks like the German real estate market is not about to slow financiers, building societies, banks or insurance companies. down. However, bearing in mind public discussion about the lack of affordable housing in the big cities, we would expect even more project developments in the housing sector. In general, the German 6 Real Estate Market market is short of construction resources, which increases the time necessary for project developments. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally be involved in a real estate transaction in your 7 Liabilities of Buyers and Sellers in Real jurisdiction? Please briefly describe their roles and/or Estate Transactions duties.

7.1 What (if any) are the minimum formalities for the sale In most transactions notary publics are involved. If the transaction and purchase of real estate? is concluded as an asset deal or a share deal involving a limited liability company (GmbH), notarisation before a notary public is Due to the economic importance and the complicated legal questions mandatory. However, notary publics are also often involved if and legal relationships relating to a transfer of real estate, the this is not mandatory (e.g. transfer of shares in a partnership); for conclusion of a real estate sale and purchase contract is not possible example, if the notary public works as escrow agent. Usually, seller without the use of a formal agreement; indeed, the cooperation of and buyer also have their own legal and tax advisors. Furthermore, a notary is required. All essential agreements between the seller often real estate agents are also involved in the transaction. and purchaser must be included in the contract. Any agreements between the parties that are not contained in the contract and which 6.2 How and on what basis are these persons are not subsequently notarised are invalid. remunerated?

7.2 Is the seller under a duty of disclosure? What matters In Germany, statutory tariffs exist for notary publics and advisors. must be disclosed? However, usually only notary publics are remunerated according to the statutory tariff. Advisors are usually paid on the basis of In principle, the seller has no comprehensive duty of disclosure. hourly fees. Lump sum fees, success fees and caps have become According to German law, there are only two cases in which the more common in recent years. Real estate (or finance) agents are seller is obliged to provide the purchaser with information: usually paid on the basis of a lump sum, often calculated as a certain percentage of the purchase price. a) In any situation, the seller has the duty to provide clarification whenever the purchaser has asked a specific question. The seller is then obliged to answer the question completely and correctly.

96 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

b) A duty of disclosure can also exist without any request by the purchaser. Under the principle of good faith, the seller 8 Finance and Banking is obliged to disclose relevant facts to the purchaser without being asked. The seller must, without being asked, disclose 8.1 Please briefly describe any regulations concerning any facts which are recognised to be of essential importance the lending of money to finance real estate. Are the for the purchaser’s decision to purchase and the disclosure of rules different as between resident and non-resident which can be expected in accordance with common practice persons and/or between individual persons and (Verkehrssitte). corporate entities?

7.3 Can the seller be liable to the buyer for The German Civil Code (Bürgerliches Gesetzbuch) contains the main misrepresentation?

provisions on (real estate) loans and the corresponding collateral Germany provided by the borrower. No different provisions apply to domestic Usually, property sale and purchase contracts contain liability and foreign persons (at any rate apart from banking supervisory provisions that restrict the seller’s liability. However, a complete regulations). However, the BGB contains very different provisions exclusion of liability is not possible; for example, the seller cannot for B2B loans on the one hand and B2C loans on the other. The exclude his liability in the event that he has deliberately failed to German Banking Act (Kreditwesengesetz) and related regulations, disclose important information to the purchaser. such as the German Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement or MaRisk), contain regulatory provisions on lending business and banking supervision, 7.4 Do sellers usually give any form of title “guarantee” which also have an impact on the content design of loan agreements. or contractual warranties to the buyer? What would be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, 8.2 What are the main methods by which a real estate to give information)? Would any such guarantee or lender seeks to protect itself from default by the warranties act as a substitute for the buyer carrying borrower? out his own diligence? The most important methods of protecting the real estate lender Usually, real estate sale and purchase contracts contain warranty against default by the borrower include the provision of collateral provisions that deviate from the position under the law. The wording that grants the real estate lender direct payment claims or exploitation depends strongly on the circumstances of the individual case, for rights. A distinction is made between so-called personal securities example on the condition of the real estate or the market power of (additional claims against persons) and so-called real/physical a party. Usually the sellers try to exclude the warranties provided collateral (access rights to assets). Examples of personal securities by law as far as possible. To a certain extent, this is possible under are: surety; guarantee; and solid responsibility statement. Examples German law. Typical warranties concern: of real/physical collaterals are: land charge; mortgage; pledging ■ the condition of the real estate; of receivables (e.g. account balances); and security cession of ■ the non-existence of encumbrances or contracts (e.g. rental receivables (e.g. purchase price or rent receivables). agreements); In order to minimise the risk of default, loan agreements also ■ public charges; and frequently contain information rights and termination rights for the ■ soil contamination. benefit of the real estate lender. From a purely legal perspective it would possible to use guarantees to substitute one’s own due diligence. However, this is not very 8.3 What are the common proceedings for realisation of common as the seller usually tries to exclude his warranties as far as mortgaged properties? Are there any options for a possible. Furthermore, such guarantees would need to be backed by mortgagee to realise a mortgaged property without strong security arrangements which most sellers usually would not involving court proceedings or the contribution of the be willing or able to provide. mortgagor?

In order to realise the mortgage collateral, in general a court decision 7.5 Does the seller retain any liabilities in respect of the is required that obliges the owner of the property to allow execution property post sale? Please give details. on the property. However, the requirement of a court decision is usually avoided by the fact that the owner submits to immediate After the conclusion of the sale and purchase contract, the seller execution on creation of the mortgage (or land charge). is generally liable under the contractually agreed or statutory warranties. Even if the seller’s warranties are contractually excluded Enforcement itself is governed by the German Compulsory to the greatest possible extent, the seller shall in any case be liable Auction of Immovable Property Act (Zwangsversteigerungsgesetz) for damages incurred by the purchaser as a result of any intentional and requires the initiation of judicial enforcement proceedings. conduct by the seller. According to the ZVG, enforcement is possible by auctioning the property and subsequently distributing the proceeds (compulsory auction) or by confiscating the property in favour of the mortgage 7.6 What (if any) are the liabilities of the buyer (in addition creditor so that he can access the income associated with the to paying the sale price)? property (e.g. rent or lease claims) (forced administration).

In addition to the obligation to pay the purchase price, the purchaser must usually also pay the notary’s fees, the land transfer taxes 8.4 What minimum formalities are required for real estate lending? (Grunderwerbssteuern) and – often – the costs of hiring a real estate agent. The buyer also becomes liable for obligations from lease agreements concerning the sold property. In the B2B sector, real estate loan agreements are generally not required to be formal, but should nevertheless be concluded in

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 97 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

writing for evidence purposes. In the case of B2C loans, much stricter requirements apply to the form. In addition to the mandatory 8.8 What is the impact of an insolvency process or a requirement of written form, the real estate lender has numerous corporate rehabilitation process on the position of a real estate lender? obligations to inform and advise, e.g. regarding the consumer’s right of revocation. In case of any insolvency process opened against the borrower’s In both the B2B and B2C sectors, the provision of securities can assets, the lender generally cannot demand the settlement of the loan also entail very strict formal requirements. For example, the from the borrower or the receiver in insolvency. His claims are then encumbrance of real property (e.g. by a land charge, possibly with so-called insolvency claims, which are in the best case only fulfilled submission to execution) requires notarial form and entry in the land proportionately. However, on the basis of existing securities such register. as land charges, mortgages or liens, the lender can demand so-called Germany separate satisfaction from the insolvency estate. This means that 8.5 How is a real estate lender protected from claims the collateral (the real estate) may be realised/sold/auctioned off by against the borrower or the real estate asset by other the receiver in insolvency, but the proceeds thereof must be used to creditors? primarily satisfy the lender’s claims.

The protection of the real estate lender depends on the type of 8.9 What is the process for enforcing security over security chosen. In case of a land charge or lien on receivables, shares? Does a lender have a right to appropriate the real estate lender may, for example, have a right to priority shares in a borrower given as collateral? If so, satisfaction over the other creditors. In the event of a successful can shares be appropriated when a borrower is in security cession of the borrower’s claims against third parties, the administration or has entered another insolvency or real estate lender is protected against other creditors of the borrower reorganisation procedure? by the fact that the claims are no longer part of the borrower’s assets. In the event of a dispute, the real estate lender must defend himself As a rule, participation in companies is realised by the sale of against the access of the other creditors in court. A variety of legal shares. A creditor is not automatically entitled to a participation remedies are available to him for this purpose, e.g. third-party in the borrower’s company as security. Outside insolvency plan claims and actions for preferential satisfaction. proceedings, a participation can only be considered if the lender is pledged a participation as security by the other shareholders or if it is offered for sale. If the participation is pledged before insolvency 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? proceedings are instituted, the lender may also realise it within the framework of insolvency proceedings. In the context of insolvency plan proceedings (i.e. in the opened proceedings), a so-called In general, the real estate lender has a legitimate interest in obtaining dept-equity swap (section 225a InsO) is also possible. During the collateral. Real estate lenders may even be obliged under banking drafting of the plan, it is possible to provide for claims of creditors supervisory law to demand collateral. However, this justified to be converted into share or membership rights in the borrower. interest in obtaining collateral does not apply without restriction. In Conversion against the will of the creditors concerned is excluded. particular, the real estate lender may not demand collateral that leads In particular, the plan may provide for a capital reduction or increase, to overcollateralisation. Such – initial – overcollateralisation occurs the payment of contributions in kind, the exclusion of pre-emptive if a noticeable disproportion between the secured claim and the rights or the payment of compensation to departing shareholders. collateral already exists when the collateral is initially provided (e.g. where the value of the collateral is more than 110% of the claim). If an overcollateralisation occurs retrospectively, for example 9 Tax because the secured claim has been partially met, the borrower has a claim against the real estate lender for the elimination of the overcollateralisation by (partially) releasing the collateral. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? The enforcement and realisation of collateral by the real estate lender can be averted by the assertion of objections. This may include both The transfer of real estate situated in Germany is subject to Real Estate objections by the borrower itself and objections by third parties (e.g. Transfer Tax (RETT; Grunderwerbsteuer) pursuant to the real estate objections by the guarantor or the holder of priority mortgages). transfer tax act (RETT Act; Grunderwerbsteuergesetz). RETT has to be paid for the transfer of real estate, for the transfer of at least 95% 8.7 What actions, if any, can a borrower take to frustrate of the interests in a partnership within five years (if the partnership enforcement action by a lender? holds real estate) and for transactions of the interests of companies (if the company holds real estate). There are currently plans to The borrower can raise substantive legal objections to the adapt the RETT Act in such a way, that in the future the threshold enforcement within court proceedings (action to oppose of interests to trigger RETT would be reduced to at least 90% and enforcement). There is also the possibility of interim measures. If the relevant period of time would be extended to 10 years. The tax the objections are justified, e.g. because there is no security case, rate depends on the federal state where the real estate is located. The enforcement is declared inadmissible by the court. If enforcement tax rate currently varies from 3.5% to 6.5%. The tax is calculated is justified, the borrower may nevertheless be permitted to lodge according to the value of the consideration. In the case of an asset appeals against enforcement as such and the individual enforcement deal, the consideration is the purchase price. Normally, the purchaser measures in order to delay enforcement and to make it more difficult and the seller are liable for the payment of RETT; however, the parties by increasing the enforcement costs which often have to be paid in usually stipulate that RETT shall be borne by only one of the parties advance by the real estate lender. (usually by the purchaser). In case of a change of the partnership of a real estate holding partnership, the partnership itself is liable for

98 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

the payment of RETT. In case of transactions of the interests of real to new partners within a period of five years (or 10 years in future, estate holding companies, the legal entity which has the economic as planned) (Section 1 Para. 2a RETT Act). If only 94.9% (or 89.9% exposure is liable for the payment of RETT. in future, according to current plans) of the partnership interests in a partnership are transferred to new partners within a period of five years (or 10 years in future), RETT will not be triggered 9.2 When is the transfer tax paid? in the case at hand. After the five-year period, the outstanding 5.1% (or 10.1% in future) of the partnership interests could be A transfer of real estate must be notified to the local tax office. transferred; nevertheless, RETT will be due on this 5.1% (10.1%), After notification, the local tax office will issue a tax assessment but the transfers of 94.9% (89.9%) of the interests are RETT-free. notice. RETT becomes due one month after announcement of the Furthermore, in the case of transfers of real estate by the transfer of tax assessment notice. shares of a real estate holding company, RETT becomes due if 95% Germany (90%) or more of (corporation) shares or (partnership) interests in 9.3 Are transfers of real estate by individuals subject to a real estate holding company are directly or indirectly transferred. income tax?

9.7 Are there any tax issues that a buyer of real estate If an individual holds the real estate as part of his private assets should always take into consideration/conduct due for a period of 10 years or less, income from the sale of the real diligence on? estate is subject to income tax and the solidarity surcharge (Solidaritätszuschlag). The tax rate depends on the individual tax If the transfer of real estate qualifies as the transfer of a business as rate of the seller (maximum 47.475%). If an individual holds the a whole, the purchaser will inherit the legal position of the seller for real estate as part of his private assets for a period of more than 10 VAT purposes. In this case, the transfer will also most likely qualify years, the sale of the real estate is income tax-free. The transfer as the transfer of a business within the meaning of section 75 general of real estate could be subject to trade tax (TT; Gewerbesteuer), if tax code (Abgabenordnung) and the purchaser could be liable for so- three or more properties are sold within a period of five years. The called operational taxes (betriebliche Steuerschulden) and withholding tax rate depends on the municipality and currently varies from 7% amounts (Steuerabzugsbeträge) or land taxes due from the seller. If to 18%. If an individual holds the real estate as part of his business operating facilities are run on the real estate, further RETT- and VAT- assets, income from the sale of the real estate is subject to income issues may be triggered. If those operating facilities are leased to third tax (tax rate maximum 47.475%). Additionally, the sale is subject to parties this might jeopardise the extended trade tax deduction. trade tax. There will be no trade tax if the taxpayer is able to fulfil the prerequisites of the extended trade tax deduction. 10 Leases of Business Premises 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? 10.1 Please briefly describe the main laws that regulate leases of business premises. If the transfer of real estate qualifies as the transfer of a business as a whole, it is not subject to VAT. In the event that the transfer of real The Civil Code contains all the main regulations concerning leases, estate qualifies as the supply of real estate, it is also VAT-exempt. insofar as the leases are not contractually agreed. However, the seller may usually opt for the application of VAT and waive the VAT-exemption for the part of the real estate which is used for sales which do not exclude input tax deduction. The VAT rate is 10.2 What types of business lease exist? 19%. Due to the reverse charge procedure, the purchaser is liable for VAT. However, the purchaser is able to deduct input tax. In essence, the regulations of the German Civil Code apply to all business leases. The Civil Code only distinguishes between leases and usufructuary leases (Pachtverträge), for which the regulations 9.5 What other tax or taxes (if any) are payable by the are generally identical. seller on the disposal of a property?

Individual as seller: income tax (plus the solidarity surcharge and 10.3 What are the typical provisions for leases of business church tax) and RETT; the tax rate will depend on the individual tax premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or rate of the seller. sub-lease; (d) insurance; (e) (i) change of control of Partnership as seller: income tax (plus the solidarity surcharge) the tenant; and (ii) transfer of lease as a result of a and trade tax (if the prerequisites of the extended trade tax deduction corporate restructuring (e.g. merger); and (f) repairs? are not met). Corporation as seller: corporate income tax (CIT; Körperschaftsteuer) a) Length of term plus the solidarity surcharge. The total tax rate is 15.83%. Furthermore, Business leases are usually concluded for an initial temporal fixed the seller is subject to TT. term with the possibility for the tenant to extend the term once or several times. The possibility of temporarily limiting a lease is restricted by law to 30 years. In addition to a temporal limited term, 9.6 Is taxation different if ownership of a company (or a lease can also be concluded for an unlimited term. In this case, other entity) owning real estate is transferred? the lease can be terminated after the legal or contractually agreed notice periods. In case of transfers of real estate by the transfer of shares of a real estate holding company, RETT becomes due if 95% (or 90% in b) Rent increases future, as currently planned) or more of partnership interests in a Leases often contain a regulation for the automatic adjustment of the real estate holding partnership are directly or indirectly transferred rent. In general, the change in the rent is based on the changes in the

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 99 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

consumer price index for Germany (Verbraucherpreisindex). Such A lease contract concluded for an indefinite term may be terminated so-called index-linked rents are only permissible if the lease has been at any time, but only in accordance within the statutory notice concluded for at least 10 years. In addition, it is also possible to agree periods. The parties may also contractually agree on deviating a so-called stepped rent (Staffelmiete), according to which the rent is provisions regarding notice periods. Even in the case of a lease adjusted by a certain amount after contractually stipulated periods. with no fixed term, the lease can be terminated immediately if there c) Tenant’s right to sell or sub-lease is an extraordinary reason for termination. According to German law it is not possible for the tenant to sell the In the event of premature termination of a lease agreement due to an lease. With the consent of the landlord, however, a change of party extraordinary right of termination, the terminating party can often can take place on the part of the tenant. assert claims for damages against the other contract party, e.g. due to loss of profit, etc. The tenant is only entitled to sublet after prior consent of the landlord. Germany Under a business lease agreement, the tenant is not entitled by law to the granting of such consent. However, if the landlord withholds his 10.6 Does the landlord and/or the tenant of a business consent without good reason, the tenant is entitled by law to a special lease cease to be liable for their respective right of termination (Sonderkündigungsrecht). This right of special obligations under the lease once they have sold their termination is, however, often excluded by contractual agreement. interest? Can they be responsible after the sale in respect of pre-sale non-compliance? d) Insurance Usually, the landlord agrees to arrange property insurance and a) Landlord building liability insurance within the business lease. The If the landlord sells the real estate on which the leased object is arrangement of so-called all-risk insurance is also frequently located, the purchaser becomes the new landlord when his ownership agreed in such leases. The costs of the insurances concluded by is registered in the land register. However, the seller is legally liable the landlord are usually passed onto the tenants by way of ancillary as a guarantor for the obligations of the new owner and landlord costs. The tenant, on the other hand, is frequently obligated to take towards the tenant. Often this liability is contractually excluded, so out a business liability insurance policy at his own expense. that once the registration of ownership has been entered in the land e) (i) Change of control of the tenant register only the new landlord is liable to the tenant. If the lease does not contain a change of control regulation, the lease b) Tenant will remain with the tenant. The tenant is not entitled to transfer its rights and obligations under (ii) Transfer of lease as a result of a corporate restructuring the lease agreement to a third party without the consent of the (e.g. merger) landlord. If a new legal entity emerges from a corporate restructuring, the lease remains with the new legal entity. 10.7 Green leases seek to impose obligations on f) Repairs landlords and tenants designed to promote greater By law, the lessor is responsible for all repairs and maintenance sustainable use of buildings and in the reduction of himself and at his own expense. However, other regulations are the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly almost always agreed by contract. Only the repairs in connection found in leases stating whether these are clearly with the essential building substance, so-called roof and structure defined, enforceable legal obligations or something (Dach und Fach), must be carried out by the landlord himself and at not amounting to enforceable legal obligations (for his own expense. If the repairs are carried out by the landlord, the example aspirational objectives). costs incurred are usually (proportionately) passed on to the tenant through the ancillary costs. Currently, rental agreements under the “green leases” label are still seldom concluded in Germany. However, the subject of green 10.4 What taxes are payable on rent either by the landlord leases is attracting more and more attention, especially in connection or tenant of a business lease? with so-called certified green buildings. There are no laws yet that regulate the implementation of a green lease. Recently, however, Generally, the rent on business leases is paid without VAT. The recommendations for action have been formulated as to how a green landlord can opt for VAT if the tenant uses the property solely for lease can be structured. sales and services that are not exempt from VAT. 10.8 Are there any trends in your market towards more flexible space for occupiers, such as shared 10.5 In what circumstances are business leases usually short-term working spaces (co-working) or shared terminated (e.g. at expiry, on default, by either party residential spaces with greater levels of facilities/ etc.)? Are there any special provisions allowing a activities for residents (co-living)? If so please provide tenant to extend or renew the lease or for either party examples/details. to be compensated by the other for any reason on termination? There are various efforts in Germany to adapt workplaces to changing A lease agreement is terminated by expiration of time, termination working conditions. In particular, there is a trend among companies or by agreement between the parties. to make more effective use of existing workplaces, for example by creating co-working places. There is also a trend towards allowing A lease agreement for a limited term ends when the agreed term office space to be rented for a short term only, sometimes as little as of lease expires. A premature termination is only possible by an a few hours. Regarding the residential markets, projects involving extraordinary termination. The conditions are regulated by law, e.g. so-called micro apartment areas are becoming more common. if the property is used contrary to the agreed purpose of the lease. However, these new trends have not yet had a noticeable impact on The parties may also contractually stipulate for conditions which German legislation and jurisdiction. entitle either party to extraordinary termination.

100 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

In order to obtain a compulsory eviction from the premises, a court 11 Leases of Residential Premises eviction title (Räumungstitel) is required. A claim for eviction is often difficult to enforce under German law due to the special 11.1 Please briefly describe the main laws that regulate protection of tenants. leases of residential premises. 12 Public Law Permits and Obligations As with business leases, the German Civil Code contains the main provisions relating to leases of residential premises. In contrast to business leases, however, the legal regulations that apply to leases 12.1 What are the main laws which govern zoning/ of residential premises are stricter from the landlord’s point of view. permitting and related matters concerning the use,

Also, in order to protect the tenant, the parties are often prohibited development and occupation of land? Please briefly Germany by law from agreeing to contractual terms that deviate from the describe them and include environmental laws. statutory provisions. The issue of which buildings may be constructed in a certain zone is basically determined by the provisions of a development plan 11.2 Do the laws differ if the premises are intended for (Bebauungsplan). The development plan is issued by the relevant multiple different residential occupiers? public municipality on the basis of the provisions of the Federal Building Code (Baugesetzbuch) and the Federal Land Utilisation No. The law contains no such differentiation. Ordinance (Baunutzungsordnung). Which requirements the building must fulfil in its construction depends on the relevant state 11.3 What would typical provisions for a lease of building regulations (Landesbauordnungen). residential premises be in your jurisdiction regarding: Within the framework of a planning procedure for the development (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of of an area (Planunverfahren), but also within the framework the term; and (d) the tenant’s contribution/obligation of a building permit procedure (Baugenehmigungsverfahren), to the property “costs” e.g. insurance and repair? environmental laws are observed, for example the Federal Soil Protection Act (Bundesbodenschutzgesetz). (a) Length of term Residential Leases are generally concluded for an indefinite term. 12.2 Can the state force land owners to sell land to Only in cases regulated by law is the fixed term of a residential lease it? If so please briefly describe including price/ permissible. compensation mechanism. (b) Rent increases/controls Expropriation constitutes an encroachment on the constitutionally A rent increase is only permissible within the legally stipulated limits. guaranteed right of ownership (Art. 14 of the Constitution). For this In general, it is possible to agree an index-linked rent (Indexmiete) reason, expropriation is only permissible to a very limited extent. If within the framework of the lease, which is based on the changes a landowner is expropriated, he must be compensated for the loss to the consumer price index for Germany (Verbraucherpreisindex of his property. Art. 14 para. 3 of the Basic Law provides that the für Deutschland), or a graduated rent (Staffelmiete), according to “compensation shall be determined on the basis of a fair assessment which the rent is increased by a certain amount in accordance with of the interests of the general public and of the parties involved”. As a contractually agreed terms. rule, the owner is compensated with the market value that his property (c) The tenant’s rights to remain in the premises at the end of the had at the time of the expropriation resolution (Enteignungsbeschluss). term In principle, there are no regulations allowing the tenant to remain in the premises after the end of the term. 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do (d) The tenant’s contribution/obligation to the property “costs” buyers obtain reliable information on these matters? e.g. insurance and repair Property costs are charged to the tenant in the form of ancillary As Germany is organised on a federal basis, the relevant local bodies costs. The question of which ancillary costs can be passed on are responsible for control of land/building use and/or occupation is essentially determined by the Ordinance on Operating Costs and environmental regulation. The most important body is the local (Betriebskostenverordnung). Usually, the tenant pays monthly building authority (Bauordnungsbehörde). advance payments for ancillary costs in addition to the rent. Once a year, the ancillary costs are settled by the landlord. 12.4 What main permits or licences are required for building works and/or the use of real estate? 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed Whether and which permits or licences are required depends to achieve vacant possession if the circumstances essentially on where the respective building is to be erected and which existed for the right to be exercised? building is planned. The question of which buildings are permit-free or require a building permit is regulated by the relevant state building The landlord can only terminate a rental agreement under strict regulations. In principle, only smaller structures are permit-free. legal conditions. A basic distinction is made between ordinary (temporary) termination and extraordinary (immediate) termination. A building permit essentially also describes how the building may In any case, there must be a reason for termination. In the case of be used. If the building is to be used for a considerably different an ordinary termination, such a termination might be, for example, a purpose, e.g. for other commercial purposes, a change of use permit termination for personal needs (Eigenbedarf). (Nutzungsänderungsgenehmigung) is usually required.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 101 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

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

If a structure requires a building or usage permit, this must generally On the basis of the Energy Saving Ordinance (Energieeins- be obtained through a formal procedure. There is no implied granting parverordnung), building owners have standard construction of a permit under German law. However, there is passive protection standards for the efficient operating energy requirements of their (passiver Bestandsschutz) of existing structures. The consequence building or construction project. The Energy Saving Ordinance of this protection of existing structures is that a structure is protected applies to residential buildings, office buildings and certain against demolition orders (Abrissverfügungen), even if it is contrary commercial buildings, while others are excluded. Whether and Germany to building law under the current situation. The prerequisite for this, how proof must be provided in accordance with the Energy Saving however, is that the building was erected lawfully at some time. If Ordinance depends, among other things, on whether a new building this is the case, the building remains lawful. is to be erected or an existing one modified.

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

The costs incurred in a permit process and the length of time required 13.1 Please briefly explain the nature and extent of any will depend to a large extent on the scope of the construction work. regulatory measures for reducing carbon dioxide The costs will depend on the fee regulations of the federal states. emissions (including any mandatory emissions trading scheme). In addition, the processing times for building permits can vary considerably depending on the body responsible. As a signatory to the Paris Agreement, Germany has committed itself to significantly reducing carbon dioxide emissions. This agreement 12.7 Are there any regulations on the protection of historic resulted, in particular, in the creation of the Climate Protection Plan monuments in your jurisdiction? If any, when and how 2050, which describes a modernisation strategy for the necessary are they likely to affect the transfer of rights in real transformation to a low-carbon economy. The climate protection estate or development/change of use? plan covers the fields of energy, industry, buildings, transport, agriculture, land use and forestry. In addition, overarching aims Each federal state has enacted its own law for the protection of and measures are defined. The legal framework to implement the historical monuments. aforementioned aims consists of various laws and grants incentives Monuments are registered in a monument list (Denkmalliste). If a to make “green energy” more attractive. This has led to a share of monument is sold or changed, the owner, possessor or authorised approx. 34% of renewable energy in the German energy production user must inform the responsible monument authority of the change sector. within one month. Trade in emission allowances reached a value of EUR 1,146,817,980 in 2017 (figure based on EEX auctions for Germany). 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land 13.2 Are there any national greenhouse gas emissions in your jurisdiction? reduction targets?

Contaminated sites and areas suspected of being contaminated The restructuring of the energy industry is of central importance. are recorded in the registers of contaminated sites. These are held In this sector, emissions are to be reduced by 61% to 62% by 2030 in databases by the environmental offices of the federal states or compared with 1990 levels. In the industrial sector, the reduction municipalities. is to be 49% to 51% by 2030. In the building sector, the reduction in emissions by 2030 should be 66% to 67% compared to 1990. In the transport sector, emissions are to be reduced by 40% to 42% by 12.9 In what circumstances (if any) is environmental clean- 2030. It is planned that, by 2030, agriculture will contribute to the up ever mandatory? achievement of the target with a reduction of 31% to 34% compared to 1990 levels. There is a general obligation to clean-up land with contaminated soil. The authorities will demand that contaminated soils are cleaned up only if the waste poses a real risk to people and the 13.3 Are there any other regulatory measures (not already environment. German soil protection law requires the polluter but mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? also (if not the same) the current owner(s) to carry out the clean-up. Due to the considerable costs which a remediation of soil can entail, In recent years, regulations have been created to increase the energy soil appraisals (Bodengutachten) are therefore frequently carried efficiency of new or existing buildings. For example, the owner of a out within the framework of real estate transactions in order to property must submit a current energy performance certificate when determine whether the property is contaminated with contaminated letting a new property or selling it, which provides information on soils. the energy efficiency of the property.

102 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Kapellmann Germany

Dr. Florian Kirchhof Dr. Max Mommertz Kapellmann Kapellmann Stadttor 1 Stadttor 1 40219 Düsseldorf 40219 Düsseldorf Germany Germany

Tel: +49 211 600 500-418 Tel: +49 211 600 500-439 Email: [email protected] Email: [email protected] URL: www.kapellmann.de URL: www.kapellmann.de

■■ Studied law at the University of Bielefeld, 1990 to 1996. ■■ Study of legal science at the Heinrich-Heine-University, Dusseldorf, Germany 2006 to 2011. ■■ Worked at the Deutsche Gesellschaft für Technische Zusammenarbeit to support the legislation reforms and university ■■ Research associate at the professorial chair of civil and civil training in Ulan Bator, Mongolia. procedure law, Prof. Dr. Dirk Olzen, 2011 to 2014. ■■ Legal clerkship at the Higher Regional Court Hamm, 1997 to 1999. ■■ Doctorate with a medical law topic, 2014. ■■ Lawyer since 2000. ■■ Legal intership at the higher regional court Dusseldorf, 2014 to 2016. ■■ Lawyer (Rechtsanwalt) at Schönherr Rechtsanwälte, with local approval as European lawyer in Vienna and Ljubljana, 2002 to ■■ Lawyer (Rechtsanwalt) at Kapellmann since 2017. 2006. Dr. Mommertz consults on all matters relating to real estate law. The ■■ Lawyer (Rechtsanwalt) at Kapellmann since 2006. focus of his consulting work is the advising of clients in the area of real estate transactions and project development as well as the drafting Dr. Kirchhof provides comprehensive advice on the drafting and of contracts for real estate transactions. Other areas of activity structuring of contracts relating to real estate, in particular, on include industrial tenancy law, property developers’ law and residential construction, purchase and lease contracts. Among his clients are property law. market players from all parts of the real estate and construction sectors, including project developers, construction companies and institutional investors – also in the construction process. Further key practice areas are the provision of advisory services on real estate transactions as well as on the law governing agents and brokers. Recommended lawyer for real estate law – The Legal 500 Germany 2018.

Kapellmann is a legal partnership that combines a high level of specialisation and academic standard in advising its clients with the efficiency of a medium-sized company and individual client care. With about 140 lawyers, we work in six offices in Germany as well as in our EU office in Brussels. “Steady, sound, excellent – this is how the firm’s reputation in its core fields can be described.” – JUVE German Commercial Law Firms 2017. “Kapellmann und Partner in their present form are the result of an almost unparalleled success story.” – Kanzleien in Deutschland 2014. Ranked as a “leading business law firm 2018”. – FOCUS-SPEZIAL Deutschlands Top-Anwälte 2018 (annual ranking of Germany’s leading lawyers by FOCUS magazine).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 103 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 12

Greece

Valmas Associates Ioannis Valmas

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to Below are several of the categories of limitations on the acquisition/ question 12.1. Those relating to tax should be listed in ownership of real estate in Greece by non-residents of third response to questions in Section 9. countries: The principal law governing Real Estate matters in Greece is The ■ Articles 25 par. 1 and 26 par. 2 of Law 1892/1990, as amended by Article 114 Law 3978/2011, define that the Law of Rights in Rem (Law of Real Property – Εμπράγματο Δίκαιο) acquisition of real estate in regions of Greek territory in Chapter 3 of the Hellenic Civil Code, under Articles 947–1345. designated as border areas, is permitted to individuals and Specific real estate matters are also dealt with in the Hellenic Code legal entities which are Greek or have their citizenship or of Civil Procedure, other parts of the Hellenic Civil Code, the place of business within a Member States of the European Hellenic Constitution and by statutory law. Union and the European Free Trade Association without any limitations. Third countries’ nationals may enjoy the same tight conditions upon prior authorisation by the Hellenic 1.2 What is the impact (if any) on real estate of local (Greek) State. These persons should apply to a special common law in your jurisdiction? committee to obtain permission before acquiring or renting the real estate as well as before proceeding to any shareholders’ The Hellenic Republic, Greece is a civil law country thus, real structure change. Accordingly, they shall have to submit estate matters are regulated largely by the Hellenic Civil Code, the an application to the regional Decentralised Administration Hellenic Code of Civil Procedure, the Constitution and statutory Authority’s Committee of Article 26 Law 1892/1990 prior law. However, judicial precedent, jurisprudence (a common law to acquisition of the property. These Committees are set up legal system’s principal feature) is quintessential as laws – in many in regional border zone areas including Preveza, Thesprotia, instances – leave a wide scope for interpretation; thus, judicial Florina, Kastoria, Kilkis, Xanthi, Rodopi, Evros, Mytilene (Lesvos), islands of the Dodecanese, Thera (Santorini), precedent, is frequently cited by lawyers and judges, and ultimately Skyros, areas of Drama and Ioannina, Serres, etc. taken into consideration by courts of law in Greece, particularly the judicial precedent set by the Court of Cassation (Άρειος Πάγος) and Council of State (Συμβούλιο της Επικρατείας). 3 Real Estate Rights

1.3 Are international laws relevant to real estate in your 3.1 What are the types of rights over land recognised in jurisdiction? Please ignore EU legislation enacted your jurisdiction? Are any of them purely contractual locally in EU countries. between the parties?

By virtue of rules of Private International Law, incorporated in Rights over Land/Rights in Rem: national legislation (Article 4 et seq. Hellenic Civil Code), the (a) ownership (full, bare & usufruct, Article 999 of the Hellenic principle of lex rei sitae applies to real estate property in Greece Civil Code); (Article 27 of the Hellenic Civil Code). The domicile of a claimant or defendant is thus irrelevant. The courts of the vicinity where the (b) easement rights (by virtue of Article 1118 of the Hellenic Civil Code); property is located are thus the competent courts. (c) mortgage (burden, encumbrance, Article 1257 of the Hellenic Civil Code) over real estate as security in favour of creditors of the owner; and

104 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

(d) “surface right”, as defined by Article 18 et seq. Law 3986/2011, conferring a right to use real property owned by 4.3 What rights in land are compulsory registrable? What the Hellenic State, Public Law Entities and State Agencies, (if any) is the consequence of non-registration? for a period of time ranging between five and 99 years. Apart from the above, various purely contractual rights can be As indicated in question 4.1 above, it is mandatory to register all acquired over land (e.g. lease agreement, use free of charge rights in rem over real property in Greece to the competent Land agreement – “loan for use” (χρησιδάνειο) agreement, etc.). Registry and/or Cadastral Office; in essence these are the rights acquired/transferred through a formal procedure/notarial deed (for example, notarial purchase agreements, property donations such as 3.2 Are there any scenarios where the right to land parental donations, court decisions pronouncing ownership rights or

diverges from the right to a building constructed Greece other rights in rem over assets, partitioning agreements, acceptance thereon? of inheritance deeds, court decisions pronouncing the acquisition of ownership rights through extraordinary adverse possession, rural One such example is the case of the surface right of Article 19 Law expropriation decisions, implementation acts of the town plan, etc.). 3986/2011 where the right to building on State-owned properties is conferred to a third party. Registration with the competent Land Registry and/or Cadastral Office is a prerequisite for the completion of a real estate transaction (i.e., the transfer of ownership or other in rem rights). Consequently, 3.3 Is there a split between legal title and beneficial title lack of registration equals to non-transfer of ownership or to better in your jurisdiction and what are the registration say not creating a right in rem of e.g. the buyer or not terminating a consequences of any split? Are there any proposals to change this? right in rem of e.g. the seller over real estate. A non-commercial lease over real estate for a duration exceeding There is no such split under the laws of the Hellenic Republic, nine (9) years is only valid to a subsequent new owner of such real Greece. estate if the lease has been drawn up in the form of a notarial deed and has been registered with the competent Land Registry and/or Cadastral Office. Such registration is not compulsory, but provides 4 System of Registration the tenant with the above protection against a subsequent owner.

4.1 Is all land in your jurisdiction required to be 4.4 What rights in land are not required to be registered? registered? What land (or rights) are unregistered? As indicated in questions 4.1 and 4.3 above, contractual rights such It is mandatory to register all rights in rem over real property in as business or housing lease agreements are not registrable with the Greece to the operating competent Registrars: 1. Land Registry; exception of long-term, non-commercial notarial lease agreements and/or 2. Hellenic Cadastre. Registration with the one or the other exceeding the length of nine years. Also, Expropriations declared depends on whether the latter has been implemented in the area a for public interest do not have to be registered with either the Land property is located. Registry or the Hellenic Cadastre; accordingly, with effect from the Land Registry – System of Transcriptions and Mortgages Books: date of payment of the compensation amount to the former owner Currently applies to the majority of the territory of the Hellenic of the expropriated property, ownership rights are transferred to the Republic, Greece. Rights in rem are subject to registration therein. entity (public or private) that is the beneficiary of the expropriation. On the other hand, rural and zoning expropriations must be Hellenic Cadastre (formerly known as National Cadastre): Where registered with the competent Registrar. the Cadastral System has been implemented, rights in rem are recorded in the competent local Cadastral office. Each plot is granted a registration number and individual/independent properties within 4.5 Where there are both unregistered and registered land the plot are assigned with a number under the plot’s registration or rights is there a probationary period following first number. registration or are there perhaps different classes or qualities of title on first registration? Please give Contractual rights such as lease agreements are not registrable details. First registration means the occasion upon with the exception of long-term, non-commercial notarial lease which unregistered land or rights are first registered agreements that exceed the length of nine years. in the registries. The only exception of unregistered right is the case of adverse possession where a party possesses over a specified period of time a According to the system pertaining to Land Registries there is no property (10 or 20 years depending on whether the possession of the probationary period after the first registration for ownership rights; disseisor is in good or bad faith). Once this period lapses, formal registration becomes effective when it occurs. recognition of such a property right may be obtained via a court In regards to the Hellenic Cadastre corrections of initial registrations/ decision and Registration of the title (court decision in this case) non-registrations of rights should be made within seven to 14 may subsequently commence. years (the latter only with regards to areas that the Cadastre was implemented before the coming into force of Law 3481/2006). 4.2 Is there a state guarantee of title? What does it guarantee? 4.6 On a land sale, when is title (or ownership) transferred to the buyer? There is no State Guarantee of title under the laws of the Hellenic Republic, Greece. Ownership is transferred to the buyer via the Notarial Deed/ Purchase Agreement and the subsequent registration of the title (Notarial Deed) to the competent Land Registry or Cadastral Office.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 105 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

4.7 Please briefly describe how some rights obtain 5.5 Are there restrictions on public access to the priority over other rights. Do earlier rights defeat later register? Can a buyer obtain all the information he rights? might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved In respect to Mortgages, in the event where multiple mortgages are by a search of the register? If not, what additional information/process is required? registered on the same property, the principle of priority awards preferential satisfaction to the rights of the creditor (mortgagee) whose right was registered. In the less common event mortgages had Both the Land Registry and the Hellenic Cadastre are obliged by been registered on the same day, the creditors will be proportionally statute to make copies of the Transcription & Mortgages Books Greece satisfied. (Land Registry) or Cadastral Records (Hellenic Cadastre) available to the public. A manual search on the records and due diligence of the titles, however, may only commence via hiring a lawyer. 5 The Registry / Registries 6 Real Estate Market 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules and requirements. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally be involved in a real estate transaction in your As indicated in various sections above, there are two types of jurisdiction? Please briefly describe their roles and/or authorities/registrars for real estate in Greece: duties. 1. the System of Transcriptions and Mortgages Books – Land Registry; and Parties with a vital role in a real estate transaction in Greece are as 2. the Hellenic Cadastre (formerly known as the National follows: Cadastre). 1. Lawyers: The execution of the notarial deed, due diligence With the full deployment/implementation of the Hellenic Cadastre on titles, coordination of the sale process are some of in the future, remaining Land Registries will no longer register the quintessential parts of the transaction that a lawyer property rights and will be replaced by the Hellenic Cadastre. may provide assistance with. Although not compulsory, representation by a lawyer is vital, especially for the buyer of real estate in Greece. 5.2 How do the owners of registered real estate prove 2. Notaries: The notary executes the notarial deed and checks their title? – along with the lawyer – the validity of certificates provided by the seller as well as their conformity with the law. An owner or a potential buyer can apply to the competent Registrar 3. Realtors/Agents: Although it is not compulsory to appoint one, on the Land Registry for a Certificate of Ownership; a similar a realtor is often utilised by buyers and sellers of real property. certificate may be acquired from the competent office of the Hellenic 4. Civil Engineers: Civil Engineers are usually appointed Cadastre. Lawyers’ due diligence may also reveal the ownership by sellers and provide topographic drawings, declarations status of a property. of conformity of the property with the law, certificates on non-existence of illegal constructions/buildings, energy environmental certificates that are prerequisites for the 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need completion of a transfer via a notarial deed. to be provided to the land registry for the registration 5. Accountants: Accountants are vital for making annual tax of ownership right? Can information on ownership of statements (including statement for property ownership) and registered real estate be accessed electronically? – if any – income from real estate property. A distinct category of bodies involved in the process is the tax A registration cannot be completed electronically. Registering a office where transfer tax is paid by the buyer (currently at 3.09 per transaction will have to be completed with submission to the Land cent of the value of the transaction (tax or actual, whichever is the Registry of the notarial deed, a summary of the deed, an application highest), and Registrars (Land Registry or Hellenic Cadastre (fees for registration, tax declaration and the payment of the registration fee. at around 0.6–0.8 per cent of the value of the transaction) where the A similar process is required for registration with the Cadastral Office. property is subsequently registered. Information can be accessed through visits to the competent Land Registry Office or Cadastral Office and it is available electronically 6.2 How and on what basis are these persons (on all Cadastral Offices) or through a manual search of hard copies remunerated? of records (some Land Registries may not have info available electronically). With the exception of notaries’ fees, fees of professionals are subject to an agreement between the parties. 5.4 Can compensation be claimed from the registry/ Notarial fees are calculated as a percentage of the value of the registries if it/they make a mistake? transaction (actual or tax value (whichever is higher)) plus by the pages and copies of the deed. The law specifies that the Registrars of the Land Registries are liable for compensation exclusively for any acts or omissions related to the fulfilment their duties. The Cadastral Authority may be liable on any occasion that a party suffers damages as a result of the operation of the Hellenic Cadastre.

106 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

After the entry into force of Laws 4174/2013 and 4223/2013, as in 6.3 Is there any change in the sources or the availability force, any in rem or contractual agreement, by virtue of which rights of capital to finance real estate transactions in over real property are established, transferred, altered or a mortgage your jurisdiction, whether equity or debt? What are or pre-notation of mortgage right is granted thereon, is null and the main sources of capital you see active in your market? void, if no ENFIA (Uniform Tax on the Ownership of Immovable Property) certificate is attached to the notarial deed, verifying that the real property has been properly declared and the tax obligations There has been a considerable increase in the availability of for a period of five years prior to the transaction have been fulfilled. capital in the past 2–3 years, largely in the form of foreign equity. In parallel, there is an increase in investment inflows due to the participation of foreign funds in the share capital of Real Estate 7.2 Is the seller under a duty of disclosure? What matters Greece Investment Companies and individual investors buying properties must be disclosed? in rural centres and tourist areas. Unlike with several common law jurisdictions, sale of real estate is not caveat emptor in Greece. The seller is under a duty of disclosure 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and (please see question 7.5 below). what are the sectors/areas of most interest? Please give examples. 7.3 Can the seller be liable to the buyer for misrepresentation? Greece’s real estate market has been demonstrating clear signs of recovery since 2017 and urban centres have been at the epicentre of real A seller can be liable on both civil and criminal grounds leading estate investments from investors from all over the world. Local prices to a series of consequences for him/her such as: annulment of the are still well below pre-crisis levels making Greece an undisputed contract; reduction of the sale price; compensation for the buyer; buyer’s market. According to the Bank of Greece, in Q1/2017, Athens and criminal liability/imprisonment. property was 44 per cent cheaper than its 2008 peak. Sales of tourist residences, apartments in the urban centres and properties over the value of 250,000 EUR (the latter attracting Golden Visa applicants) seem 7.4 Do sellers usually give any form of title “guarantee” to dominate real estate transactions. Properties on the Greek islands or contractual warranties to the buyer? What would be the scope of these? What is the function of any seem to do considerably well also. Finally, many private investors such guarantee or warranties (e.g. to apportion risk, from countries such as Israel seem to prefer low value/older properties to give information)? Would any such guarantee or for investment, by subsequently renovating and leasing on short-term warranties act as a substitute for the buyer carrying leases (e.g. AirBnB) or longer term leases (e.g. annual or two-year out his own diligence? leases to students or permanent residents). Furthermore, following the implementation of the new legislation on Non-Performing Loans As part of the due diligence process, the buyer should require deeds and the commencement of enforcement and auction proceedings from evidencing ownership of the property from the seller, issued by the banks, there has been noted an interest in such properties also. competent Land Registry and a full series of ownership titles of the seller’s predecessors covering at least a 20-year period prior to the most 6.5 Have you observed any trends in particular market recent ownership title. Also the lawyer of the seller should conduct a sub sectors slowing down in your jurisdiction in deep search on the records as part of the due diligence process whereas terms of their attractiveness to investors/developers? release of advance payments as part of any promissory agreement Please give examples. should be made until due diligence has been conducted. Furthermore, the seller formally states and signs in the notarial House building has remained slow in Greece during the years of the deed that he guarantees and warrants that the property is free from financial crisis, but there are signs of recovery, and there has been any: encumbrance; mortgage; debt; pre-notation of mortgage; forecasted an increase in new constructions within 2018. confiscation; claims by third parties; real and legal defects; leases; concession of use by any means; expropriation; contribution of land; and any debts to public authorities. 7 Liabilities of Buyers and Sellers in Real Estate Transactions These guarantees and warranties can be deemed as a substitute for the buyer’s lack of due diligence although the above processes are costly, take a long time and have risks, so it is advisable that due 7.1 What (if any) are the minimum formalities for the sale diligence is conducted through the lawyer of the buyer prior to and purchase of real estate? signing the notarial deeds and the subsequent transfer of property.

The minimum prerequisites for the transfer of ownership of real 7.5 Does the seller retain any liabilities in respect of the estate are: (a) signing the purchase agreement (notarial deed) by the property post sale? Please give details. contracting parties; (b) payment of the agreed price; (c) payment of the transfer tax; and (d) registration of such deed with the competent Please see question 7.4 above. Land Registry/Cadastre. Also, according to Law 4495/2017, all real estate property transaction 7.6 What (if any) are the liabilities of the buyer (in addition deeds are mandatorily accompanied with a legally binding statement to paying the sale price)? from the owner, and a certificate from the engineer declaring and certifying that no illegal structures or uses exist. Breach of any of The buyer pays for the notary fee, the transfer tax, registration fees these conditions results in invalidity of the notarial deed and entails with the competent authority as well as realtor, lawyer fees, etc. severe sentences against all parties involved in the transactions.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 107 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

lender(s) (Articles 933 & 934). Interim measures (filing a caveat) 8 Finance and Banking may be sought against the auction process (for limited reasons) with a right of the borrower to appeal against the decision (Article 937). 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the 8.8 What is the impact of an insolvency process or a rules different as between resident and non-resident corporate rehabilitation process on the position of a persons and/or between individual persons and real estate lender? corporate entities?

As noted in questions 4.7 and 8.5, the principle of prior in tempore No custom regulations for lending exist and residents/non-residents

Greece prior in jure shall, in principle, have effect on Mortgages existing as well as individuals/corporate entities do not enjoy more privileges prior to the declaration of the insolvency (the lender being considered over one another. as a secured creditor) and subject to the requirements/limitations of the Greek Insolvency Code – Law 3588/2007 as amended (see, for 8.2 What are the main methods by which a real estate example, Articles 21, 26, etc.). lender seeks to protect itself from default by the borrower? 8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate Usually a lender will be protected with a mortgage or a prenotation shares in a borrower given as collateral? If so, of a mortgage over the property with its subsequent registration with can shares be appropriated when a borrower is in the competent Registrar (Land Registry or Cadastral Office). administration or has entered another insolvency or reorganisation procedure?

8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a According to Article 26 para. 1 of the Greek Insolvency Code mortgagee to realise a mortgaged property without secured creditors can enforce security exclusively over the asset (e.g. involving court proceedings or the contribution of the property burdened with a Mortgage in their favour). They can only mortgagor? be remunerated from the whole of the insolvent estate if they resign from the privilege of the security on the asset (e.g. mortgage) or in the The realisation of mortgaged properties can only be effected through event the privilege/security is not enough for their full remuneration. enforcement by public auction. The mortgagee cannot automatically acquire ownership rights over the mortgaged property. 9 Tax

8.4 What minimum formalities are required for real estate lending? 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? The lender shall require proof that the borrower is the owner of the property and shall establish a mortgage over the property prior to The buyer bears the obligation to enumerate the local Tax Office enumeration of the mortgagee. with the transfer tax at a rate of 3.09 per cent of the tax or actual value (whichever is the highest) or VAT on the first sale of newly built buildings (see question 9.4 below). 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 9.2 When is the transfer tax paid?

As mentioned in question 4.7, the principle prior in tempore prior Transfer tax should be paid prior to the signing of the notarial deed in jure shall have effect in mortgages so it would make sense for a and a certificate/receipt should be presented before the notary, lender to establish a first-rank mortgage before any other burden. attached to the deed and be referenced on it. Article 1272 of the Hellenic Civil Code provides that the rank is defined by the date of the first Registration of the Mortgage. 9.3 Are transfers of real estate by individuals subject to income tax? 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? Betterment Tax for Sellers: Pursuant to Article 41 Law 4172/2013, a betterment tax on the transfer of real estate, will be imposed on As an example, a court order can render a security unenforceable the seller of real estate property in Greece with a coefficient of 15 in the event, e.g., that it was granted to defraud third creditors and per cent calculated upon the profit the seller made by the sale of a third creditor seeks, e.g., an injunction from the competent court the property when compared to the original purchase value of the rendering it unenforceable. property. There are reduction factors limiting the amount of tax a seller will be called to pay upon the profits from the resale of his/ 8.7 What actions, if any, can a borrower take to frustrate her property based on amount of time they kept ownership and other enforcement action by a lender? factors defined by the above law. The coming into effect ofthe above provision has continued to be postponed since its inception The new Hellenic Civil Procedure Code which came into force in 2016 and subsequent enactment and it has now further been suspended st limited the capabilities of a borrower against enforcement actions by until the 31 December 2018.

108 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

B. Rent increases 9.4 Are transfers of real estate subject to VAT? How Adjustments may be claimed by the landlord in the absence of an much? Who is liable? Are there any exemptions? explicit agreement. If a dispute arises, Regional Committees for the Settlement & Re-Adjustment of Rent have been set up under the VAT (24%) is imposed on the purchase value on the first sale of auspices of Article 15 Law 4013/2011. Resorting to the Committee is newly built buildings by a developer, or by a person who deals conditioned on the ground that a two-year period since the business professionally with the construction and the sale of buildings. lease started (or since the last downward adjustment of rent) has lapsed. For all other properties that do not fall under the above category, C. Tenant’s right to sell or sub-lease the transfer is charged with a real estate transfer tax at 3.09 per cent. Selling is not permitted by the tenant, whereas sub-letting according to Article 593 of the Hellenic Civil Code is not prohibited unless Greece 9.5 What other tax or taxes (if any) are payable by the there was an agreement to the contrary between the landlord and seller on the disposal of a property? tenant. D. Insurance No further taxes, other the ones outlined in the sections above, It is not compulsory to insure the business premises but it does make burden the buyer. sense for either the landlord or tenant to do so (for different reasons each). 9.6 Is taxation different if ownership of a company (or E.i. Change of control of the tenant other entity) owning real estate is transferred? The change of control does not have any effect unless otherwise stated in the business lease agreement. Transfer tax is the same for companies and private individuals. Revenue made from a transfer may be subject to further or differing E.ii Transfer of lease as a result of corporate restructuring (between individuals or companies) taxation. In principle, there will be no consequences on the lease agreement as the new participants will succeed the previous ones by default.

9.7 Are there any tax issues that a buyer of real estate In the event of bankruptcy of the landlord and auction of the should always take into consideration/conduct due property, the highest bidder is entitled to evict the tenant within two diligence on? months according to the Hellenic Civil Procedure Code. F. Repairs Tax issues have been outlined above, although depending on the end The property must be fit for its intended purpose and use, although purpose of the acquisition (business, residence) the buyer should be the agreement may contain clauses to the contrary. advised accordingly.

10.4 What taxes are payable on rent either by the landlord 10 Leases of Business Premises or tenant of a business lease?

Every natural person/individual that owns property in Greece is 10.1 Please briefly describe the main laws that regulate entitled to lease their property and generate income, so long as they leases of business premises. declare the profits/income to the tax authorities. No residence permit is required for this type of activity as it is not a business activity per se. The principal laws regulating leases of business premises are the Hellenic Civil Code and Presidential Decree 34/1995 as amended Income from property (EUR) Tax rate (%) by Laws 3853/2010, 4242/2014 and 4373/2016. 0–12,000 15% 12,001–35,000 35% <35,000 45% 10.2 What types of business lease exist? Furthermore, a solidarity levy at a coefficient of 2.2 per cent up to Several types of business leases exist such as: 10 per cent (depending on the total income) is imposed if the annual 1. Business Leases pertaining to certain business activities such income exceeds 12,000 EUR. as banking operations, marine trade/shipping, agents, etc. Net taxable real estate income of individuals is subject to rules, 2. State/Public leases pertaining to housing public authorities. according to which not all expenses (including depreciation) are 3. Leases pertaining to certain professions such as lawyers, necessarily taken into account language schools, doctors, accountants, notaries, civil Net taxable income of legal entities is treated as income from a engineers, process servers, etc. business operation and the related expenses are tax deductible if the general preconditions set by law are met and if they are inscribed in 10.3 What are the typical provisions for leases of business the books of the company and evidenced by documentation. premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of 10.5 In what circumstances are business leases usually the tenant; and (ii) transfer of lease as a result of a terminated (e.g. at expiry, on default, by either party corporate restructuring (e.g. merger); and (f) repairs? etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party to be compensated by the other for any reason on A. Length of term termination? Business Leases after the coming into force of Law 4242/2014 are for a three-year minimum term, even in case a lesser term has been agreed As a general rule, leases can be terminated at the expiry of their set upon in writing with a lease agreement. Lengthier terms are allowed. contractual term or for any of the reasons stipulated in the agreement

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 109 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

and the law (non-payment, etc.). A lease is implicitly active/ renewed for an indefinite length if the tenant continues to enumerate 11.2 Do the laws differ if the premises are intended for the landlord and the landlord receives the rent enumeration after the multiple different residential occupiers? date of termination and can subsequently be terminated pursuant to the Hellenic Civil Code. The law applies to multiple occupiers under the same tenancy agreement. The law sets out provisions and scenarios for compensation of both the landlord and tenant in the event the relationship is terminated early. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: 10.6 Does the landlord and/or the tenant of a business (a) length of term; (b) rent increases/controls; (c) the Greece lease cease to be liable for their respective tenant’s rights to remain in the premises at the end of obligations under the lease once they have sold their the term; and (d) the tenant’s contribution/obligation interest? Can they be responsible after the sale in to the property “costs” e.g. insurance and repair? respect of pre-sale non-compliance? A. Length of term The tenant shall be fully liable once they have sold their interest Residential Tenancies are for a three-year minimum term, even while the agreement is still in force; the landlord will be succeeded in case a lesser term has been agreed upon in writing with a lease in his rights and obligations by the new owner, although he may be agreement. Lengthier terms are allowed. liable to the latter for pre-sale non-compliance. B. Rent increases/controls Please see question 10.3 above. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater C. Tenant’s rights to remain in the premises at the end of term sustainable use of buildings and in the reduction of At the lapse of the tenancy’s term, the tenancy becomes indefinite the “environmental footprint” of a building. Please and it can remain until one of the parties provides a termination briefly describe any “green obligations” commonly notice. found in leases stating whether these are clearly defined, enforceable legal obligations or something D. Tenant’s contributions to property costs not amounting to enforceable legal obligations (for The tenant is to assume payments of communal expenses, bills example aspirational objectives). of electricity, water, etc. Insurance is not compulsory for either landlord or tenant whereas repairs (unless damage is caused by the According to Law 4122/2013, a Building Energy Performance tenant) are to be assumed by the landlord. Certificate is required for the conclusion tenancy agreement for an apartment, building, etc. (i.e. residential or business). Since the coming into force of Law 4245/2015, where it became compulsory 11.4 Would there be rights for a landlord to terminate a for all leases to be filed electronically with the tax office, the details residential lease and what steps would be needed to achieve vacant possession if the circumstances of the Certificate must be submitted on the platform of the tax office existed for the right to be exercised? for any new lease filed falling under the scope of Law 4122/2013; the certificate’s validity can be automatically verified by the system. Non-compliance with the terms of the tenancy agreement may result in an eviction process. The fastest method of eviction is via the 10.8 Are there any trends in your market towards more process pursuant to Law 4055/2012. flexible space for occupiers, such as shared short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ 12 Public Law Permits and Obligations activities for residents (co-living)? If so please provide examples/details. 12.1 What are the main laws which govern zoning/ With the advent of AirBnB and the ever increasing flows of tourists in permitting and related matters concerning the use, development and occupation of land? Please briefly Greece – urban centres in particular – short-term rental of properties describe them and include environmental laws. has been awash with apartments offering sharing facilities (where, e.g., owner hosts a visitor in his/her own property, sharing facilities Below we list the main regulatory instruments. with them). Urban and Land-Use Planning Laws: ■ Urban Development Law (Law 1337/1983). 11 Leases of Residential Premises ■ Sustainable Urban Development Law (Law 2508/1997). ■ General Construction Regulation (Law 1577/1985). 11.1 Please briefly describe the main laws that regulate ■ New Construction Regulation (Law 4067/2012). leases of residential premises. ■ Control and Protection of the Constructed Environment (Law 4495/2017). Leases of residential premises are regulated by the Hellenic Civil Environmental Legislation: Code (Article 574 ) as well as Law 1703/1987 as amended by Law 2235/1984. ■ Mostly EU Legislation implemented and incorporated into National Law.

110 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

■ The Hellenic Constitution sets out the boundaries as to construction activities primarily in Article 24. 12.6 What is the typical cost of building/use permits and ■ A further limitation is imposed by Law 2971/2001 in respect the time involved in obtaining them? to the protection of the coast and shoreline. The costs should include engineers’ reports/studies and supervision (which are freely negotiated with their clients) and should be heavily 12.2 Can the state force land owners to sell land to dependent on the type/complexity/size of building work undertaken it? If so please briefly describe including price/ as well as the area/locality of the competent authority. compensation mechanism. Since a complete file will have to be filed with the authority, timelines for obtaining permits will depend upon several factors. The Hellenic Republic can expropriate real estate against full Greece and prompt compensation to the owners or in rem beneficiaries, conditioned on the ground that by doing so such expropriation 12.7 Are there any regulations on the protection of historic serves the public interest and that such legal route is provided by monuments in your jurisdiction? If any, when and how law. are they likely to affect the transfer of rights in real estate or development/change of use? Pursuant to the Code of Expropriations of Immovable Property (Law 2882/2001) the expropriation process is considered to be officially declared by publication in the Government Gazette of Article 24 of the Hellenic Constitution as well as Laws 3028/2002 notification by the expropriating party that payment of the lawful and 4067/2012 – among other Laws – grant protection to monuments, consideration in favour of the parties, whose property is being antiquities, etc. of Greek heritage, including monuments from 1830 expropriated, has been made in a special account with the Deposits and buildings, constructions of historical heritage as young as 100 and Loans Fund. Unless full payment is made, the beneficiary of years old. the expropriation cannot take possession of the expropriated asset. It is also possible that the expropriation may involve an exchange 12.8 How can e.g. a potential buyer obtain reliable of properties (i.e. exchange the expropriated property with another information on contamination and pollution of real property in possession of the expropriating party). estate? Is there a public register of contaminated land in your jurisdiction? The State assesses, among others, the value of the expropriation which is subject to judicial review by the Court of First Instance, which may either accept it or fix a new price. If the owner of the There is no public register of contaminated sites in Greece other real estate objects to such price, he/she may file an appeal against than decentralised inventories. Buyers will have to conduct their the decision of the Court of First Instance. own due diligence.

12.9 In what circumstances (if any) is environmental clean- 12.3 Which bodies control land/building use and/or up ever mandatory? occupation and environmental regulation? How do buyers obtain reliable information on these matters? Pursuant to Article 28 Law 1650/1986, anyone who pollutes or The responsible bodies for land-use building-use and occupation damages the environment shall be liable on criminal grounds as are the Technical Services Sectors of the Municipalities, the well as – under Article 29 – for compensation whereas under Article Environmental Departments of the Prefectures, the Town/City 30 par. 2 interim administrative measures may be taken against a Planning Authorities, the Forest Registries and several Departments polluting business or polluting activity until suitable measures of the Ministry of Environment, Energy and Climate Change against the pollution are taken by the business. (ΥΠΕΚΑ). 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy 12.4 What main permits or licences are required for performance of buildings in your jurisdiction. building works and/or the use of real estate?

Pursuant to Law 4495/2017, the below can be considered the main As mentioned in question 10.7, Law 4122/2013 sets out the types of permits: requirements for the assessment and management of the energy performance of buildings. The inspector may provide guidance 1. Common licence/permit. as to how to enhance the overall performance of the building and 2. Small-scale works permit for works under 25,000 EUR inspections should be made and certificates issued every 10 years. (described in Article 29 par. 2 Law 4495/2017). 3. Administrative pre-approval of the right to a building permit (for buildings over 3,000 sq.m. or when the permit 13 Climate Change is issued by another authority such as the Church’s Building Authority). 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide 12.5 Are building/use permits and licences commonly emissions (including any mandatory emissions obtained in your jurisdiction? Can implied permission trading scheme). be obtained in any way (e.g. by long use)? In June 2012, the registry architecture of the EU Emissions Trading Building permits are commonly obtained by the competent local/ System underwent a fundamental change. The Union Registry municipal authority. No implied permit can be obtained. has replaced the EU Member States’ national registries. EU ETS

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 111 © Published and reproduced with kind permission by Global Legal Group Ltd, London Valmas Associates Greece

operations were centralised in a single EU registry developed, operated and maintained by the European Commission. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of The Greek Greenhouse Gas Registry is part of the Union Registry. both newly constructed and existing buildings? The Union Registry is an online database that holds accounts for stationary installations as well as for aircraft operators. It ensures Ministerial Decision 171563/131 of 2018 creates incentives to accurate accounting for all allowances issued under the EU homeowners to install new windows, heating systems, shading emissions trading system (EU ETS), precise tracking of holdings, systems, etc. by subsidising the purchases with the programme issuances, transfers, cancellations and retirements of general Saving at Home. The programme is co-funded by the EU. allowances and Kyoto units. Therefore, all companies registered Also the Rooftop PV Programme incentivises homeowners to install

Greece in the Greek Registry can perform all the necessary actions (e.g. transactions, surrendering), in this way. small photo-voltaic systems up to 10kWp on the rooftops of their buildings and selling the electricity produced to HEDNO (Hellenic In line with EU legislation, the Greek part of the Union Registry is Electricity Distribution Network Operator S.A.). managed by the Section for Market Mechanism and Registry of Greenhouse Gas Emissions/Directorate of Climate Change and Air Quality of the Ministry of Environment and Energy which also serves Ioannis Valmas as a contact point for national and international authorities. The Section Valmas Associates for Market Mechanism and Registry of Greenhouse Gas Emissions is Ippokratous 10-12 also responsible for the operational management of the registry and Athens, 106 79 Greece provides account holders with the required information and support. Tel: +30 210 339 2081 Email: [email protected] 13.2 Are there any national greenhouse gas emissions URL: www.athenslawoffice.com reduction targets?

Greece has implemented a programme since 2000 which coordinates Ioannis Valmas is a Greek trial attorney, writer and legal advisor that activities from the public & private sectors with the aim of limiting has represented – almost exclusively – since 2008, overseas clients (from government bodies to private individuals) for their business and greenhouse gases. This programme has taken measures affecting the personal legal matters in Greece gaining a stellar reputation abroad. household and tertiary sectors, transportation, industry, electricity He has lived abroad for almost a decade and earned several degrees generation, waste disposal, agriculture, manufacturing processes from UK Universities. He has attended seminars at US Universities and more. This aims to reduce emissions as part of a concerted EU (Harvard and Stanford Law Schools). He has been a member of the effort to aggressively reduce emissions. Athens Bar Association for over a decade.

Valmas Associates is a client focused boutique law practice, striving for excellence in the provision of legal services to overseas clients in Greece. The firm’s dedication and attention to its clients has been the very reason of our success. Unlike with many larger firms, we are able to offer individualised attention to our clients throughout the course of their legal representation. This personalised approach, backed by our vision for commitment, responsibility, elimination of risk and ultimately creation of value while resolving or dealing with legal issues, has led to the establishment of strong and lasting partnerships with the firm’s clients. It is important to point out that it matters not how big or small (in terms of monetary value) a project is, our clients shall always receive the highest level of attention and commitment they can get, with no exceptions made. Valmas Associates retains a strong practice in Real Estate Law, Aviation Law, Shipping, Business Law, Business Claims, and Immigration by Investment in Real Estate.

112 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 13

Hong Kong

Simon Reid-Kay & Associates Simon Reid-Kay

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to All land in Hong Kong is government owned (with the exception question 12.1. Those relating to tax should be listed in of St John’s Cathedral, which is the only freehold property). response to questions in Section 9. “Ownership” of leasehold land is governed by government leases or conditions of grant (which is an agreement for lease) granted by the Conveyancing and Property Ordinance (Chapter 219) (CPO) – government to private individuals or corporations. governs the ownership of, and rights in, property including land and buildings. It includes: provisions relating to conveyancing and the law of property; agreements and deeds relating to land and other 3.2 Are there any scenarios where the right to land agreements; the acquisition and holding of land and other property; diverges from the right to a building constructed and standard agreements and deeds relating to land. thereon? New Territories Ordinance (Chapter 97) – consolidates the laws No, there are not. relating to administration and regulation of the New Territories, where the continued force of Chinese customary law is recognised. Land is defined in the CPO as including: Land Registration Ordinance (Chapter 128) – provides for (a) land covered by water; registration of instruments affecting real or immovable property, the (b) any estate, right, interest or easement in or over any land; keeping of Land Registry records, and other matters relating to land (c) the whole or part of an undivided share in land and any estate, registration. right, interest or easement in or over the whole or part of an undivided share in land; and (d) things attached to land or permanently fastened to anything 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? attached to land. An owner of land also owns the airspace above the land and Hong Kong is a common law jurisdiction. Land law persists as a everything beneath the surface, subject to limited exceptions such case law system with modifications by legislation. as minerals or treasure trove.

1.3 Are international laws relevant to real estate in your 3.3 Is there a split between legal title and beneficial title jurisdiction? Please ignore EU legislation enacted in your jurisdiction and what are the registration locally in EU countries. consequences of any split? Are there any proposals to change this? International laws are not relevant to real estate in Hong Kong. There is a split between legal and beneficial titles in Hong Kong, but this does not have any registration consequences. However, 2 Ownership unwritten interests (which are sometimes the case in beneficial title) are not registrable. There are no proposed changes. 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)?

There are no restrictions on ownership by any particular class of person.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 113 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

4 System of Registration 5.2 How do the owners of registered real estate prove their title?

4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? Title to real estate in Hong Kong is administered by a system of deeds registration (as opposed to title registration). This means that instruments affecting real estate are usually registered with the Land Please see the responses to questions 4.3 and 4.4. Registry. Together, these instruments make up the title, but there is no single document of title. To prove title the seller has to produce 4.2 Is there a state guarantee of title? What does it their original title documents. Where documents are missing, sellers guarantee? commonly rely on statutory declarations to show and give good title. Hong Kong However, the primary duty to produce satisfactory conveyancing There is no state guarantee of title. evidence to remove doubt on title and render the risk of a successful assertion of an encumbrance on title unreal or non-existent remains 4.3 What rights in land are compulsory registrable? What with the seller. Title insurance may be available, although it is not (if any) is the consequence of non-registration? widely used.

Registration is not compulsory, as the Land Registry only registers 5.3 Can any transaction relating to registered real estate deeds to protect priority and not to create title. However, the be completed electronically? What documents need consequence of non-registration of a registrable instrument is loss of to be provided to the land registry for the registration priority as against a registered interest, even if the registered interest of ownership right? Can information on ownership of is subsequently created. registered real estate be accessed electronically?

(a) Electronic conveyancing is not available. 4.4 What rights in land are not required to be registered? (b) The original instrument to be registered must be provided to the Land Registry for registration along with a memorial (a) Unwritten interests (e.g. equitable interests arising under a form which is verified, usually by a solicitor. resulting or constructive trust); and (c) Information on ownership of registered real estate is managed (b) leases for terms not exceeding three years. by the Land Registry, and can be accessed online at https:// www2.iris.gov.hk/eservices/common/selectuser.jsp. 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first 5.4 Can compensation be claimed from the registry/ registration or are there perhaps different classes registries if it/they make a mistake? or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered Compensation cannot be claimed. in the registries.

5.5 Are there restrictions on public access to the There is no probationary period or different classes or qualities of register? Can a buyer obtain all the information he title on first registration. might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved by a search of the register? If not, what additional 4.6 On a land sale, when is title (or ownership) transferred information/process is required? to the buyer? There are no restrictions on public access to the register. A buyer Title is transferred upon proper execution of an assignment of the can obtain all the information he might reasonably need regarding seller’s interest in the relevant government lease under which the all registered encumbrances and other rights affecting real estate. property is held. Additional information is obtained through due diligence. At a minimum, the following due diligence is undertaken for a 4.7 Please briefly describe how some rights obtain straightforward property purchase: priority over other rights. Do earlier rights defeat later (a) Title. The buyer’s solicitors will check the title documents of rights? the property to ensure that the title is good. (b) Structures. The buyer’s solicitors will check to see what Generally earlier rights have priority, except where the owner of an approvals, if any, have been obtained to identify if building earlier registerable right has failed to register that right. works have been authorised. Issues as to title may arise if there are unauthorised building works. 5 The Registry / Registries Depending on the nature of the transaction additional due diligence may be required in relation to issues such as tenancies, maintenance and management contracts, planning, redevelopment potential and 5.1 How many land registries operate in your jurisdiction? litigation. Third party consultants may also be engaged to carry If more than one please specify their differing rules out due diligence investigations regarding the physical state of the and requirements. property as well as environmental and insurance issues.

There is one Land Registry.

114 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

6 Real Estate Market 7 Liabilities of Buyers and Sellers in Real Estate Transactions 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally 7.1 What (if any) are the minimum formalities for the sale be involved in a real estate transaction in your and purchase of real estate? jurisdiction? Please briefly describe their roles and/or duties. An agreement for sale and purchase of real estate must incorporate (a) Real estate agents market the real estate and broker deals. all the terms agreed between the parties. It must be in writing and signed by both parties. An interest in land purported to be created (b) Lawyers are usually engaged by each party. The seller’s lawyer

orally does not create any legal estate in land. It creates only an Hong Kong will draft the contract of sale and both parties’ lawyers will settle. The purchaser’s lawyer will perform investigation of title interest at will that may be revoked at any time. and carry out due diligence. The lawyers will then negotiate Most land transactions must be completed by a deed. Additional and draft transaction documentation, assist in completion, and formalities apply to deeds. follow up with post-completion matters. (c) Surveyors may be engaged by the purchaser to carry out a 7.2 Is the seller under a duty of disclosure? What matters survey of the physical condition of the real estate and/or the must be disclosed? building which the real estate forms part of. (d) Accountants are usually involved in financial due diligence, The principle of “caveat emptor” (let the buyer beware) applies in especially in the sale and purchase of shares in a property holding company. Hong Kong. While the seller is not under a duty to disclose patent defects, he has to disclose any latent defect (i.e. encumbrances and any other 6.2 How and on what basis are these persons adverse interests which a prospective buyer cannot discover for remunerated? himself on reasonable inspection). (a) Real Estate Real Estate Agents – commission basis. (b) Lawyers – either a time costs basis or fixed fee basis. 7.3 Can the seller be liable to the buyer for misrepresentation? (c) Surveyors – agreed fixed fee basis. (d) Accountants – either a time costs basis or fixed fee basis. The seller can be liable to the buyer for misrepresentation.

6.3 Is there any change in the sources or the availability of capital to finance real estate transactions in your 7.4 Do sellers usually give any form of title “guarantee” jurisdiction, whether equity or debt? What are the or contractual warranties to the buyer? What would main sources of capital you see active in your market? be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or There has been a noticeable increase in the availability of capital in warranties act as a substitute for the buyer carrying Hong Kong during the past decade. Investors are generally getting out his own diligence? strong returns from real estate. Mainland China is an active source of capital in the real estate market. Unless otherwise contractually agreed, the seller has a duty to give and prove good title to property. 6.4 What is the appetite for investors and/or developers There are no legal requirements for a seller to give any warranties to invest in your region compared to last year and to a buyer. A buyer will often require a seller to give contractual what are the sectors/areas of most interest? Please warranties in relation to the following matters: give examples. ■ that the seller has not received any notices adverse to the seller’s interest in the property; Investors increasingly focus on asset management to deliver ■ that no third party has any right or interest in the property; returns. There has also been a migration to niche investments in ■ that the property is not adversely affected by any unconventional asset classes (such as data centres, self-storage and encumbrances; co-working spaces) with higher yields. As a result of the relatively large rental differential between Grade-A and Grade-B buildings, ■ tenancies; investors and developers are looking for repositioning deals. They ■ litigation; strive to circumvent the scarcity of supply and the continued high ■ corporate matters; and prices in the prime markets (e.g. Central offices). ■ matters arising out of the due diligence. Whether or not the seller gives the warranties will depend on the 6.5 Have you observed any trends in particular market bargaining power of the parties and the commercial imperatives sub sectors slowing down in your jurisdiction in behind the deal. terms of their attractiveness to investors/developers? Warranties mainly apportion risk between the parties. They do not Please give examples. act as a substitute for the buyer carrying out his own due diligence. We have not observed a slow-down in any particular market sub- sectors. However, investors are cautious about the possible impact of higher interest rates and US-China trade tensions on the Hong Kong market.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 115 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

(b) Sale. The CPO implies, in all legal charges or equitable 7.5 Does the seller retain any liabilities in respect of the mortgages by deed, a power of sale subject to the provisions property post sale? Please give details. of the CPO, unless it has been varied or excluded. The title to the property can be assigned to a bona fide purchaser free A seller may retain liability post sale for a breach of covenant of the mortgage. If the proceeds of sale are not sufficient to committed by the seller before the sale. cover the debts owed, the borrower is still under an obligation to repay the deficit. (c) Possession. The receiver will take physical possession of 7.6 What (if any) are the liabilities of the buyer (in addition the property so that vacant possession can be delivered to to paying the sale price)? the buyer if the property is sold. If the borrower refuses to deliver vacant possession to the receiver, the receiver will The parties usually agree in the contract that the buyer is liable to have to apply to the court for a possession order. Hong Kong pay all the stamp duty on the transaction, and the registration fees associated with the transfer of title of the real estate. 8.4 What minimum formalities are required for real estate lending? 8 Finance and Banking (a) For a mortgage/charge over the real estate to pass legal title, it must be made by deed. 8.1 Please briefly describe any regulations concerning (b) Security over land and buildings made by companies the lending of money to finance real estate. Are the incorporated in Hong Kong, and companies incorporated rules different as between resident and non-resident outside Hong Kong but registered as a non-Hong Kong persons and/or between individual persons and company under the Companies Ordinance (Chapter 622), corporate entities? must be registered at the Companies Registry within one month of the date the security is created, or the security is (a) Money Lenders Ordinance (Chapter 163) – regulates void against a liquidator and any creditor of the company. money lenders and money-lending transactions. (c) The security creating an interest over land must be registered (b) Banking Ordinance (Chapter 155) – regulates banking at the Hong Kong Land Registry within one month of the business and the business of taking deposits. security being created or the priority of the security may be The rules are the same as between resident and non- resident persons compromised. and/or between individual persons and corporate entities. 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other 8.2 What are the main methods by which a real estate creditors? lender seeks to protect itself from default by the borrower? (a) Registration of security documents safeguards the mortgagee/ lender’s priority as against other creditors in respect of the (a) Provision of security/guarantee, which may include: charged assets. ■ Legal Charge/Mortgage over real estate (incorporating (b) Notices and confirmations of assignment should be given a charge over bank accounts into which the proceeds/ to the counterparty to any contract, and confirmation/ income are paid). acknowledgment of the creation of the security from such ■ Assignment of Sales Proceeds and Rental Income. counterparty is desirable. ■ Assignment of Insurances. (c) The borrower can give a negative pledge in the loan ■ Debenture (incorporating a floating charge over all the agreement not to create any other security interest over the assets of the borrower). charged assets. ■ Share Charge (over the entire issued shares of the Borrower, and/or its holding company). 8.6 Under what circumstances can security taken by a ■ Subordination Deed (incorporating an assignment of lender be avoided or rendered unenforceable? loans and advances). (b) Guarantee by shareholders (direct and/or indirect). (a) If there is a breach of director’s fiduciary duties in creating (c) Borrowers may be required to obtain regular valuations of the security, the security may be rendered unenforceable. the real estate and could be required to provide additional (b) Insolvency in the security provider. Generally, security which collateral to maintain the agreed Loan-to-Value ratio. has been properly structured and created should be recognised (d) Requiring the borrower/mortgagor to take out insurances in insolvency, subject to risk periods known as “hardening over the real estate. periods”. Security is granted subject to the risk of the security being invalid or being attacked by a liquidator appointed to the security provider and rendered unenforceable if it is granted in 8.3 What are the common proceedings for realisation of risk periods on or before insolvency or winding-up. The length mortgaged properties? Are there any options for a of the risk period varies according to the circumstances. Security mortgagee to realise a mortgaged property without could also be unenforceable if it constitutes a transaction at an involving court proceedings or the contribution of the undervalue, or where there is an unfair preference. mortgagor?

8.7 What actions, if any, can a borrower take to frustrate (a) Receivership. Section 50 of the CPO implies, in all legal enforcement action by a lender? charges or equitable mortgages by deed, a power for the lender to appoint a receiver of the real estate and the income derived from it when the money becomes due. The borrower may refuse to deliver vacant possession of the real estate, or refuse to assist the lender in coordinating his tenant’s

116 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

delivery of vacant possession. This may hinder enforcement action, For purchases on or after 27 October 2012, BSD at a flat rate of as the lender has to incur additional time and costs in, for example, 15% of the purchase price is applicable to all residential property obtaining writ of possession and fieri facias combined in court and transactions. The buyer is liable to pay the BSD. Key Exemptions engaging bailiffs to recover possession. are: (i) a Hong Kong permanent resident (HKPR) who is acting on his/her own behalf, and does not own any other residential property in Hong Kong; (ii) joint acquisition by a HKPR with one or more 8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a non-HKPR close relative(s) (i.e. spouse, parents, children, brothers real estate lender? and sisters) each acting on his/her own behalf; (iii) transfer between close relatives, whether or not they are HKPRs, each of them acting Generally, the onset of a borrower’s insolvency or corporate on his/her own behalf; and (iv) intragroup transfers of property between associated companies may be exempt from BSD.

rehabilitation does not affect a lender’s position unless its loan, Hong Kong guarantee or security is invalid, liable to be set aside, or the lender’s SSD targets disposition of any residential property acquired either enforcement action does not comply with the terms of the underlying by an individual or company (regardless of where it is incorporated) documents. Please also see the response to question 8.6. and resold within 36 months after acquisition. SSD is calculated based on the stated consideration for the transaction or the market value of the property, whichever is higher, at the following rates for 8.9 What is the process for enforcing security over acquisitions on or after 27 October 2012: shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, ■ 20% if the seller held the property for six months or less; can shares be appropriated when a borrower is in ■ 15% if the seller held the property for more than six months administration or has entered another insolvency or but for 12 months or less; and reorganisation procedure? ■ 10% if the seller held the property for more than 12 months but for 36 months or less. The nature of the security determines what happens on enforcement and/or insolvency. Lenders usually take security over shares in terms of a fixed charge, but it is also possible to take a legal mortgage. A 9.2 When is the transfer tax paid? legal mortgage results in the shares being transferred to the lender, who is then registered as the owner of the shares. Because lenders Within 30 days after the date of execution of the instrument. usually do not want to deal with any consolidation issues that arise when the company whose shares are charged becomes a subsidiary, 9.3 Are transfers of real estate by individuals subject to this form of security is not common. income tax? The security document will set out when and how the lender may enforce its security. Typically, the security document will also give No, they are not. very wide enforcement powers to the lender, including the right to: ■ transfer ownership of the shares to a third party (through sale) 9.4 Are transfers of real estate subject to VAT? How and use the proceeds to satisfy the debt; and much? Who is liable? Are there any exemptions? ■ appoint a receiver to sell the shares and use the proceeds to satisfy the debt. No, they are not.

9 Tax 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property?

9.1 Are transfers of real estate subject to a transfer tax? Please see the response to question 9.1. How much? Who is liable?

Under the Stamp Duties Ordinance (Cap.117) (SDO), the 9.6 Is taxation different if ownership of a company (or seller and the buyer are liable for the payment of ad valorem duty other entity) owning real estate is transferred? (AVD), buyer’s stamp duty (BSD) and special stamp duty (SSD) for acquisition and disposition of residential property. Limited AVD, BSD and SSD are not applicable to the purchase of shares in exemptions apply. The Purchaser usually agrees contractually to a property-owning company. However, stamp duty is payable on pay AVD and BSD. each bought note and sold note for a transfer of shares in a Hong Payments of AVD, BSD and SSD are not mutually exclusive. If Kong company at the rate of 0.1% of the higher of the purchase stamp duty is paid on the agreement for sale and purchase, HK$100 price or the net asset value of the shares. HK$5.00 is also payable stamp duty is payable on the assignment. on the instrument of transfer. Under the SDO the seller and the buyer are both liable for the payment of stamp duty, but the buyer at a flat rate of 15% of the purchase price is applicable to all AVD usually agrees contractually to pay the stamp duty. residential property transactions. The seller and the buyer are both liable. However, the buyer usually contracts to pay the AVD. Key Exemptions are: (i) a Hong Kong permanent resident (HKPR) 9.7 Are there any tax issues that a buyer of real estate who is acting on his/her own behalf, and does not own any other should always take into consideration/conduct due residential property in Hong Kong at the time of acquisition will diligence on? be subject to lower rates (AVD at Scale 2 rates); and (ii) intragroup transfers of property between associated companies may be exempt The Hong Kong tax system is simple. Foreign buyers and sellers from AVD. should nonetheless engage tax advisors to advise on the structuring of the acquisition of real estate in a tax-efficient manner.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 117 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

10 Leases of Business Premises 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a 10.1 Please briefly describe the main laws that regulate tenant to extend or renew the lease or for either party leases of business premises. to be compensated by the other for any reason on termination? The Landlord and Tenant (Consolidation) Ordinance (Chapter 7), the CPO and the Land Registration Ordinance (Chapter 128). There Other than termination by expiry, business leases usually provide is no legislation governing lease terms in Hong Kong. Leases are for termination only where: freely negotiable although, generally speaking, Hong Kong is a ■ the tenant is in default; landlord’s market. Hong Kong ■ the premises or the building are destroyed or rendered unfit for use by an act of God; 10.2 What types of business lease exist? ■ the premises are affected by a demolition or closing order issued by a competent authority not due to the default of the (a) Leases, which are entered into for terms of three years or tenant; or more. ■ the landlord has a right of early termination by notice in terms (b) Tenancy agreements, which are (generally speaking) entered of a sale and redevelopment clause in the lease. into for a term not exceeding three years. There are no statutory provisions allowing a tenant to extend or There is no significant difference between the two, save for the renew its lease, or providing for compensation by one party to the length of the term, certain execution formalities, and the fact that a other on termination. lease for a term of three years or more must be registered to protect Options to renew or to terminate can be agreed but options to the lessee’s interests. terminate, other than by the landlord under a sale and redevelopment clause, are highly unusual. 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of 10.6 Does the landlord and/or the tenant of a business term; (b) rent increases; (c) tenant’s right to sell or lease cease to be liable for their respective sub-lease; (d) insurance; (e) (i) change of control of obligations under the lease once they have sold their the tenant; and (ii) transfer of lease as a result of a interest? Can they be responsible after the sale in corporate restructuring (e.g. merger); and (f) repairs? respect of pre-sale non-compliance?

Typical provisions include the following: The landlord and the tenant remain liable to each other for the (a) A term of three years, but shorter or longer terms can be performance of their respective obligations under the lease even negotiated. after the lease has been assigned by a party. (b) Rent is generally fixed for the whole term without any mid- Covenants which touch and concern land bind the successors in title term review. If an option term is granted, rent is usually of the original contracting parties. reviewed to market. (c) The tenant is generally prohibited from assigning the lease, subletting, or part with or share possession of the premises. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater (d) The tenant will be required to effect insurance for public sustainable use of buildings and in the reduction of liability, tenant’s fixtures and fittings, and indemnity obligations the “environmental footprint” of a building. Please under the lease. briefly describe any “green obligations” commonly (e) Changes of control of the tenant and transfers as a result of a found in leases stating whether these are clearly corporate restructuring are usually prohibited. defined, enforceable legal obligations or something (f) The tenant is usually responsible for repairing and maintaining not amounting to enforceable legal obligations (for the premises in a good and tenantable condition. The landlord example aspirational objectives). is usually responsible for structural repairs. Items of a capital nature are often overlooked and it is sensible to specifically “Green obligations” are not common in business leases. include them as part of the landlord’s obligations.

10.8 Are there any trends in your market towards more 10.4 What taxes are payable on rent either by the landlord flexible space for occupiers, such as shared or tenant of a business lease? short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ The landlord is responsible for property tax payable in respect activities for residents (co-living)? If so please provide examples/details. of rental income. However, a corporate landlord may apply for exemption from property tax on the basis that the income will be There is a noticeable trend towards more flexible co-working and co- assessed to profits tax instead. living spaces in Hong Kong. Co-working spaces increasingly play No taxes are payable by the tenant in consequence of entering into host to a wide variety of end users, including both large companies a lease. and start-ups. Cost savings, leasing flexibility and collaboration are all cited as drivers of this trend. There is also an increase in co- living spaces. These spaces typically combine private bedrooms with extensive shared spaces and social amenities.

118 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

11 Leases of Residential Premises 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price/ compensation mechanism. 11.1 Please briefly describe the main laws that regulate leases of residential premises. (a) The Land Resumption Ordinance (Chapter 124) (LRO) grants the government power to acquire land compulsorily, Please refer to question 10.1 as the applicable laws are the same. by resumption for public purposes such as the development of new towns or infrastructure. 11.2 Do the laws differ if the premises are intended for (b) Compensation is payable to the former owner and any person multiple different residential occupiers? having an interest in the land immediately before reversion

under an instrument registered in the Land Registry. Subject Hong Kong to other provisions in the LRO, the compensation payable No, they do not. will usually be the market value of the land.

11.3 What would typical provisions for a lease of 12.3 Which bodies control land/building use and/or residential premises be in your jurisdiction regarding: occupation and environmental regulation? How do (a) length of term; (b) rent increases/controls; (c) the buyers obtain reliable information on these matters? tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? (a) Land use: ■ The Survey and Mapping Office of the Lands Department (a) A term of two years, but shorter or longer terms can be is the official land survey and mapping agency for Hong negotiated. Kong. Planning documents can be ordered from the (b) There are no statutory rent increases/controls and contractual Lands Department office. rent review terms are unusual. ■ The Lands Administration Office of the Lands Department (c) The tenant does not typically have the right to remain in the takes charge of land disposal and acquisition, valuation premises at the end of the term. of land and properties for various purposes, lease enforcement, land and squatter control, urban renewal (d) The tenant is usually responsible for repairing and maintaining and maintenance of man-made slopes on unallocated and the premises in a good and tenantable condition. unleased government land. The relevant information can be obtained from government gazettes. 11.4 Would there be rights for a landlord to terminate a (b) Building use/Occupation: residential lease and what steps would be needed ■ The Legal Advisory and Conveyancing Office of the Lands to achieve vacant possession if the circumstances Department provides in-house legal advisory services, existed for the right to be exercised? administers the Lands Department Consent Scheme by giving consent to sale of units in uncompleted developments Residential leases are terminated in accordance with the terms of and approves Deeds of Mutual Covenant. Relevant the agreement between the parties. Unless otherwise agreed, there information can be obtained from the Lands Department. is no way to end a fixed-term tenancy before the expiration of the ■ The Buildings Department sets and enforces safety, lease agreement. Periodic tenancies may, however, be terminated health and environmental standards for private buildings. on notice to quit. The notice period is typically one rental period Relevant information can be obtained from the Buildings (e.g. one month’s notice for a month-to-month tenancy). Department. (c) Environmental regulation: ■ The Environmental Protection Department is responsible 12 Public Law Permits and Obligations for: developing policies covering environmental protection, nature conservation; enforcing environmental legislation; monitoring environmental quality; providing 12.1 What are the main laws which govern zoning/ collection, transfer, treatment and disposal facilities for permitting and related matters concerning the use, various types of waste; advising on the environmental development and occupation of land? Please briefly implications of town planning and new policies; handling describe them and include environmental laws. pollution complaints and incidents; and raising awareness and support in the community for environmental initiatives. (a) Statutory Outline Zoning Plans set out the designated uses of land. (b) The Town Planning Ordinance (Chapter 131) and the Town 12.4 What main permits or licences are required for Planning Regulations make provision for the systematic building works and/or the use of real estate? preparation and approval of plans for the layout of areas of Hong Kong as well as for the types of building suitable (a) Statutory Outline Zoning Plans set out the designated uses for erection therein and for the preparation and approval of land. Some uses need permission of the Town Planning of plans for areas within which permission is required for Board before building works can commence. development. (b) Building works must not commence without approval of the (c) The Buildings Ordinance (Chapter 123) provides for the building plans and consent for commencement of building planning, design and construction of buildings and associated works being obtained from the Building Authority. works, and controlling the safety of buildings. (c) A new building must not be occupied (except by no more than (d) Conditions under the relevant government lease/grant. two caretakers) unless an occupation permit or temporary occupation permit has been issued by the Building Authority.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 119 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

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

Building/use permits and licences are commonly obtained in Building Energy Code – Developers, owners or occupiers of Hong Kong. It is not possible to obtain implied or retrospective prescribed buildings must ensure that building services installations permission. comply with certain minimum energy efficiency standards. In addition, owners of commercial buildings or portions of composite buildings used for commercial purposes must carry out energy 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? audits once every 10 years. Hong Kong

The statutory fees for applications for building/use permits are 13 Climate Change updated from time to time. These fees, and the time involved in obtaining the relevant building/use permits, are dependent on the type of permission sought, and the scale and complexity of the 13.1 Please briefly explain the nature and extent of any development. regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions trading scheme). 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how (a) Ozone Layer Protection Ordinance (Chapter 403) – gives are they likely to affect the transfer of rights in real effect to Hong Kong’s international obligations under the estate or development/change of use? 1985 Vienna Convention for the Protection of the Ozone Layer and the 1987 Montreal Protocol on Substances that Antiquities and Monuments Ordinance (Chapter 53) – provides Deplete the Ozone Layer. for the preservation of objects of historical, archaeological and (b) Buildings Energy Efficiency Ordinance (Chapter 610) – palaeontological interest. requires compliance with codes of practice concerning the A declaration as a monument may affect the marketability of energy efficiency of installations and energy audits in respect real estate, since the Antiquities and Monuments Office must be of several types of buildings. consulted before the commencement of any work, or development (c) Air Pollution Control Ordinance (Chapter 311) – provides that may affect declared historic monuments. for abating, prohibiting and controlling pollution of the atmosphere. (d) Motor Vehicle Idling (Fixed Penalty) Ordinance (Chapter 12.8 How can e.g. a potential buyer obtain reliable 611) – prohibits the idling of motor vehicles, imposes information on contamination and pollution of real penalties, and provides for the recovery of penalties. estate? Is there a public register of contaminated land in your jurisdiction? 13.2 Are there any national greenhouse gas emissions There is no public register of contaminated land in Hong Kong. A reduction targets? buyer will have to rely on its own due diligence to obtain reliable information in this regard. Hong Kong’s climate action plan published in 2017 only pledges a 26% to 36% cut from 2005 levels by 2030. It is anticipated that a long-term carbon cuts strategy will be ready by the end of 2019 or 12.9 In what circumstances (if any) is environmental clean- early 2020. up ever mandatory?

Clean-up of existing contamination is mainly dealt with in the 13.3 Are there any other regulatory measures (not already Environmental Impact Assessment Ordinance (Chapter 499). The mentioned) which aim to improve the sustainability of “polluter pays” principle is not adopted in a strict sense in Hong both newly constructed and existing buildings? Kong. Instead, the effect of legislation is to make the person who wants to develop a contaminated site responsible for any necessary See the response to question 12.10 above. clean-up.

120 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Simon Reid-Kay & Associates Hong Kong

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

Tel: +852 3470 9070 Email: [email protected] URL: www.srkandassociates.com

Simon leads Simon Reid-Kay & Associates and has practised in Hong Hong Kong Kong since 1985. He deals with all types of real estate transactions and regularly advises on the real estate aspects of IPOs, funds (including REITs), securitisations, sale and leaseback and portfolio management for substantial Hong Kong-based international investment banks and conglomerates. He regularly advises private funds and investment banks on their own and their clients’ real estate requirements including investments, financing and property management. As well as handling purchases, sales and leases, Simon has advised owners, developers and lenders on the planning and construction aspects of many major developments and infrastructure projects in Hong Kong and the region. He also has extensive experience in government land administration and heavyweight commercial leasing work. Simon has been ranked as a Tier 1 real estate lawyer in Chambers Global.

Simon Reid-Kay and his long-established team offer high-quality bespoke real estate legal services to a wider range of clients in Hong Kong and Asia-Pacific. All with agility, independence and a commitment to the highest-quality of service. Simon Reid-Kay & Associates covers the full spectrum of real estate legal services, from leasing and landlord and tenant to investment and M&A, to fund structuring and REITs. Simon has a deserved reputation as one of Hong Kong’s leading real estate specialist lawyers and is extremely well connected in Hong Kong and Asia-Pacific. Working with his long established team, Simon continues to provide blue-chip advice on some of the largest, most complex and high- profile real estate projects. Respected for its successful track record and years of “seen it all” experience, Simon Reid-Kay & Associates is the go-to law firm for the highest level of legal services in many areas.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 121 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 14

India Amaresh Kumar Singh

L&L Partners Manjul Mantri

■ Foreign Exchange Management Act, 1999 (FEMA): To 1 Real Estate Law regulate and increase the flow of foreign exchange in India, FEMA was enacted. The object of FEMA is to consolidate and amend the law relating to foreign exchange. FEMA 1.1 Please briefly describe the main laws that govern regulates the transfer of securities for any such entity where real estate in your jurisdiction. Laws relating to the person is not an Indian citizen or a person of Indian origin leases of business premises should be listed in (such as foreign nationals and foreign entities), a person response to question 10.1. Those relating to zoning and environmental should be listed in response to resident outside India who is a citizen of India or a person of question 12.1. Those relating to tax should be listed in Indian origin resident outside India. response to questions in Section 9. ■ Land Revenue Codes: Land Revenue Codes provides laws relating to land, land revenue and matters connected There are a series of central and State laws that govern real estate therewith. The codes encapsulate division and classes of property, the powers and duties of revenue officers, rules and in India. regulations and penalties for contravening the codes. ■ Transfer of Property Act, 1882: The transfer of Property ■ Urban Land (Ceiling and Regulation) Act, 1976: The Act is a central act and provides general principles of real Government of India repealed this Act in relation to most estate, such as sale, exchange, mortgage, lease and gift of areas. However, it is still in force in certain States including property, part performance and lis pendens. The States have Andhra Pradesh, Gujarat, Haryana, Himachal Pradesh, to adopt the provisions of this Act. Karnataka, Maharashtra, Orissa, Punjab, Tripura, Uttar ■ Co-ownership and joint ownership: The Act recognises co- Pradesh and West Bengal – and the six Union Territories and ownership and joint ownership of property. it shall also apply to such other State which adopt this Act by ■ Leasehold rights: The Act deals with leases, culminating resolution passed on their behalf under clause (1) of Article rights and entitlement, reversionary rights vested in the 252 of the Indian Constitution. In the governed States, there owner, termination, and types of tenures. are restrictions on the purchase of lands in urban area beyond ■ The Real Estate (Regulation and Development) Act, 2016 the permissible limit. (RERA): The Central Government, through the Ministry of Housing and Urban Poverty Alleviation, has enacted the Act. 1.2 What is the impact (if any) on real estate of local It is an Act to establish the Real Estate Regulatory Authority common law in your jurisdiction? for the regulation and promotion of the real estate sector and to ensure sale of plot, apartment or building, or a real estate project in an efficient and transparent manner and to The Legal System of India envisages both Civil and Common Law protect the interests of consumers in the real estate sector and whilst most laws in India relating to real estate are codified; Transfer to establish an adjudicating mechanism for speedy dispute of Property Act, Contract Act and others. However, Common Law redressal and also to establish the Appellate Tribunal to hear is instrumental in interpretation of such codified provisions as appeals from the decisions, directions or orders of the Real precedents have both persuasive as well as authoritative value. Estate Regulatory Authority. Under the Act, new projects and ongoing projects qualifying 1.3 Are international laws relevant to real estate in your a certain limit of area and number of units are required to jurisdiction? Please ignore EU legislation enacted register with the Authority. Similarly, promoters and agents locally in EU countries. are required to register with the Authority. ■ The Indian Contract Act, 1872: The Indian Contract Act is According to the Legal System of India, Municipal Laws and the principle Act governing laws related to contracts in India and the contractual obligations of parties to a contract. The international laws are construed harmoniously and in case of chapters and sections of the Transfer of Property Act which conflicts, Municipal Laws prevail. In India, real estate laws are relate to contracts shall be taken as part of the Indian Contract codified. In the absence of domestic law occupying the field, the Act, 1872. contents of international conventions and norms are significant for ■ Easement and Licences: Laws relating to easements and the purpose of interpretation. Also, the Constitution of India under licences in property are governed by the Indian Easement Articles 253 and 51(c) envisages the importance of international Act, 1882 (the ‘Easement Act’). A licence is a right to use agreements as mentioned hereunder: property without any interest.

122 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

253: Legislation for giving effect to international agreements – India any activity, excluding a liaison office, may also acquire any Notwithstanding anything in the foregoing provisions of this Chapter, immovable property in India, which is necessary for or incidental to Parliament has the power to make any law for the whole or any part carrying on such activity. Foreign citizens and foreign entities may of the territory of India for implementing any treaty, agreement or invest in an Indian company (either as a joint venture or a wholly convention with any other country or countries or any decision made owned subsidiary) for developing certain real estate projects such at any international conference, association or other body. as townships, housing, infrastructure, construction-development 51(c) fosters respect for international law and treaty obligations in projects, industrial parks, and special economic zones. In certain the dealings of organised peoples with one another; and encourages real estate projects such as construction development projects, settlement of international disputes by arbitration (PART IVA investment is not permitted where the project is already developed FUNDAMENTAL DUTIES). or in advanced stages of development. India

2 Ownership 3 Real Estate Rights

2.1 Are there legal restrictions on ownership of real estate 3.1 What are the types of rights over land recognised in by particular classes of persons (e.g. non-resident your jurisdiction? Are any of them purely contractual persons)? between the parties?

Earlier, the right to property was guaranteed under the Constitution The types of rights over land recognised in India vary diversely in under fundamental rights. Currently, the right to property is not a nature which form part of a bundle of rights existing by operation of fundamental right, but a constitutional right. Article 300-A mandates law, contract, inheritance, etc. including: that no person shall be deprived of his property save by authority of Freehold Rights: These refer to rights over an estate which is ‘free law. Article 300-A embodies the doctrine of ‘eminent domain’ which from hold’ of any entity besides the owner. In its strict interpretation provides for acquisition of the property by the government in the means absolute right or interest in the property perfected against public interest. Also, there are certain classes of people who under the world at large. Title may be encumbered due to any subsisting specific constitutional provisions have special ownership of lands. mortgage/lien/lease/agreement for sale, etc. The ownership/title in States are duly empowered to legislate and impose legal restrictions a property may be transacted by the following mode. on ownership of certain classes of people. Further, there are legal (i) Sale and conveyance. restrictions on ownership of land beyond the land ceiling limits. (ii) Gift. Under the existing foreign exchange norms, no person resident (iii) Inheritance/succession. outside India can acquire any immoveable property in India, except (iv) Trust. as permitted. Non-residents may be classified into three categories (v) Government grant. for the purposes of determining their eligibility to purchase immoveable property in India: (vi) Operation of law. ■ a person resident outside India who is a citizen of India; Hence, the owner of such an estate enjoys free ownership for ■ a person of Indian origin resident outside India; and perpetuity and can use the land for any purposes; however, in accordance with the local regulations. The Transfer of Property Act ■ a person not being an Indian citizen or a person of Indian provides for absolute rights of alienation and enjoyment. origin (such as foreign nationals and foreign entities). Leasehold Rights: These refer to an ownership of a temporary right A person resident outside India who is a citizen of India and person to hold land or property in which a lessee or a tenant holds rights of Indian origin resident outside India: Such person is permitted of real property by some form of title from a lessor or landlord. to acquire immoveable property in India, other than agricultural Although a tenant does hold rights to real property, a leasehold property, plantation property or a farm house, provided that the estate is typically considered personal property. payment of purchase price, if any, shall be made out of: (i) funds received in India through normal banking channels by Licensed Rights: A licensing agreement is an arrangement whereby way of inward remittance from any place outside India; and a licensor grants the right to intangible property to another entity for a specified period, and, in return, the licensor receives a fee from the (ii) funds held in any non-resident account maintained in India in accordance with the foreign exchange regulations. licensee. Normally, no interest is created in the property in case of a license and is revocable. However, there are certain instances when A person not being an Indian citizen or a person of Indian origin: licences become irrevocable as provided under the ‘Easement Act’. Such persons are not permitted to acquire immoveable property in These are contractual rights. India. However, a foreign national who, takes up an employment in India or who carries on a business or vocation in India, and becomes Mortgage Rights/Charge on Property: A mortgage or charge a person resident in India, may acquire immoveable property in creates an interest on behalf of the lender of the immovable property India for his own use without any permission as on becoming a for the purpose of securing (i) the payment of money advanced or person resident in India, such persons would be treated on par with to be advanced by way of loans, (ii) an existing or future debt, or persons otherwise resident in India. However, if such a foreign (iii) the performance of an engagement which may give rise to a national, who has become a person resident in India, is a citizen of pecuniary liability. These are largely contractual rights. Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or (i) Simple mortgage. Bhutan, then he is required to obtain prior permission of the Reserve (ii) Mortgage by conditional sale. Bank of India (RBI) for acquiring or transferring an immoveable (iii) Usufructuary mortgage. property in India. Further, a person resident outside India who (iv) English mortgage. has established in India, in accordance with the applicable foreign (v) Mortgage by deposit of title deeds. exchange management regulations, a branch office, or other place of business (other than a company in India), for carrying on in (vi) Anomalous mortgage.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 123 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

Easement Rights: An easement is a right which the owner or occupier of certain land possesses, as such, for the beneficial 4.2 Is there a state guarantee of title? What does it enjoyment of that land, to do and continue to do something, or to guarantee? prevent and continue to prevent something being done, in or upon, or in respect of, certain other land not his own; for, e.g., Right of In India, the registration of land or property refers to the registration Passage, Right to Light, etc. of the transaction (a sale deed), and not the land title. A registered sale deed is not a government guarantee of land ownership. The Development Rights: Development rights are unused rights present record-of-rights in land in India is fiscal in nature. The that allow developers to make changes to their property within person on record is presented to be the owner. Thus, title to land the limitations imposed by State or local law. A special type of

India is only incidental. Providing a guarantee of title is on the primary development right is represented by the Transferable Development Legislative Agenda of the State. However, so far, no State has Rights, which can compensate owners for not being allowed to legislated any provisions with respect to the same except Rajasthan develop certain properties because of legal limitations. Another which has initiated the process by enacting the ‘The Rajasthan mode of acquiring land is to enter into joint development agreements Urban Land (certificate of title) Bill, 2016’. with the title holders of land for joint development of real estate projects. These are contractual rights. Rights of Specific Enforcement for Part Performance: Specific 4.3 What rights in land are compulsory registrable? What performance is an equitable remedy in the law of contract, whereby (if any) is the consequence of non-registration? a court issues an order requiring a party to perform a specific act, such to complete performance of the contract. Section 17 of the Registration Act provides for documents that need to be compulsorily registered. Subsurface Rights: Subsurface rights are rights to the earth below the land, and any substances found beneath the land’s surface. Section 17(1A) of the Registration Act provides that documents Mineral rights are a type of subsurface right. containing contracts to transfer for consideration any immovable property for the purpose of Section 53A of the Transfer of Property Transferable and Non-Transferable Rights: The Transfer of Act, 1882 (4 of 1882) shall be registered if they have been executed Property Act provides for rights which are transferrable and non- on or after the commencement of the Registration and Other Related transferrable. Laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then they shall have no 3.2 Are there any scenarios where the right to land effect for the purposes of the said Section 53A. diverges from the right to a building constructed Section 49 of the Registration Act talks about the effect of non- thereon? registration of property that is required to be registered under the TPA or Section 17 of Registration Act. The general assumption is that the right of ownership of a super structure/building is merged with the ownership of land unless there No document required by Section 17 or by any provision of the is a contrary intent and transaction in which scenario ownership of Transfer of Property Act, 1882 (4 of 1882) to be registered shall: the super structure vests in a separate entity than that of the land (a) affect any immovable property comprised therein; underneath. Indian laws allow for separate ownership of land and (b) confer any power to adopt; or building. (c) be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered. 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration Thus, the land compulsorily required to be registered is specified consequences of any split? Are there any proposals under Section 17, and the effects thereof, too, are specified in the Act. to change this?

4.4 What rights in land are not required to be registered? A beneficial owner is a legal term where specific property rights (‘use and title’) in equity belong to a person even though the legal title of the property belongs to another person. Therefore, Section 18 of the Registration Act describes the documents, the beneficial title emerges out of the beneficial rights provided to registration of which is optional. Mortgagees, Lessees, Temples and Endowments, etc. Hence, there are certain situations where there may be a split between the legal 4.5 Where there are both unregistered and registered land title and beneficial title in India for owners. Currently, there are no or rights is there a probationary period following first proposals to change the status quo; however, from the perspective registration or are there perhaps different classes of registration, legal title is considered as against beneficial title. or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered 4 System of Registration in the registries.

In India, registration is not required of the land in question, rather it is 4.1 Is all land in your jurisdiction required to be to be done by the instruments relating to land or the transaction. The registered? What land (or rights) are unregistered? main purpose of registration is to render the title of the property in the name of the transferee. A registered document operates from the There is no registration of land titles in India. Instruments/ date of its execution and not from the date of registration. Registration documents/transactions pertaining to lands are required to be also makes the documents pertaining to the land in question available registered in accordance with the ‘Registration Act’. Section 17 of to the public at large. This is where the doctrine of caveat emptor and the Registration Act talks about the documents of which registration Constructive Notice comes into play. If the land is registered, it would is mandatory. mean that the documents are available to the public for perusal. That

124 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

being the case, if the buyer or purchaser of the property fails to exercise Section 48 of the Transfer of Property Act, 1882 states the law due diligence at the time of transfer (including sale), then he cannot regarding priority of rights created by transfer – This means be given any benefit. If there is a loss caused to the purchaser due to that where a person purports to create by transfer at different times, negligence on his own part, he cannot claim compensation. Transfer rights over the same immovable property, and such rights cannot be in the Transfer of Property Act can be of two types – Registered or exercised to their full extent together, each later right created will be Unregistered. Instruments that are unregistered can also be registered subject to the rights that were previously created. This is the general with the approval of the Sub-Registrar of Assurances. rule, except when: There is no probationary period in India except that all documents, 1. there is a special contract; or other than a Will, have to be registered within four weeks of 2. reservation binding on the parties. India execution or during the extended period of four weeks. In the This principle is based on the maxim qui prior est tempore potior circumstance, if instruments are not registered, it will not: est jure which means he who is prior in time is better in law. (a) affect any immovable property comprised therein; The one who has advantage in time should also have precedence (b) confer any power to adopt; or in law, where two successive transfers of the same property have (c) be received as evidence of any transaction affecting such been affected. property or conferring such power unless it has been As a general rule, rights transferred by a registered document prevail registered. over those transferred by an unregistered document. It is pertinent to note that a transaction may entail a series of stages Sometimes, the rights provided by Statue may prevail over those and for every such stage there may be a requirement of creation of that are given under an agreement. documents and instruments. Such instruments may be required to Section 47 of the Registration Act, 1908 states that a registered be registered under the ambit and mandate of the Indian Registration document will prevail from the time which it would have Act. Such registered instruments may result in different classes of commenced to operate if no registration is required, and not from rights, title and interest. the time of its registration. By way of an example, in a transaction of sale, the ownership is ‘Notice’ under Section 3 of the Transfer of Property Act means transferred by a sale deed. However, a precursor document may be knowledge or cognisance or awareness of a fact. an ‘agreement to sell’ which is an enforceable document but does not create a title which is done by the sale deed. However, certain If the transferee is found to have either actual or constructive notice, classes of agreements to sell are required under law to be registered, he would not be given the benefit under Section 48. The Doctrine such as ‘agreements to sell with possession’ as they only entail a of Caveat Emptor will also apply, which means ‘let the buyer right of possession; not ownership. Please refer to Section 17 of the beware’ or that the purchaser buys at his own risk. However, if the Indian Registration Act. Thus, a new class of rights and entitlement purchaser is a bona fide purchaser, then the benefit under Section 48 are created in the interregnum in the process of an absolute sale. will be given to him.

4.6 On a land sale, when is title (or ownership) transferred 5 The Registry / Registries to the buyer?

As per Section 54 of the Transfer of Property Act, a ‘sale’ is a transfer 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules of ownership in exchange for a price paid or promised of part-paid and requirements. and part-promised. Such transfer, in the case of tangible immovable property, of the value of Rs.100 and upwards or in case of a reversion Registries are within the jurisdiction of the State Government and or other intangible thing, can be made only by a registered instrument, fall in Concurrent List in Schedule VII and, thus, laws in respect of whereas tangible immovable property below Rs.100 can be transferred these matters can be made both, by the Centre as well as by the State. either by registered instrument or by delivery of possession. They are guided and operated under the laws, rules and regulations Where the transfer takes place by delivery of possession, then the of the parent state. The Registration Act, 1908 is a Central transfer will take effect when the transferee is put in possession of Legislation which provides for the registries to be adopted by the the land/property, but in cases where registration is compulsorily States who are empowered to cause amendment or modification in required, transfer will take effect only upon registration of the terms of Article 254. instrument of transfer. Section 47 of the Registration Act states that a registered document 5.2 How do the owners of registered real estate prove will prevail from the time which it would have commenced to their title? operate if no registration would be required, and not from the time of its registration. The owners of real estate prove their title through the documents of registry. A registered instrument is admissible in evidence under 4.7 Please briefly describe how some rights obtain the provisions of the Registration Act, 1908 and the Transfer of priority over other rights. Do earlier rights defeat later Property Act. Such evidence is advanced before the court of law in rights? accordance with the Evidence Act.

As a general rule, rights that are created earlier are also deemed to be created prior in law, and thus even though the instrument by which the rights were initially transferred was registered after the subsequent instrument in respect of the same property being registered, the right created earlier will be enforceable in priority to that created subsequently.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 125 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

to render the public law by way of penalising the wrongdoer and 5.3 Can any transaction relating to registered real estate fixing the liability for the public wrong on the State which has failed be completed electronically? What documents need in its public duty to protect the fundamental rights of the citizen. to be provided to the land registry for the registration The compensation is in the nature of ‘exemplary damages’ awarded of ownership right? Can information on ownership of registered real estate be accessed electronically? against the wrongdoer for the breach of its public law duty”.

No, a transaction relating to registered real estate cannot be 5.5 Are there restrictions on public access to the completed electronically. Physical presence of the parties is register? Can a buyer obtain all the information he required. might reasonably need regarding encumbrances and India other rights affecting real estate and is this achieved The documents of the property that need to be registered need to by a search of the register? If not, what additional be submitted to the Sub-Registrar of Assurances within whose information/process is required? jurisdiction the property is situated. The authorised signatories for the seller and the purchaser have to be Even though the books and materials registered are available for present along with two witnesses, for registration of the documents. access to the public at large, there are still some restrictions due to Documents that are needed at the time of registration are: which some of the books might not be available for access to the public, though they are accessible to the parties to the transaction ■ Aadhaar Card; and even the beneficiaries. ■ PAN Card; or 1. Section 57 of the Registration Act, 1908 deals with ■ any other proof of identity issued by a government authority. registering officers to allow inspection of certain books If the signatories are representing someone else, they have to furnish and indexes, and to give certified copies of entries. The the power of authority. same can be presumed under law to be adequate evidence of any encumbrance on the property created by a registered If company is a party to the agreement, the person representing the instrument. company has to carry adequate documents like a letter of authority or power of attorney along with a copy of the company’s board, 2. An application can be made under the Right to Information Act, 2005 (RTI) for a timely response for authorising him to carry out the registration. In order to facilitate citizens that request for government information. The object the same. of the RTI, 2005 is to empower citizens, promote transparency Digitisation of land records was introduced to computerise all land and accountability in the working of the Government, to records including mutations, improve transparency in the land contain corruption, and to make democracy work for the records maintenance system, digitise maps and survey, update all people in a real sense. settlement records and minimise the scope of land disputes. All information relating to Public Information Officers under the RTI The registered documents can be accessed electronically dating back is available online, on the Department of Town and Country Planning to the date when they were first digitised in that jurisdiction. The website, including the office addresses, designation, their e-mail IDs list of cases Change of Land Use (CLU) that are pending granted and their telephone number. The list of cases related to CLU which or rejected are all available online on the website of Department are pending, granted or rejected are all available online as well. of Town and Country Planning. Along with this, the list of licence cases is also available online. Government plans, mobility plans, 6 Real Estate Market e-government initiatives, policy documents, controlled/urban areas details, etc. are also available online. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally 5.4 Can compensation be claimed from the registry/ be involved in a real estate transaction in your registries if it/they make a mistake? jurisdiction? Please briefly describe their roles and/or duties. The Registration Act provides for penalty/punishment by imprisonment for incorrectly endorsing, copying, and translating a In addition to the buyer, seller and the buyer’s finance provider, the registered document with intent to misinform. people that are usually involved in a real estate transaction are: Every registering officer is deemed to be a public servant within the Developer: A developer is defined as any person/entity meaning of the Indian Penal Code. circumscribed within the ambit of the understanding of the definition The Registration Act further provides that no registering officer of a ‘Promoter’ within (RERA) or by any other name or claims to shall be liable to any suit, claim or demand by reason of anything in be acting as the holder of a power of attorney from the owner of the good faith or refused in his official capacity. land on which the building or apartment is constructed or plot is However, the principles of absolute and strict liability may be developed for sale. applicable on the registry in cases of tort law. Agent/Broker: Under RERA, a ‘real estate agent’ means any To ensure the personal liberty of individuals from abuse of public power, person, amongst others, who negotiates or acts on behalf of one a remedy was created by the Apex court to grant damages through writ person in a transaction of transfer of his plot, apartment or building, petitions under Article 32 and Article 226 of the Constitution. in a real estate project, by way of sale. The doctrine of Sovereign Immunity has lost its significance as time Allottee: Under RERA, an ‘allottee’ in relation to a real estate has passed. project means, amongst others, the person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as In Dr. Mehmood Nayyar Azam v. State of Chhattisgarh & ors, freehold or leasehold) or otherwise transferred by the promoter. the Supreme Court held that “when the court moulds the relief by granting ‘compensation’ in proceedings under Article 32 or 226 Surveyor: A surveyor is an individual who conducts surveys of seeking enforcement or protection of fundamental rights, it does so properties.

126 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

Registered Valuer: Where a valuation is required to be made in commercial sub-sector has witnessed an upward trend in growth. respect of any property, stocks, shares, debentures, securities The sector has witnessed high growth with a rise in demand for or goodwill or any other assets or net worth of a company or its office as well as residential spaces. The construction development liabilities, it shall be valued by a person having such qualifications sector received FDI equity in flow to the tune of US$ 24.84 billion and experience and registered as a valuer. in April–June 2018. Commercial office stock is expected to cross Lawyer: Lawyers in terms of real estate transactions would 600 million square feet by 2018. typically include lawyers from both/all parties. Affordable housing and logistic and warehousing have witnessed Witness: A witness would refer to a person who sees an event take impressive growth also. place. India 7 Liabilities of Buyers and Sellers in Real 6.2 How and on what basis are these persons Estate Transactions remunerated?

The people typically involved in real estate transactions are 7.1 What (if any) are the minimum formalities for the sale remunerated on a contractual basis. and purchase of real estate?

Under Section 54 of the Transfer of Property Act, 1882: 6.3 Is there any change in the sources or the availability of capital to finance real estate transactions in your 1. Transfer of tangible immovable property with a value jurisdiction, whether equity or debt? What are the of Rs.100 and upwards, or in case of reversion or other main sources of capital you see active in your market? intangible thing, can be made only by a registered instrument. 2. In case of tangible immovable property having a value of less On an evaluation basis of current market trends, an inference can than Rs.100, a transfer can be made either by a registered instrument or by delivery of the property. be drawn that to finance real estate transactions, developers have various options to seek capital. With respect to the raising of debt, 3. Delivery of the tangible immovable property takes place developers prefer approaching Non-Banking Financial Companies when the seller places the buyer or such other person as he directs, in the possession of the property. (NBFCs) which is a company registered under the Companies Act, 1956 or Companies Act, 2013 and engaged in the business 4. The seller should also have the capacity to sell and the buyer of loans and advances or other businesses. NBFCs lend and make should have the capacity to buy. investments and hence their activities are akin to that of banks. Eligibility criterion as prescribed for a valid contract by the Indian NBFCs like Xander Finance Pvt. Ltd., Muthoot Finance Ltd. provide Contract Act will also be required to be met. a wide range of monetary advices like chit-reserves and advances. Banks also provide a Rupee Term Loan, non-fund based limit and 7.2 Is the seller under a duty of disclosure? What matters overdraft facility to fund the commercial and residential real estate must be disclosed? Sector. Under Section 55 of the Transfer of Property Act, 1882, the seller Various companies opt the means of raising funds by way of equity has a duty to disclose to the buyer any material defect in the property as well. or in the seller’s title thereto of which the seller is, and the buyer is not, aware and which the buyer could not, with reasonable care discover. 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and what are the sectors/areas of most interest? Please 7.3 Can the seller be liable to the buyer for give examples. misrepresentation?

The appetite of investors and/or developers to invest in India has The seller is under a duty under Section 55(1)(a) to disclose all increased significantly compared with last year. Logistics and material defects in the property or his title in the property, which the warehouses have witnessed a growth of about 40–45% and are buyer, as an ordinary prudent man, could not have known. much sought after. Similarly, commercial inventory demand has Misrepresentation vests the buyer with the right to repudiate the also increased. Under Section 6 of the Insolvency and Bankruptcy contract of sale or seek compensation/damages or indemnity from Code, 2016, bidding against a stressed asset is now allowed when the seller. any corporate debtor commits a default. Also, massive growth opportunities are being witnessed in the renewable energy sector. 7.4 Do sellers usually give any form of title “guarantee” or contractual warranties to the buyer? What would 6.5 Have you observed any trends in particular market be the scope of these? What is the function of any sub sectors slowing down in your jurisdiction in such guarantee or warranties (e.g. to apportion risk, terms of their attractiveness to investors/developers? to give information)? Would any such guarantee or Please give examples. warranties act as a substitute for the buyer carrying out his own diligence? On a pan-India basis, there is no discernible and long-lasting slow down of any sub-sector of real estate; however, there may be The sellers of real estate usually provide representation, warranties, regional slow down. For example, the NCR region has suffered and covenants relating to a clear and marketable title. from residential slow down. Though the seller discloses all information about the property as The real estate sector in India is expected to reach a market size well as his title, the buyer should exercise due diligence and check of US$ 1 trillion by 2030. The housing, retail, hospitality and the title of the seller.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 127 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

‘Notice’ under Section 3 of the Transfer of Property Act means A company may, by virtue of the Companies Act, 2013, raise knowledge or cognisance or awareness of a fact. Notice may be of investments through a public offer and private placements. two types: Actual Notice; and Constructive Notice. The kind of capital raised through the above mentioned methods If the buyer has actual (direct) notice from the seller, then he cannot are: claim the title of bona fide purchaser. Similarly, with constructive (a) Equity share capital. notice (deemed notice) – if the document is publicly available, then (b) Preference share capital. the buyer is deemed to have constructive notice. He cannot claim (c) Debentures or other short/long-term lending. the title of bona fide purchaser if he had constructive notice but failed to acknowledge the information due to his own negligence. Section 185 of the Act specially imposes a blanket ban on companies

India on providing loans to directors and persons in whom the director is Due diligence is imperative to becoming a bona fide purchaser, even interested, subject to certain exceptions mentioned under the Section. though it is not a legal obligation. Section 186 empowers a company to legally provide a loan/ Warranties are in the domain of contracts. The sellers vest the buyer guarantee by complying the provisions of sub-sections (2) and (3) with warranties and covenants more particularly with regards to title of Section 186 of the Act. in the form of property having a clear and marketable title. Sale on an ‘as-seen’ basis often dilutes such warranties and covenants and reliance A Non-Banking Finance Company may also lend money to finance is placed on notice to the buyers and due-diligence conducted by them. real estate activities. The rules and regulations applicable to non-resident persons for investment in real estate in India are extensive in nature. 7.5 Does the seller retain any liabilities in respect of the property post sale? Please give details. The FDI Policy, 2017, Chapter 3 provides general conditions of FDI, in case of Eligible Investors. The seller must abide by any contractual liabilities that he has A non-resident entity can invest in India subject to the FDI Policy. undertaken at the time of sale. However, there are restrictions on citizens of several countries like Also, under Section 55 of the Transfer of Property Act, 1882, the seller Bangladesh, Pakistan, etc. has several duties such as to disclose to the buyer any material, to NRIs resident in Nepal and Bhutan as well as citizens of Nepal and answer questions of the buyer, to execute a proper conveyance and to Bhutan are permitted to invest in the capital of Indian companies on pay all public charges and rent accrued due in respect of the property. a repatriation basis. Some duties of the seller transcend beyond execution of sale, such OCBs have been derecognised as a class of investors in India with as transfer of vacant and peaceful possession of the property; safe- effect from September 16, 2003. keeping and handing over of title documents to the new buyer; A company, trust and partnership firm incorporated outside India payment of arrears of taxes, statutory dues, etc. to the buyer. In the and owned and controlled by NRIs can invest in India with the event of misrepresentation of capacity or entitlement to transfer the special dispensation as available to NRIs under the FDI Policy. land, the seller may be held accountable on discovery of such defect or absence of power to convey. Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI) may, in terms of Schedule 2 and 2A of FEMA (Transfer or Issue of Security by Persons Resident outside India) Regulations, as the case 7.6 What (if any) are the liabilities of the buyer (in addition may be, respectively, invest in the capital of an Indian company under to paying the sale price)? the Portfolio Investment Scheme subject to specific conditions. The aggregate FII/FPI investment, individually or in conjunction with other Section 55 (5) and (6) of the Transfer of Property Act, 1882 provides kinds of foreign investment, will not exceed the sectoral/statutory cap. for the rights and liabilities of a buyer in addition to payment of the sale price. Only registered FIIs/FPIs and NRIs, as per Schedules 2, 2A and 3 respectively of the Foreign Exchange Management (Transfer or The liabilities of the buyer include disclosure of any fact as to the Issue of Security by a Person Resident Outside India) Regulations, nature and extent of seller’s interest, to pay the purchase money to 2000, can invest/trade through a registered broker in the capital of the seller and to pay all public charges and rent which may become Indian companies on recognised Indian Stock Exchanges. payable in respect of the property. A SEBI registered Foreign Venture Capital Investor (FVCI) may The rights of the buyer include the benefit of any improvement in, contribute up to 100% of the capital of an Indian company engaged or increase in the value of, the property, and to the rents and profits in any activity mentioned in Schedule 6 of Notification No. 20/2000 thereof, charge on the property, as against the seller, to the extent of the FEMA, including start-ups, irrespective of the sector in which they seller’s interest in the property, for the amount of any purchase-money. are engaged, under the automatic route. Such investments shall also be subject to the extant FEMA regulations and extant FDI 8 Finance and Banking policy including sectoral caps, etc. The investment can be made in equities or equity-linked instruments or debt instruments issued by the company (including start-ups and if a start-up is organised 8.1 Please briefly describe any regulations concerning as a partnership firm or an LLP). SEBI-registered FVCIs are also the lending of money to finance real estate. Are the allowed to invest under the FDI Scheme, as non-resident entities, rules different as between resident and non-resident in other companies, subject to FDI Policy and FEMA regulations. persons and/or between individual persons and corporate entities? A non-resident Indian may subscribe to the National Pension System governed and administered by the Pension Fund Regulatory There are various and elaborate rules and regulations concerning and Development Authority (PFRDA). the lending of money to finance real estate. The rules applicable to Other Entities: FDI in resident entities, other than those mentioned residents and non-residents are distinct in nature. above, is not permitted.

128 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

Entry Routes for Investment: Investments can be made by non- residents in the equity shares/fully, compulsorily and mandatorily 8.3 What are the common proceedings for realisation of convertible debentures/fully, compulsorily and mandatorily mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without convertible preference shares of an Indian company, through the involving court proceedings or the contribution of the automatic route or the Government route. Under the automatic route, mortgagor? the non-resident investor or the Indian company does not require any approval from the Government of India for the investment. Section 58 of the Transfer of Property Act defines mortgage. Under the Government route, prior approval of the Government of India is required. When a mortgaged property is to be realised by the lender due to default by the borrower, he may take recourse to Order 37: Summary Foreign investment in sectors/activities under the Government India Procedure of the Code of Civil Procedure. approval route will be subject to government approval and conditions. Also, as per the provisions of the Transfer of Property Act, a lender has the right to foreclosure or sale of mortgaged property to realise Caps on Investments: Investments can be made by non-residents dues as against such property. in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy. As per Section 67 of the Transfer of Property Act, providing the right to foreclosure or sale, the mortgagee has, at any time after the mortgage- Entry Conditions on Investment: Investments by non-residents money has become due to him, and before a decree has been made for can be permitted in the capital of a resident entity in certain sectors/ the redemption of the mortgaged property, or the mortgage-money has activity with entry conditions. Such conditions may include norms been paid or deposited as hereinafter provided, a right to obtain from for minimum capitalisation, a lock-in period, etc. the Court, a decree that the mortgagor shall be absolutely debarred of The FDI also provides an automatic route for 100% investment in his right to redeem the property, or a decree that the property be sold. construction-development projects (which would include development For details, please refer to Section 67 of the Transfer of Property Act. of townships, construction of residential/commercial premises, roads or Also, as per the Insolvency and Bankruptcy Code, 2016, where bridges, hotels, resorts, hospitals, educational institutions, recreational any corporate debtor commits a default, a financial creditor, an facilities, city and regional level infrastructure, and townships). operational creditor or the corporate debtor itself may initiate Note: It is clarified that FDI is not permitted in an entity which is engaged corporate insolvency resolution process in respect of such corporate or proposes to engage in real estate business, construction of farm debtor in the manner as provided. (Please refer to Sections 6 and houses and trading in transferable development rights (TDRs). ‘Real 7 of the Code for details and processes of insolvency proceedings.) estate business’ means dealing in land and immovable property with However, there is also a way to realise a mortgaged property without a view to earning profit there from and does not include development involving court proceedings in order to get a speedy recovery. Under of townships, construction of residential/commercial premises, roads the ambit of the SARFAESI Act, 2002, the financial institution/bank or bridges, educational institutions, recreational facilities, city and can give notice to the defaulting borrowers to pay the entire amount in regional level infrastructure and townships. Further, rental earnings/ arrears within a stipulated timeframe. If the borrower fails to pay such income from the lease of a property, not amounting to transfer, will not outstanding amount within the prescribed time period, the lender can amount to real estate business. (For details, please refer to the ‘Foreign initiate recovery proceedings without the intervention of the court. Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Sixteenth Amendment) Regulations, 2014’.) 8.4 What minimum formalities are required for real estate lending? 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the The usual formalities are: borrower? ■ NBFC lending: NBFCs are required to be registered with the RBI, unless specifically exempted. The main methods of protection are: ■ Due Diligence: The lender must carry out a due diligence Charge/Mortgage: The most common method by which a real against the borrower to verify title, outstanding/pending estate lender seeks to protect himself from default by borrower is litigations, accrued interests, etc. creating a charge on property/mortgage. ■ Valuation Report: A valuation report is an assessment of Hypothecation: Hypothecation means offering an asset/receivables the property concerned to determine its value. It must be as collateral security to the lender whereby the ownership lies with obtained by a certified valuer. the vendor and the possession is enjoyed by the borrower. In the ■ Stamping and Registration: Proper execution, stamping event of default by a borrower, the lender can exercise his rights of and registration of documents must be carried out. ownership and seize the asset. Pledge: There is one fundamental difference between a ‘pledge’ 8.5 How is a real estate lender protected from claims and a ‘hypothecation’; the possession of the asset remains with the against the borrower or the real estate asset by other lender in case of a pledge, while it remains with the borrower in case creditors? of hypothecation. Third-party Guarantee: This refers to when a guarantor is a third Under the IBC, any claims against the borrower are entertained on party in a contract who promises to pay for certain liabilities if one the basis of hierarchy of claims. of the other parties in the contract defaults on their obligations. The most effective way of protecting oneself against claims by Guarantors sometimes appear on insurance contracts and also creditors is to create the first charge on the concerned property in provide a sort of insurance themselves. his name. Such charge created in a property may have priority over Personal Guarantee: A personal guarantee is an individual’s legal all others and may be enforced even in the absence of consent of promise to repay credit issued to a business for which they serve as subsequent creditors. Please refer to Section 13 of the SARFAESI an executive or partner. Act for provisions regarding the same.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 129 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

The sale of the assets of the liquidation estate will be distributed in ■ Securitisation: Securitisation is the process of issuing the waterfall mechanism manner and in a priority set out in Section marketable securities backed by a pool of existing assets 53, IBC, such as: such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitisation company 1. Insolvency Resolution Process costs and Liquidation costs. or reconstruction company may raise funds from only the 2. Workers’ dues and dues to secured creditors shall be QIB (Qualified Institutional Buyers) by forming schemes for distributed on a pari passu basis. acquiring financial assets. 3. Wages and unpaid dues. ■ Asset Reconstruction: Enacting the SARFAESI Act has 4. Financial debt owed to unsecured creditors. given birth to Asset Reconstruction Companies in India. It can be done by either proper management of the business

India 5. Amount due to central Government & State Government and debts due to secured creditor remaining unpaid following the of the borrower, or by taking it over or by selling a part or enforcement of Security interest. whole of the business or by rescheduling of payment of debts payable by the borrower and enforcement of security interest 6. Any remaining debts or dues. in accordance with the provisions of this Act. 7. Preference shareholders. 8. Equity shareholders. 8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a 8.6 Under what circumstances can security taken by a real estate lender? lender be avoided or rendered unenforceable? A financial creditor is defined in Section 2(7) of the Insolvency and Security is vulnerable to a range of provisional aspects. Bankruptcy Code, 2016 as any person to whom a financial debt is Circumstances under which a security taken by a lender be avoided owed and includes a person to whom such debt has been legally or rendered unenforceable are: assigned or transferred to. ■ Breach of terms of original allotment/agreement. An operational creditor is defined under Section 2(20) of the ■ Hierarchy of claims by which a creditor enjoy the position of Insolvency and Bankruptcy Code, 2016 as a person to whom an priority over receivables and claims of creditors. operational debt is owed and includes any person to whom such debt ■ The SARFAESI Act allows secured creditors to take has been legally assigned or transferred. possession over collateral within a prescribed timeframe. Financial Debt means a debt along with interest, which is disbursed In addition to the Amendment Act, the Central Government against the consideration for the time value of money. (Please refer has also notified certain non-banking finance companies to the Code for details.) (NBFCs) as secured creditors under the SARFAESI Act. Operational Debt means a claim in respect of the provision of ■ Third-party agreements: if the property rendered as security goods or services including employment or a debt in respect of the and its title is conferred on any subsequent/third party before the interest is created in the lender’s title for such property, repayment of dues arising under any law for the time being in force such security may be rendered unenforceable. and payable to the Central Government, any State Government or any local authority. The Hierarchy of Claims is given under Section 53 of the 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? Insolvency and Bankruptcy Code. The proceeds of insolvency is to be distributed in the manner stated in the Code. (Please refer to the Code for details.) Under the ambit of Section 13 and Section 14 of the SARFAESI Act, secured creditors are permitted to take possession over collateral within a prescribed timeframe. Section 17 allows any person 8.9 What is the process for enforcing security over (including borrower), aggrieved by any of the measures taken by the shares? Does a lender have a right to appropriate secured creditor or his authorised officer to make an application to the shares in a borrower given as collateral? If so, Debts Recovery Tribunal. Therefore, we can deduce the following: can shares be appropriated when a borrower is in administration or has entered another insolvency or RIGHTS OF BORROWERS: reorganisation procedure? ■ The borrowers can, at any time before the sale is concluded, remit the dues and avoid losing the security. Upon enforcement of security over the shares pledged by a company ■ In case any act in contravention to the provisions of this act is to a lender, the lender shall have the right to receive all amounts carried out by the authorised officer, he will be liable for penal payable in respect of such collateral or to sell such shares without consequences and the borrower is entitled to compensation. the intervention of the court and without any consent of the pledgor The borrowers can approach the DRT and thereafter the at public or private sale or vote on any part in connection with the DRAT in appeal. collateral or to receive all dividends, interest and other distributions METHODS OF RECOVERY: made in respect of the collateral and otherwise act as though it were The registration and regulation of securitisation companies or the owner thereto and apply the aforesaid proceeds towards payment reconstruction companies is done by RBI. These companies are of the outstanding amounts owed to the lender. authorised to raise funds by issuing security receipts to qualified In the event of insolvency of the company, the financial creditor institutional buyers (QIBs), empowering banks and Fls to take shall enforce its security interest in the company and such amounts possession of securities given for financial assistance and sell or which remain unpaid following such enforcement shall be paid to lease the same to take over management in the event of default. the creditor from the proceeds of the insolvency. This act makes provisions for two main methods of recovery of the NPAs as follows:

130 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

9 Tax 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property?

9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? Capital Gains Tax would have to be paid by the seller on the disposal of the property. It is charged under Section 45 of the Income Tax Act, 1961 and it is deemed to be income. It is taxed in the Presently, the levy of Goods and Services Tax (GST) is limited only assessment year immediately after the preceding previous year in to the activity of construction of a complex, building, civil structure, which the immovable property was transferred. including a complex or building intended for sale to a buyer.

Therefore, sale of land and immovable property is not subject to The other taxes that would have to be paid by the seller on the disposal India GST. Typically, sale of land and immovable property is subject to of a property in addition to Income Tax are: stamp duties; registration stamp duty and registration charges. fees; GST, etc., which have already been discussed above. Stamp laws are administered under the Indian Stamp Act and various Along with this, local taxes may be levied that may differ from State State stamp acts and rules. Stamp duty charges in India differ from to State. State to State and sometimes, even within the State. It varies further if the property is within the Municipal Corporation, Municipal Council, 9.6 Is taxation different if ownership of a company (or Gram Panchayat limits, etc. Stamp duty ranges from 3% to 10%, other entity) owning real estate is transferred? depending on the slab decided by the particular State. Stamp duty is encapsulated in the schedule attached to the Indian Stamp Act. The acquisition of the business/property of an Indian company can Please refer to the Indian Stamp Act, 1899 (Section 29) for visibility be accomplished by the purchase of shares or the purchase of all on who pays stamp duty. or some of the assets. From a tax perspective, long-term capital gains arising on a sale of equity shares through the recognised stock exchanges in India are exempt from tax, provided Securities 9.2 When is the transfer tax paid? Transaction Tax (STT) is paid. All other gains on sales of assets are taxable. Transfer Tax (referring to stamp duty) would only be paid prior to or during/at the time of execution of such conveyance/agreement of In addition, stamp duty and registration fees with respect to the transfer. It cannot be paid on a date subsequent to such date of transfer. instrument of transfer is to be paid. Registration fees (as under the Indian Registration Act, 1908) are paid subsequently to the payment of stamp duty pertaining to such 9.7 Are there any tax issues that a buyer of real estate transfer. should always take into consideration/conduct due diligence on?

9.3 Are transfers of real estate by individuals subject to Yes, the following matters need to be taken into consideration by the income tax? buyer of real estate: ■ The documentation of the property should be properly done. Section 45 of the Income Tax Act, 1961 provides for provisions The sale document should be stamped as required by law and with respect to any profits or gains arising from the transfer of a original title deeds should be taken by the purchaser from the capital asset affected in previous years and shall be chargeable with seller of the property. income tax under the head – . capital gains ■ The title of the property needs to be checked properly. The capital asset includes property of any kind or any securities held ■ The Sanctioned Plans and Commencement Certificate by the by a FII which has invested in such securities in accordance with the concerned authority should be inspected of the property in regulations made under the Securities and Exchange Board of India question. Act, 1992 (15 of 1992). ■ The Power of Attorney needs to be properly scrutinised to Capital Assets are further classified into long-term capital gains and ensure that it is properly executed. short-term capital gains. ■ The tenure of the land in question needs to be taken into account. If it is a leasehold property and the remaining period is short and there is no provision regarding the renewal of old 9.4 Are transfers of real estate subject to VAT? How lease. much? Who is liable? Are there any exemptions? ■ No objection certificate from the society should be obtained, even though it is not required as of now. No, transfers of real estate are not subject to VAT. With effect from 1 July 2017, VAT has been subsumed under GST. Real estate, ■ All dues should have been paid including Property Tax. excluding land, is subject to tax. ■ The buyer should check whether or not any proceedings under Section 281 of the Income Tax Act, 1961 have been instituted The general GST rate on the supply of real estate is 18%. However, against the seller. In case of a non-resident being the seller, abatement to the extent of the value of the land has been provided TDS may be deductible from the consideration paid, unless under the Goods and Services Law. a situation arises whereby a certificate of non-deduction As a default mechanism, 33% of the value of supply is considered or lower deduction of TDS is obtained by the concerned to be the value of land. Therefore, Goods and Services Tax is levied Income-Tax Officer. Also, Section 56 of the Income Tax Act on supply of real estate at the rate of 12%. provides for income from other sources which would have to be taken into consideration. As income of every kind which Generally, the liability to pay GST falls on the supplier of the goods is not to be excluded from the total income under this Act and services. In case of supply of real estate, it is the developer or shall be chargeable to income tax under the head-income builder or contractor who is liable to pay GST on the consideration from other sources, if it is not chargeable to income tax under charged by the buyer. any of the heads specified in Section 14, items A to E.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 131 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

Before purchasing a property, one should confirm as to whether the (b) Rent increase: A rent increase is a matter of contract. The property in question is of a commercial nature or residential as per lease deed contains an escalation clause whereby lease rentals the Development Control Regulations. Other things to be considered are increased annually or on terms as mutually agreed. may include set-back for road widening, heritage rules, etc. (c) Tenant’s right to sell or sub-lease: All such rights are determined contractually. In practice, residuary rights of ownership and transfer are vested with the owner and there are 10 Leases of Business Premises restrictions on sub-lease by the tenants. In certain instances, the tenant may be entitled to assign its rights but these rights are generally subjected to the permission of the owner. 10.1 Please briefly describe the main laws that regulate (d) Insurance: Insurances are integral to high-value leases and India leases of business premises. properties. Tenants may be obligated to ensure the premises are insured and ensure that they are reasonable and can be satisfied. The Transfer of Property Act, 1882 governs leases in India. (e) (i) Change of control of the tenant: It is in the realm of A lease is defined as transfer of right to enjoy property for a certain contract and such provisions must be provided in the lease period expressly or impliedly or in perpetuity, in consideration of a deeds in comprehensive, unambiguous and clear terms. price paid or promised to be paid to be rendered periodically or on (ii) Transfer of lease as a result of corporate restructuring specified occasions. In leases, residuary or reversionary powers are (e.g. merger): Transfer of lease is permitted unless prohibited vested with the owner, thereby, on determination and termination of by law or contract. Under the scheme of amalgamation right the lease, the property reverts to the owner. of tenancy and occupancy gets vested in and becomes the property of the Transferee Company. Various states in India have enacted their own rent control laws (f) Repairs: Provisions of Repairs are in the realm of private which affect tenancies created thereunder. Lease of property is contract. In practice, day-to-day repairs fall under the created by way of an instrument duly stamped and registered as per obligation of the tenant and structural repairs by the owner. the provisions of the Indian Stamp Act, 1899 and Registration Act, However, under no circumstances urgent and structural repairs 1908, respectively. are conducted without the knowledge and consent of the owner. Central Government is in the process of setting up model laws of tenancy for States to follow in consonance of changing the paradigm 10.4 What taxes are payable on rent either by the landlord of the rental environment in India. or tenant of a business lease? In India, the Government owns leasehold property which it grants under the Transfer of Property Act, 1882 or Government Grants Act, The Goods and Services Tax, which is the umbrella tax covering all 1895 for various terms including perpetual lease. indirect taxes, is levied on a business lease at a rate of 18%.

10.2 What types of business lease exist? 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party A business lease is a type of lease. There is no separate codified law etc.)? Are there any special provisions allowing a specific to business leases, and laws relating to leases apply. tenant to extend or renew the lease or for either party to be compensated by the other for any reason on In India, business leases are usually term-based and would have a termination? specific time limit, on expiry of which the lease concludes. Unlike residential leases, business leases are of a longer duration. Business Business leases can be terminated on the following grounds: leases are characterised by high rentals, incubation period leases, (a) by efflux of the time limited thereby; strong representations and warranties, strong positive and negative (b) where such time is limited conditionally on the happening of covenants, lock-in period, default situations, termination clauses, some event – by the happening of such event; security deposit, etc. (c) where the interest of the lessor in the property terminates Business leases also take the form of a sub-lease where the on, or his power to dispose of the same extends only to, the incumbent sub-tenant is bound by the terms of sub-lease deeds and happening of any event – by the happening of such event; master lease deed. (d) in case the interests of the lessee and the lessor in the whole The terms of business leases are in the realm of private contract of the property become vested at the same time in one person and may be in the nature of a full-service lease, percentage lease, in the same right; step-up lease, straight lease and others whereby tenants may be (e) by express surrender; that is to say, in case the lessee yields up obligated to pay and discharge rents, property taxes, insurance, his interest under the lease to the lessor, by mutual agreement taxes, maintenance, utilities and the like. between them; (f) by implied surrender; 10.3 What are the typical provisions for leases of business (g) by forfeiture; that is to say: premises in your jurisdiction regarding: (a) length of (1) in case the lessee breaks an express condition which term; (b) rent increases; (c) tenant’s right to sell or provides that, on breach thereof, the lessor may re-enter; sub-lease; (d) insurance; (e) (i) change of control of (2) in case the lessee renounces his character as such by the tenant; and (ii) transfer of lease as a result of a setting up a title in a third person or by claiming title in corporate restructuring (e.g. merger); and (f) repairs? himself; or (3) the lessee is adjudicated an insolvent and the lease Typical provisions for leases of business premises are: provides that the lessor may re-enter on the happening (a) Length of term: It varies from short-term to long-term. of such event; and in any of these cases the lessor or Sometimes, a tenant may make capital investments and his transferee gives notice in writing to the lessee of his therefore require a long-term lease. intention to determine the lease; and

132 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

(h) on the expiration of a notice to determine the lease, or to quit, The Transfer of Property Act, 1882 has provisions regarding or of intention to quit, the property leased, duly given by one leases. party to the other. The Rent Control Act differs from State to State and it declares the standard rent for different kinds of premises, including residential 10.6 Does the landlord and/or the tenant of a business premises. lease cease to be liable for their respective Leases are required to be stamped and registered. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance? 11.2 Do the laws differ if the premises are intended for

multiple different residential occupiers? India The entitlements, liabilities and obligations of the owners of a premise under a lease is generally transferred to the owner/ No, the laws do not differ if the premises are intended for multiple transferee and tenancy runs its terms as per the lease deed; unless residential occupiers. They would remain the same. terminated mutually. The past obligations may continue to remain the responsibility of the erstwhile owner but such course is determined 11.3 What would typical provisions for a lease of contractually. Similarly, the termination/determination of the lease residential premises be in your jurisdiction regarding: coupled with discharge of all obligations by the tenant ensures the (a) length of term; (b) rent increases/controls; (c) the cessation of liabilities of the tenant; unless contracted otherwise. tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of (a) Length of term – As per Section 107, it is contractually the “environmental footprint” of a building. Please determined. They are generally of a short duration. briefly describe any “green obligations” commonly (b) Rent increases/controls – This is based on the general market found in leases stating whether these are clearly practice and it depends on the terms and conditions as decided defined, enforceable legal obligations or something between the parties to the agreement. It is generally around not amounting to enforceable legal obligations (for 5% to 10% annually. example aspirational objectives). (c) The tenant’s right to remain in the premises at the end of the term – There are two ways in which the tenant can remain in All development/construction, use and operation of such buildings the premises even at the end of the term. These are: have to be in compliance with the environmental laws. Keeping TENANCY AT WILL – A tenancy at will is a tenancy under the ‘green’ commitment in mind, green practices result in energy- which the tenant is in possession, and which is determinable efficiency (and includes products like energy-efficient LEDs, air- at the will of either the landlord or tenant. A tenancy at will is conditioners and the like), sustainability and superior air quality, implied when a person is in possession by the consent of the thereby providing occupants a healthy working environment. All owner, and is not held in virtue of any tenancy for a certain such commitments forming a part of a legal and valid contract are term. enforceable in entirety and in parts before the court of law. TENANCY AT SUFFERANCE – A tenant at sufferance is one who comes into possession of land by lawful title, but who holds it by wrong after the termination of the term or 10.8 Are there any trends in your market towards more expiry of the lease by efflux of time. A tenancy at sufferance flexible space for occupiers, such as shared is merely a fiction to avoid continuance in possession short-term working spaces (co-working) or shared operating as a trespass. A tenancy at sufferance does not residential spaces with greater levels of facilities/ create the relationship of landlord and tenant. activities for residents (co-living)? If so please provide examples/details. (d) The tenant’s contribution/obligation to the property ‘costs’ e.g. insurance and repair – As per Section 108 of the Transfer of Property Act, 1882, it is the duty of the lessor of the property Co-working spaces are coming up across Indian metros as well as Tier- to make repairs which he is bound to make to the property. In II cities, providing flexible working options. It has been predicted that case he fails to make such repairs within reasonable time after by 2030 up to 30% of all office spaces will adopt the co-working model notice, the lessee may make such repairs himself and deduct the in some form or the other. There are over 600 shared workspaces with expenses of such repairs along with interest from the rent, or over 1.80 lakh seats across the country. The area under co-working otherwise recover it from the lessor. A tenant may be obligated space is currently around 13.5 m. sq. ft. (Source: Internet.) contractually to effect insurance of the tenanted premises. The concept of shared residential spaces is at a nascent stage in India; however, there is a growing interest and trend towards it. By 11.4 Would there be rights for a landlord to terminate a way of an example, ‘Hub’ in Bengaluru provides shared residential residential lease and what steps would be needed space. (Source: Internet.) to achieve vacant possession if the circumstances existed for the right to be exercised?

11 Leases of Residential Premises The rights of landlord to determine the lease is given in Section 111 of the Transfer of Property Act, 1882.

11.1 Please briefly describe the main laws that regulate The following are the ground on which the lease may be terminated leases of residential premises. by the landlord: 1. by efflux of the time limited thereby; The laws in India that govern the leases of residential premises are 2. where such time is limited conditionally on the happening of as follows: some event – by the happening of such event;

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 133 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

3. where the interest of the lessor in the property terminates Departments of Town and Country Planning of each State on, or his power to dispose of the same extends only to, the work in accordance to the provisions of and are regulated by happening of any event – by the happening of such event; these State Acts. 4. in case the interests of the lessee and the lessor in the whole ■ Town and Country Planning Laws: Most States in India have of the property become vested at the same time in one person a Department of Town and Country Planning Act to provide for in the same right; planning the development and use of rural and urban land in 5. by express surrender; that is to say, in case the lessee yields up the respective State. Under it, competent ‘planning authorities’ his interest under the lease to the lessor, by mutual agreement are formed which perform functions like formulating the between them; Master Plan, dividing the State into zones based on their developmental potential, regulating the development in and

India 6. by implied surrender; around town, granting licences to owners having clear title of 7. by forfeiture; that is to say: land, formulating Zonal Developmental Plans, etc. a. In case the lessee breaks an express condition which ■ Master Plans: A Master Plan can be more clearly understood provides that, on breach thereof, the lessor may re-enter. as the long-term perspective plan for guiding the sustainable b. In case the lessee renounces his character as such by planned development of the city. This document lays down setting up a title in a third person or by claiming title in the planning guidelines, policies, development code and himself. space requirements for various socio-economic activities c. The lessee is adjudicated an insolvent and the lease supporting the city population during the plan period. It is provides that the lessor may re-enter on the happening of also the basis for all infrastructure requirements. It is the such event. subject matter of each State. And in any of these three cases the lessor or his transferee The Constitution of India has envisaged within its framework the gives notice in writing to the lessee of his intention to inalienable need to conserve and protect the environment and all determine the lease; and its components. Article 48 A (Directive Principles of State Policy) 8. on the expiration of a notice to determine the lease, or to quit, declares that ‘the State shall endeavor to protect and improve the or of intention to quit, the property leased, duly given by one environment and to safeguard the forests and wildlife of the country’. party to the other. A similar responsibility is imposed upon on every citizen in the form It also depends on the commercial understanding between the parties of the Fundamental Duty virtue of Article 51 (A)(g) “to protect and to the agreement. The terms and conditions of the agreement are to be improve the natural environment including forest, lakes, rivers and considered in this regard. It is trite in law that no tenant can be evicted wildlife, and to have compassion for living creatures”. Similarly, without the due process of law. This may entail serving a notice of Article 246 of the Constitution divides the subject areas of legislation termination on the tenant (statutory or otherwise) and institutions of a between the Union and the States into three lists namely: the Union civil suit before the competent Court, as may be necessary. List; the State List; and the Concurrent List. Matters related to environmental protection are enlisted in the Concurrent List and, hence, both the State and the Union have jurisdiction with respect to 12 Public Law Permits and Obligations the same. However, in matters of repugnancy, the Union will prevail. Article 253 of the Constitution empowers Parliament to make laws for implementing India’s international obligations, as well as any decision 12.1 What are the main laws which govern zoning/ made at an international conference, association or other body. permitting and related matters concerning the use, development and occupation of land? Please briefly However, the role of the judiciary in environmental governance describe them and include environmental laws. cannot be overlooked. The ‘polluter pays’ principle evolved out of the rule of ‘absolute liability’ as laid down by the Apex court in Land can be broadly classified into rural/agriculture, urban lands and ‘Sriram Gas Leak Case’. In Maneka Gandhi v. Union of India, the other land such as protected/preserved forests, and eco-sensitive zones. Supreme Court, while elucidating on the importance of the ‘right to life’ under Article 21, held that the right to life is not confined to Land falling in urbanised zones are developed within the framework mere animal existence, but extends to the right to live with the basic of town planning legislation to meet the requirements of residential, human dignity and includes the ‘Right to Wholesome Environment’ commercial, evidential, institutional, SEZs, information and within the purview of Article 21. technology, etc. Similarly, while interpreting Article 21 in the ‘Ganga Pollution Rural/agriculture land is governed by the Land Revenue Department Case’, Justice Singh justified the closure of polluting tanneries under specific statutory enactments and needs conversion of land and rightly observed: “we are conscious that closure of tanneries from ‘agriculture’ to ‘non-agriculture’ status for development may bring unemployment and loss of revenue; but life, health and purpose as per the Master Plans or any other development permitting ecology have greater importance to the people”. and conclusive plans. The laws and provisions that govern Environmental regulations and All building activity has to be in consonance with building bye-laws, matters connected therewith are: the development code and the national building code. Construction names are well prescribed. All buildings are required under the ■ The National Green Tribunal Act, 2010. municipal laws to obtain an occupation certificate indicating ■ The Air (Prevention and Control of Pollution) Act, 1981. completion of the building in a legal manner. ■ The Water (Prevention and Control of Pollution) Act, 1974. There are various and elaborate laws governing zoning/permitting ■ The Environment Protection Act, 1986. applicable to India and certain States, as the case may be, and related ■ The Hazardous Waste Management Regulations, etc. matters concerning the use, development and occupation of land in ■ The Biomedical Waste (Management and Handling) Rules, India such as: 1988. ■ Urban Planning and Development Laws: These are State ■ The Indian Forest Act, 1972. legislatures enacted for the purpose of regulating zoning ■ The Forest Conservation Act, 1980. and land use/development regulations. The respective

134 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

■ The Biological Diversity Act, 2002, etc. industrial pollution at the Central Level, which is a statutory The real estate sector is subject to many central, State and local authority, attached to the MoEF. The State Departments of Environment and State Pollution Control Boards are the regulations designed to protect the environment. Amongst other designated agencies to perform this function at the State level. things, these laws regulate the environmental impact of construction and development. The Ministry of Environment and Forest ■ Environmental Information System (ENVIS): has been established as a plan programme and as a comprehensive (MOEF) is the key national regulatory agency responsible for network in environmental information collection, collation, policy formulation, planning and coordination of all issues related storage, retrieval and dissemination to varying users. to environmental protection. ENVIS has developed itself with a network of participating With respect to forest conservation, the Forest (Conservation) institutions/organisations. India Act, 1980 regulates development restrictions in forest lands and ■ Local and Special Planning Authorities: A local/special preservation of forests through State government. The MOEF planning authority (LPA) is the local/special government mandates that an ‘Environmental Impact Assessment’ must be body that is empowered by law to exercise urban planning conducted for projects. functions for a particular area. These authorities are formed as under State Legislatures for the purpose of land use planning. Under it, competent ‘planning authorities’ are formed which 12.2 Can the state force land owners to sell land to usually go by the name of Town and Planning Department of it? If so please briefly describe including price/ every such State which performs functions like formulating compensation mechanism. the Master Plan, dividing the State into zones basis their developmental potential, regulating the development in and The State can acquire private property under eminent domain by the around town, granting licences to owners having clear title virtue of Article 31(2) as it categorically states that land can be acquired of land, formulating Zonal Developmental Plans, etc. for by the State only for public purpose in consideration of compensation. example, DTCP Haryana, DTCP Uttar Pradesh, etc. The process of such State acquisition of private property and Buyers can obtain reliable information on these matters under the the compensation mechanism for those displaced/affected by purview of the RTI Act, 2005. The Act applies to all States and Union such acquisition is elaborately provided for in the Right to Fair Territories of India, except the State of Jammu and Kashmir – which Compensation and Transparency in Land Acquisition, Rehabilitation is covered under State-level law. Under the provisions of the Act, any and Resettlement Act, 2013. citizen (including the citizens within J&K) may request information from a ‘public authority’ (a body of government) which is required The collector computes the amount to be granted as compensation to reply within 30 days. Thus, the RTI Act is a codification of the under Section 26 of the Act, the collector, having determined the important fundamental right (Article 19) of citizens. market value of the land to be acquired, shall calculate the total amount of compensation to be paid to the land owner (whose land The RTI Act is applicable to all constitutional authorities, has been acquired) by including all assets attached to the land. including the executive, legislature and judiciary; any institution or body established or constituted by an act of Parliament or State Finally, the collector, having determined the total compensation to Legislature. be paid, shall arrive at the final award, impose a ‘Solatium’ amount equivalent to 100% of the compensation amount which shall be in addition to the compensation payable to any person whose land has 12.4 What main permits or licences are required for been acquired. In addition to the market value of the land provided building works and/or the use of real estate? under Section 27, the collector shall, in every case, award an amount calculated at the rate of 12% per annum on such market value for the Land Use Change Permits/Land Clearance: This is required if any period commencing on and from the date of the publication of the land which is demarcated as ‘agricultural land’ is to be converted into notification of the social impact assessment study under sub-section ‘non-agricultural land’ for the purpose of construction, development (2) of Section 4, in respect of such land, till the date of the award of and/or use of real estate. the collector or the date of taking possession of the land, whichever Zoning Permits: Land in each State is differentiated and demarcated is earlier. on the basis of certain factors (like growth potential) for different purposes through the Master Plans of every such State, respectively. 12.3 Which bodies control land/building use and/or Therefore, a zoning permit may be required for any construction, occupation and environmental regulation? How do change of land use and the like of the concerned property/land. buyers obtain reliable information on these matters? The State town planner checks the city development with the planning board and forwards the proposals to various other ■ Ministry of Environment and Forests (MoEF): It is the concerned authorities in the city as required for issue of case- apex administrative body for: specific approvals/NOC before granting zoning approval. (i) regulating and ensuring environmental protection; Building Sanctions and Approvals: The next step requires an (ii) formulating the environmental policy framework in the approval from the authority for sanction of building plans/building country; permits under the provisions of Building Byelaws, Master Plan and (iii) undertaking conservation & survey of flora, fauna, forests Local Body Acts. Building approval comprises the building plan and wildlife; and and the layout approval for the construction of the building. (iv) planning, promotion, co-ordination and overseeing 1) Layout approval: the implementation of environmental and forestry programmes. The builder has to get approval of the layout plan from concerned authorities before starting construction of a residential or commercial ■ The Ministry is also the nodal agency in the country for the building. United Nations Environment Programme (UNEP). ■ Central Pollution Control Board (CPCB): primarily The Approved Layout Plan is as per approved FAR (Floor Area executes the responsibility for prevention and control of Ratio) or FSI (Floor Space Index).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 135 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

2) Building Plan: However, if any real estate development/construction is carried The building plan ensures that the building complies with building out in contravention of law or in the absence of such approval by laws. the concerned competent authority, it would be deemed to be an ‘Unauthorised Construction’. Once the building plan is approved, the builder should commence construction work within two years and there should be no deviation Also, the concept of self-certifying construction has been introduced from the sanctioned plan. in certain jurisdictions. 3) Intimation of Disapproval or similar processes/stages: Intimation of Disapproval (IOD) basically states conditions that 12.6 What is the typical cost of building/use permits and the time involved in obtaining them?

India need to be complied with during different phases of an under- construction project. Intimation of Disapproval in some places is also known as a Building Permit. A nominal cost is to be incurred by the parties to obtain a building or use permit; however, this varies from State to State. Environmental Impact Assessment: The purpose of an Environmental Impact Assessment (EIA) is to identify and evaluate As regards time, it varies from State to State depending on the rules the potential impacts (beneficial and adverse) of development that have been enacted in that regard. Usually, the time taken is 30 and projects on the environmental system. This exercise should to 120 days. be undertaken early enough in the planning stage of projects for selection of environmentally compatible sites, process technologies 12.7 Are there any regulations on the protection of historic and such other environmental safeguards. There are various monuments in your jurisdiction? If any, when and how parameters which brings projects under its ambit. are they likely to affect the transfer of rights in real While all industrial projects may have some environmental impacts, estate or development/change of use? all of them may not be significant enough to warrant elaborate assessment procedures. The need for such exercises will have to As per the Ancient Monuments and Archaeological Sites and be decided after initial evaluation of the possible implications of a Remains, 1958, an ‘Ancient Monument’ is defined under Section particular project and its location. 2(a) as any structure, erection or monument, or any tumulus or place ■ Environmental Clearances/Approvals: The environment of interment, or any cave, rock-sculpture, inscription or monolith, consultant hired by the company prepares the Environment which is of historical, archaeological or artistic interest and which Impact Assessment Report which is submitted to the State has been in existence for not less than 100 years, and includes: level expert Appraisal Committee which refers it to the State (i) the remains of an ancient monument; Environment Impact Assessment Authority (SEIAA). (ii) the site of an ancient monument; The main clearances to be obtained are: (iii) such portion of land adjoining the site of an ancient monument ■ Fire Department Permit: A permit from the local fire as may be required for fencing or covering in or otherwise department is required to be obtained. preserving such monument; and ■ Air and Water Pollution Control Permit: Permits (iv) the means of access to, and convenient inspection of, an for Air and Water Control are to be obtained before ancient monument. the commencement of any real estate activity by the If the Central Government apprehends that the protected monument is competent local authority of the Fire and Water department Environmental protection regulations may also require in danger of being destroyed, injured, misused, or allowed to fall into you to get approval before doing any construction or decay, it may undertake the maintenance of the protected monument. beginning operation. A Prohibited Area is the area beginning at the limit of a protected Other permits/approvals to be obtained (if necessary) are: area or the protected monument and extending to a distance of 100 ■ Costal Regulatory Zone (CRZ) clearance is obtained wherever metres in all directions. However, the Central Government may required by the Coastal Zone Management Authority. increase this area even beyond 100 metres and by notification in the Official Gazette; and specify such area to be a Protected Area. ■ Ancient Monument Approval by the Archaeological Survey of India. Every area, beginning at the limit of a Prohibited Area in respect of every ancient monument and archaeological site and remains, ■ NOC from Airport Authority of India by Civil Aviation declared as of national importance extending to a distance of two Department/Airports Authority of India. hundred metres in all directions shall be a Regulated Area. ■ NOC from the Sewerage Department (Municipal). The monument can only be changed from inside. The façade of the ■ NOC from the Storm Water and Drain Department monument cannot be changed. (Municipal). ■ NOC from the Electric Department (Municipal), etc. The transfers of ownership of lands that are within the limits as prescribed under the Act and referenced here above (‘regulations’) are not restricted or impacted. Such land should not be a part of 12.5 Are building/use permits and licences commonly such monument. obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? The development of such lands which are in the vicinity (and not part of the Ancient Monument) would have to be in compliance with Building/use permits and licences are commonly obtained through the regulations. applications and submission of required documents to the concerned competent authorities. 12.8 How can e.g. a potential buyer obtain reliable But, there are certain situations wherein permission may be information on contamination and pollution of real regarded as implied/deemed. If no such approval or rejection estate? Is there a public register of contaminated land is communicated to the interested party within the stipulated in your jurisdiction? timeframe, it is considered to be a ‘Deemed Approval’. All reliable information can be obtained by the potential buyer

136 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

on the website of various government departments of the Central ■ add 300,000 MW of renewable energy capacity. Pollution Control Board [available online at: http://cpcb.nic.in/]. The present government has taken steps to scale up clean energy Information regarding environmental data and standards can also be production and has initiated a shift in India’s stance in international obtained online on the above-mentioned website. climate negotiations. A technical diligence is also to be conducted by the potential buyer One of the government’s first acts was to rename the environment wherein he can check whether the development norms are being ministry from the Union Ministry of Environment and Forests complied with or not. The buyer can obtain information regarding to the Ministry of Environment, Forests and Climate Change. the emission standards; as mentioned above. In January, the newly reconstituted Prime Minister’s Council on Climate Change launched new initiatives on coastal zone India 12.9 In what circumstances (if any) is environmental clean- management, wind energy, health and waste-to-energy. up ever mandatory? India is also committed to the Paris Agreement. Paris Agreement Environmental Clean-up Laws govern the removal of pollution or This agreement aims to reduce the increase in global temperature contaminants from environmental media such as soil, sediment, surface rise and move towards achieving a common goal of sustainable water, or ground water. development. There are a certain set standards of emission of noise, water and air Renewable Energy pollution that are allowed to be done. Only if the standards are met, will the approval be granted by the appropriate government. Even if At the federal level, India has implemented two major renewable the approval is granted, it may be cancelled if the standards are not energy-related policies. First, the Strategic Plan for New and complied with. There are legislations for water discharge and air Renewable Energy, which provides a broad framework. Second, the pollution and several other environmental laws are made to protect National Solar Mission, which sets capacity targets for renewable the environment. sources. Solar Energy 12.10 Please briefly outline any regulatory requirements In November 2014, the Indian Government announced that it would for the assessment and management of the energy increase the solar ambition of its National Solar Mission to 100 GW performance of buildings in your jurisdiction. installed capacity by 2022. It will amount to a five-time increase and over 30 times more solar than it currently has installed. As per the Energy Conservation Act, 2001: Concurrently, the Indian Government has also announced its intention ‘[E]nergy conservation building codes’ means the norms and to bring solar power to every home by 2019. For this purpose, the standards of energy consumption expressed in terms of per square government has invested in 25 solar parks, which have potential to meter of the area wherein energy is used and includes the location increase India’s total installed solar capacity almost tenfold. of the building (Section 2(f)). Wind Energy To curb energy consumption in buildings, the Indian government The Twelfth Five-Year Plan proposes a National Wind Energy issued the Energy Conservation Building Code (ECBC) in 2007. Mission. It is similar to the National Solar Mission, and the Indian However, the impact of the ECBC depends on the effectiveness of its government recently announced plans to enhance wind energy enforcement and compliance. Currently, the majority of buildings production to 50,000 to 60,000 MW by 2022. The government is in India are not ECBC-compliant. Whether the projected targets also planning to promote an offshore wind energy market. can be achieved depends on how the code enforcement system is Transportation designed and implemented. In early 2014, India announced new vehicle fuel-economy standards. Although the development of ECBC lies in the hands of the national Apart from this, India has done away with BS III vehicles which government – the Bureau of Energy Efficiency under the Ministry would help in controlling air pollution. of Power, the adoption and implementation of ECBC largely relies on State and local governments. Smart Cities The present government has launched an initiative to create 100 ‘smart cities’ with better transport systems, utilities, and energy 13 Climate Change networks to address the challenges of urban growth. India’s National Mission on Sustainable Habitat also includes 13.1 Please briefly explain the nature and extent of any initiatives such as the Energy Conservation Building Code, mandated regulatory measures for reducing carbon dioxide for commercial buildings in eight states, and actions to support emissions (including any mandatory emissions recycling, waste management, and improved urban planning. trading scheme).

India has introduced a number of policies that work towards climate 13.2 Are there any national greenhouse gas emissions reduction targets? change control by reducing or avoiding greenhouse gas emissions. In June 2008, the Indian government released India’s first National India has adopted the National Electricity Plan (NEP) released in Action Plan on Climate Change, which identified eight core April 2018 by which it aims to achieve its ‘2˚C-compatible’ rated ‘national missions’ running through 2017. Paris Agreement NDC climate action targets. On present estimates, The National Action Plan is mentioned in India’s current Five-Year India could achieve part of its NDC goals – a 40% non-fossil-based Plan (2012–2017), which guides overall economic policy. The goals power capacity by 2030 – as early as the end of this year, 2018, a full pertaining to climate change are included in this plan which are: 12 years earlier than targeted. ■ reduce emissions intensity in line with India’s Copenhagen pledge; and

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 137 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

The government’s aims regarding electric vehicles are unclear, Powers of entry and inspection: The Environment (Protection) resulting in a sporadic uptake of EV technology across states. It Act, 1986 under the ambit of Section 10, allows any person could improve this by mandating action plans at a national level and empowered by the Central Government to have a right to enter, at working towards its earlier aim of all new vehicles being electric all reasonable times with such assistance as he considers necessary, by 2030. any place: The Indian government is optimistic that through the Perform, (a) for the purpose of performing any of the functions of the Achieve and Trade (PAT) scheme, the industry sector will continue Central Government entrusted to him; to make a substantial contribution to the country’s climate targets. (b) for the purpose of determining whether and, if so, in what The Ministry of Power and the Bureau of Energy Efficiency state manner, any such functions are to be performed; or India that the first cycle of the PAT scheme resulted in savings of 5.6 GW (c) for the purpose of examining and testing any equipment, and 31 MtCO2e between 2012 and 2015. industrial plant, record, etc. or for conducting a search of any building and for seizing any such equipment, industrial plant, record, register, document or other material object if 13.3 Are there any other regulatory measures (not already he has reason to believe that it may furnish evidence of the mentioned) which aim to improve the sustainability of commission of an offence punishable under this Act or the both newly constructed and existing buildings? rules made there under or that such seizure is necessary to prevent or mitigate environmental pollution. There exist regulatory measures (not already mentioned) which aim Air (Prevention and Control) of Pollution Act, 1981: It aims at to improve the sustainability of both newly constructed and existing curbing the environmental pollution by targeting sources that cause buildings as mentioned below: par-standard air pollution through harmful oxides, particulate matter Model Building Bye-Laws 2016: The Town and Country Planning and sulphides. It provides for provisions for State and Central Organisation, Ministry of Urban Development has made an effort Boards for the purpose of declaring areas as pollution control areas. to prepare ‘Model Building Bye-Laws 2016’ for the guidance of Ministry of Environment & Forests Government of India the State Governments, Urban Local Bodies, Urban Development (Office Memorandum): The Ministry had issued guidelines for Authorities and others. The salient features of MMBL, 2016 provide high-rise buildings. for provisions for Safety and Security, Barrier Free Environment, Environmental Concerns, Adoption for Modern Construction Technology, Swachh Bharat Mission, Ease of Doing Business, Rain Water Harvesting and Effects of Communication Technology.

138 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London L&L Partners India

Amaresh Kumar Singh Manjul Mantri L&L Partners L&L Partners 1st & 9th Floors 1st & 9th Floors Ashoka Estate Ashoka Estate 24 Barakhamba Road 24 Barakhamba Road New Delhi 110 001 New Delhi 110 001 India India

Tel: +91 11 4121 5100 Tel: +91 11 4121 5100 Email: [email protected] Email: [email protected]

URL: www.luthra.com URL: www.luthra.com India

Amaresh Singh is a Partner at L&L Partners [formerly Luthra & Luthra Manjul Mantri is an Associate at L&L Partners [formerly Luthra & Luthra Law Offices] and functions in the Real Estate division. Amaresh has Law Offices] and functions in the Real Estate division. Subsequent been practising law for over 18 years and substantially in the real to her graduation from National Law University, Gujarat, she has estate sector where he has handled major reputed and path breaking been working in the real estate sector and has been instrumental real estate projects and transactions on a Pan-India basis rendering in assisting some of the major global and national corporate names wide ranging, multitudious and multifarious legal services to leading ranging from construction houses to financial institutions and also private equity funds, real estate developers, financial institutions, include governments of the USA and Singapore. overseas funds as well as Government funds and foreign Government, She has amassed considerable experience of crystallising real such as the United States Government, CapitaLand, Blackstone, estate transactions pan-India, including diligencing, structuring, asset Lehman Brothers, Oman Investment Fund, Carlyle Group, Mahindra management and acquisition and documentation, amongst others, Lifespace Developers Limited, Hines Group, Aricent Technologies, for multifarious clients such as Intel, DLF, Godrej, Reliance, Experion Cyber Pearl Information Technology Park Private Limited, Soma New Developers, Xander Finance, Johnson Matthey, ATS Infrastructure, Towns Private Limited, DLF Group, Abbott Laboratories and Oxford Motherson Auto Solutions, Acme Cleantech, Altico Capital, Lal Path University Press. Labs, etc. Mr. Singh has considerable experience in litigation, including litigation pertaining to property, title, tenancy and rent laws. He has appeared in District Courts, State High Courts and the Supreme Court of India.

L&L Partners is a leading full-service law firm, with a team of over 350 counsels including 72 partners, and offices in New Delhi, Mumbai, Bengaluru and Hyderabad. In keeping with the Firm’s legacy of offering exceptional legal solutions and client advice, teams at the Firm ensure that clients receive practical, innovative and cost-effective advice in a responsive manner, while upholding the highest ethical standards. Enormous amounts of knowledge, experience and commitment, successfully help close/resolve complex and high-value transactions and disputes, with practical and creative legal solutions. Consistently ranked and globally recognised as leaders in the field, we adopt a forward-looking approach towards the practice of law, combining both conventional practice areas and emerging sectors, setting benchmarks and the highest technical standards within the legal fraternity. Since its inception in 1991, which coincides with India’s economic liberalisation, L&L Partners has assisted numerous multinational corporations in setting up their presence in India and in navigating the complex Indian legal system.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 139 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 15

Ireland Diarmuid Mawe

Maples and Calder Craig Kenny

1 Real Estate Law 2 Ownership

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

140 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

The Land Registry indemnifies any person who suffers loss through 3.3 Is there a split between legal title and beneficial title a mistake made by the Land Registry. A buyer, therefore, can accept in your jurisdiction and what are the registration the folio as evidence of title without having to read the relevant consequences of any split? Are there any proposals deeds. However, the State does not guarantee the conclusiveness of to change this? boundaries or the area of the relevant property as identified on the Land Registry maps. There is a split between legal title and beneficial ownership of property in Ireland. The 2009 Act provides that the entire beneficial interest in It should be noted that the Registry of Deeds does not guarantee the property passes to the buyer on the making of an enforceable contract effectiveness of a deed nor does it interpret a deed, but only records for the sale or other disposition of land. The beneficial interest in the existence of the deed. The registration of a deed in the Registry property can also be held through a traditional “off-title” trust. of Deeds governs priorities. Ireland In respect of registered land, the Land Registry does not recognise a split between legal title and beneficial ownership and only the 4.3 What rights in land are compulsory registrable? What legal owner of property will be recorded in part 2 (the ownership (if any) is the consequence of non-registration? section) of the folio. A beneficial owner may, however, protect his or her interest in the property by registering a caution or an inhibition Any unregistered property (Registry of Deeds) purchased in the against the folio in question. The purpose of a caution is to obtain State after 1 June 2011 is subject to compulsory first registration in notice of dealings by the registered owner so that the cautioner has an the Land Registry. opportunity to assert his or her unregistered right(s). An inhibition, on Registration is also compulsory where land is bought under the the other hand, operates as a restriction on registration that prevents all Land Purchase Acts or where land is acquired after 1 January 1967 registrations except those made in compliance with the terms thereof. by a statutory authority. There are currently no proposals to change the split between legal title and beneficial ownership of property in Ireland. 4.4 What rights in land are not required to be registered?

4 System of Registration Except as set out in question 4.3, there is no requirement that documents or titles be registered, but it is good conveyancing practice that deeds be registered in either the Registry of Deeds or 4.1 Is all land in your jurisdiction required to be the Land Registry in order to preserve the priority of the deed. registered? What land (or rights) are unregistered? In the case of registered land, there are certain rights which must be registered in the Land Registry to gain protection; otherwise The Property Registration Authority (the “PRA”) is the State body these rights will not be protected against a bona fidebuyer for value responsible for the registration of property transactions in Ireland without notice (e.g. rights of residence, restrictive covenants, leases and the system of registration of title (ownership) to land in Ireland. for a term exceeding 21 years). Section 35 of the 2009 Act provides The PRA is a statutory body established on 4 November 2006 under that an easement shall be acquired at law by prescription only on the provisions of the 2006 Act. registration of a court order under section 35. Section 35(4) of The main functions of the PRA are to manage and control the Land the 2009 Act provides that the order shall then be registered in the Registry and the Registry of Deeds and to promote and extend the Registry of Deeds or Land Registry as appropriate. registration of ownership of land. Section 37 Civil Law (Miscellaneous Provisions) Act 2011 amended The Land Registry was established in 1892. When ownership is the 2009 Act and the 1964 Act to enable the PRA to register registered in the Land Registry, the deeds are filed with the Land easements without a court order where there is no disagreement Registry and all relevant particulars concerning the property and its between the parties concerning entitlement to an easement or profit. ownership are entered on folios which form the registers maintained There are also a number of burdens which affect registered land in the Land Registry. In conjunction with folios, the Land Registry without registration, such as public rights and occupational tenancies also maintains maps (referred to as filed plans). Both folios and for terms not exceeding 21 years. maps are maintained in electronic form.

The Registry of Deeds was established in 1707 to provide a system 4.5 Where there are both unregistered and registered land of voluntary registration for deeds affecting land and to give priority or rights is there a probationary period following first to registered deeds over unregistered but registrable deeds. There registration or are there perhaps different classes is no statutory requirement to register a document in the Registry of or qualities of title on first registration? Please give Deeds, but failure to do so may result in a loss of priority. The effect details. First registration means the occasion upon of registration is generally to govern priorities between documents which unregistered land or rights are first registered in the registries. dealing with the same piece of land. The primary function of the Registry of Deeds is to provide a system of recording the existence of deeds affecting unregistered property. When a deed is lodged There is no probationary period following first registration. in the Registry of Deeds it must be accompanied by the relevant As noted at question 3.1, the quality of the title to registered land application form (in a prescribed form) which is a summary of the generally falls into four categories, namely: essential information of the relevant deed. ■ Absolute title: This is the best type of title to land that can be acquired in Ireland. 4.2 Is there a state guarantee of title? What does it ■ Possessory title: This category of title is granted where an guarantee? applicant does not have paper title to land but is in occupation of the land and/or in receipt of the rents and profits issuing from the land. A title registered in the Land Registry is guaranteed by the state.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 141 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

■ Qualified title: This category of title is granted where an applicant can only establish title for a limited period and/or 5.2 How do the owners of registered real estate prove where the title is subject to reservations. their title? ■ Good Leasehold title: This category of title applies where the Land Registry has not investigated the title of the lessor to Owners of registered real estate generally prove their title via the grant the lease to the applicant. Note that if the superior title Land Registry folio, which is prima facie evidence of title. The is already registered, then the lessee will be registered with an legal owner of the registered property is recorded in part 2 (the absolute title. ownership section) of the folio. In circumstances where real estate is sold onwards whilst an application for registration of ownership is 4.6 On a land sale, when is title (or ownership) transferred still pending in the Land Registry, the owner will typically produce Ireland to the buyer? the transfer instrument as evidence of their title, in addition to the folio. A Land Registry search will reveal applications or dealings The legal title usually passes when the purchase price is paid to the pending against the folio in question. seller and the buyer takes delivery of the transfer deed. To complete the effective transfer of ownership of registered land, it is necessary 5.3 Can any transaction relating to registered real estate to register the transfer in the Land Registry. be completed electronically? What documents need Section 52 of the 2009 Act provides that the entire beneficial interest to be provided to the land registry for the registration in property passes to the buyer on the making of an enforceable of ownership right? Can information on ownership of registered real estate be accessed electronically? contract for the sale or other disposition of land; however, it is not uncommon for this statutory provision to be disapplied or contracted out of in the contract for sale (particularly if a long period of time is Transactions cannot be completed between parties electronically. anticipated between signing and completion). Once completed, the details of a transaction relating to registered real estate can be submitted to the Land Registry for registration electronically. Once the application has been submitted electronically, 4.7 Please briefly describe how some rights obtain priority the Land Registry will issue a pre-lodged dealing number, which will over other rights. Do earlier rights defeat later rights? protect priority for 21 days. However, the actual documents must be physically lodged in the Land Registry in order for the dealing Priority is accorded by virtue of the date of registration of an number to go live and ultimately to effect the completion of the instrument, rather than the date of execution of the instrument. In registration. the Registry of Deeds (unregistered land), priority is determined by The documents that typically need to be provided to the Land the serial number allocated to the instrument pursuant to the 2006 Registry to effect registration of an ownership right are as follows: Act. Registered instruments have legal priority over unregistered instruments or instruments registered later in time. An exception ■ the Land Registry application form; applies where the owner of a registered instrument had actual notice ■ the transfer instrument; and of a prior unregistered or unregistrable instrument. ■ the appropriate fees. As regards registered land, the 1964 Act makes provisions for two The Land Registry maintains an electronic database which can be classes of rights or burdens that affect registered property. Section accessed electronically. 69 burdens may be registered on a folio and include charges, liens The concept of electronic conveyancing, or e-conveyancing, was and easements created by express grant. Section 72 burdens, on first proposed by the Law Reform Commission in Ireland in 2006 the other hand, are those which affect registered land without and, since then, both the Irish Government and the Law Society of registration, for example, leases for a term less than 21 years and Ireland have engaged in consultations and established a Task Force customary rights. Section 69 burdens rank in priority according to in order to ascertain how e-conveyancing can be regulated and their date of registration whilst section 72 burdens rank as of their implemented in the future. date of creation. Registered section 69 burdens rank in priority to subsequently created section 72 burdens, while section 72 burdens rank in priority to subsequently registered section 69 burdens. 5.4 Can compensation be claimed from the registry/ Judgment mortgages are dealt with separately and are subject to any registries if it/they make a mistake? right or incumbrance affecting the judgment debtor’s lands, whether registered or not, at the time of their registration. Compensation can be claimed from the Land Registry but not from the Registry of Deeds. Please refer to question 4.2 above. It is worth noting that a priority entry may be made by an intending purchaser, lessee, or chargee of property affording them priority over other registrations in respect of the folio for a period of 44 days from 5.5 Are there restrictions on public access to the the date of registration of the priority entry. If the transaction protected register? Can a buyer obtain all the information he by the priority entry is not lodged in the PRA within the priority period, might reasonably need regarding encumbrances and it loses the priority conferred by the priority entry. A priority entry can other rights affecting real estate and is this achieved by a search of the register? If not, what additional be renewed following the expiry of the 44-day period. information/process is required?

5 The Registry / Registries Any member of the public is entitled to search the Registry of Deeds index on payment of the prescribed fee. In the Land Registry, members of the public can inspect the index 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules of names, the index of lands and the folios (including maps) on and requirements. payment of the prescribed fees. Applications pending registration can only be inspected by the lodging party or the registered owner Please refer to question 4.1 above. of the property or by a prescribed category of persons.

142 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

A buyer, through his/her lawyer carrying out pre-contract diligence, can obtain all the information they might reasonably require 6.3 Is there any change in the sources or the availability regarding encumbrances and rights affecting land from the seller’s of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the lawyer. main sources of capital you see active in your market? Bonded law searchers are typically used by lawyers to carry out Registry of Deeds and Land Registry searches in Ireland. Investor appetite for Irish real estate has been very strong in 2018, with a particular focus on residential development, purpose-built 6 Real Estate Market student accommodation and hotel investment. Non-bank lenders continue to be very active in the Irish market.

The profile of investors looking for opportunities in the Irish Ireland 6.1 Which parties (in addition to the buyer and seller market is relatively consistent, led mainly by European institutional and the buyer’s finance provider) would normally buyers; however, Asian investors are starting to make a mark in this be involved in a real estate transaction in your jurisdiction, most notably in the office sector. jurisdiction? Please briefly describe their roles and/or duties. Foreign Direct Investment remains crucial for Ireland and this jurisdiction continues to be an attractive real estate investment The relevant property is usually marketed on behalf of the seller by opportunity for a number of reasons including its strong economic an agent who advertises the property and advises on the market value backdrop, levels of occupational activity and the potential for of the property. In commercial real estate transactions, the parties further rental growth. often appoint agents to act on their behalf and the commercial terms are negotiated between the parties and their respective agents. Once 6.4 What is the appetite for investors and/or developers the commercial terms are agreed, they are reduced to a non-binding to invest in your region compared to last year and heads of terms document. what are the sectors/areas of most interest? Please Between heads of terms being agreed and a binding contract being give examples. signed, the parties may put in place exclusivity agreements and confidentiality agreements (which is becoming more widespread in The commercial real estate market has been strong in Ireland in the sale of commercial real estate). A seller’s lawyer is responsible 2018. One of the largest transactions in 2018 was the disposal of for drafting contracts, dealing with pre-contract enquiries raised Eir’s headquarters at Heuston South Quarter (HSQ) for a reported by the buyer’s lawyers, replying to requisitions on title, redeeming €176 million by US Fund Northwood. mortgages/charges and distributing the balance of sale proceeds to The retail market has also performed relatively well despite concerns the seller. A buyer’s lawyer investigates the title, raises requisitions about Brexit. The sale of Westend Retail Park at Blanchardstown on the title, drafts the purchase deed, conducts closing searches, for approximately €148 was the highest value retail investment attends the closing appointment and stamps and registers the title. transaction in the first nine months of the year. Surveyors and/or architects may be engaged before the buyer signs In terms of off-market transactions, IPUT traded its office at No. 40 contracts to carry out a structural survey of the relevant property. Molesworth Street with State Street’s ownership of Deloitte House, Depending on the nature of the transaction, an environmental expert Earlsfort Terrace, an office asset swap reported at €160 million. may also be engaged to provide an environmental report in respect Investor appetite for residential development and the hotel sector of the property. is increasing as noted at question 6.3 above. Approximately €400 In the sale of commercial real estate asset portfolios, the commercial million of development land sales were completed in the first half and legal due diligence is usually facilitated by providing interested of 2018. Co-living concepts and PRS/Build to Rent schemes parties with access to information contained in an online data-room. are becoming increasingly mainstream, accounting for 25% of Before access is granted, the interested parties will typically be investment spend in the first half of the year, with a strong appetite required to execute a non-disclosure agreement. to forward fund/forward commit. A major deal in this sector was Kennedy Wilson’s acquisition of 247 apartments and 3.97 acres of development land at the Grange, Stillorgan, Dublin from NAMA- 6.2 How and on what basis are these persons remunerated? appointed receivers for a reported €160 million. The hotel/licensed market has been robust this year with the value Selling Agents – normally charge a percentage of the sale price. The of hotel deals more than tripling with a value of approximately €263 Property Services (Regulation) Act 2011 seeks to regulate property million to the end of August 2018 compared to last year. Notable services provided by auctioneers, estate agents and management disposals include the Hilton Dublin Airport Hotel, Citywest Hotel, agents. The agent must issue a letter of engagement which among Saggart and the Radisson Blu, Sligo. other things must set out the amount or the rate of any commission or any other fee payable by the client under the agreement. 6.5 Have you observed any trends in particular market Lawyers – no standard/fixed price. Fees are normally commensurate sub sectors slowing down in your jurisdiction in with the value of the property/work involved. Irish lawyers are terms of their attractiveness to investors/developers? obliged to set out the basis of their charges under section 68 of the Please give examples. Solicitors Amendment Act 1994. Stamp duty for commercial property was increased from 2% to 6% in Surveyors – no standard/fixed price. Fees are normally commensurate Budget 2018; however, this does not appear to have had a significant with the value of the property/work involved. impact on investment in commercial property over the past year. Environmental Experts – no standard/fixed price. Fees are normally The 4% stamp duty rebate scheme that was introduced last year commensurate with the value of the property/work involved. in respect of land purchased to develop residential property has encouraged residential development, particularly in the PRS Sector.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 143 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

Ireland’s 12.5% corporate tax rate on residential construction profits Another formality that will need to be adhered to is the Conveyancing has led to an increase in the number of international investors Conflict of Interest Regulation which prohibits the same firm acting establishing residential development companies, particularly in the for both the seller and buyer in real estate transactions, with certain Dublin area. very limited and defined exceptions. The Dublin office market continues to benefit from relocations due to the uncertainty around Brexit with particular growth in the 7.2 Is the seller under a duty of disclosure? What matters serviced office sector. must be disclosed? The introduction of a vacant site levy, in order to promote the development of vacant under-utilised sites in urban areas has led to The underlying principle is one of caveat emptor (buyer beware).

Ireland an increase in the disposals of sites for development. The buyer must be satisfied from its own due diligence that good The introduction of tax reforms in 2017 and 2018 which negatively marketable title to the relevant property is being offered by the seller. impacted Irish regulated funds focused on Irish property (so-called The principle of caveat emptor is diluted somewhat by the General Irish Real Estate Funds or “IREFs”) has led to a decline in the Conditions which place a number of warranties and disclosure popularity of such structures. There are now fewer tax advantages requirements on the seller. For instance, the General Conditions to larger non-Irish investors which has, together with the recovery include numerous warranties relating to matters such as notices, of the domestic investor sector, led to an increase in the number of planning compliance, boundaries, easements and identity and the Irish based buyers of Irish property. existence of any other interest in the relevant property. These warranties can be excluded or amended by agreement between the buyer and the seller. In addition to any specific disclosures, 7 Liabilities of Buyers and Sellers in Real sellers often limit the warranty provided in respect of planning Estate Transactions compliance by reference to documentation and opinions/certificates of compliance in the seller’s possession and produced to the buyer. 7.1 What (if any) are the minimum formalities for the sale Where the property is being sold in an enforcement scenario and purchase of real estate? (by a receiver, liquidator or mortgagee), it is usual that many of the warranties contained in the General Conditions are excluded To ensure consistency in drafting and avoiding protracted or limited by reference to the limited knowledge of the receiver, negotiations, the Law Society of Ireland produces a pro forma liquidator or mortgagee regarding the property. The warranties contract for sale for use in real estate transactions, which is designed received a radical overhaul in the General Conditions 2017 edition to give a fair balance of rights between buyers and sellers. prompted by the view that vendors were routinely excluding the relevant condition in its entirety or varying it to such a degree that, The contract for sale: in effect, no warranty was being given. The new wording provides ■ Contains a memorandum of the agreed terms of the sale that a vendor warrants compliance with planning in respect only of (parties, price, description of property, and completion date). his or her period of ownership. ■ Lists the documentation and searches to be provided by the seller. 7.3 Can the seller be liable to the buyer for ■ Incorporates the Law Society of Ireland General Conditions misrepresentation? of Sale (the “General Conditions”). The General Conditions make a number of assumptions about the property and place certain disclosure obligations on a seller, which the seller can Yes, a seller can be liable for misrepresentation. General Condition only exclude by inserting special conditions. This way, the 33 of the General Conditions provides that a buyer shall be entitled buyer is on notice of any deviations from the standard contract. to compensation for any loss suffered by the buyer in respect of The General Conditions were updated in 2017 for use in the sale as a result of an error which includes any omission, non- respect of transactions commencing on or after 3 January 2017. disclosure, misstatement or misrepresentation made in the contract. The General Conditions deal with formalities such as: However, as outlined above, a seller may attempt to exclude/vary ■ The seller’s title. this condition by inserting a special condition in the contract for sale ■ The identity and condition of property. stating that the buyer shall not rely on any representations made. ■ Possession. Statutory protection from fraud is provided by the 2009 Act, which makes it an offence for a seller to fraudulently conceal or falsify ■ The disclosure of notices. material information relating to the title. ■ Planning and development. ■ Completion of the sale, completion notices and interest due if completion is delayed. 7.4 Do sellers usually give any form of title “guarantee” or contractual warranties to the buyer? What would ■ Rescission of the contract. be the scope of these? What is the function of any ■ Forfeiture of deposit and resale. such guarantee or warranties (e.g. to apportion risk, ■ Risk. to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying ■ Boilerplate issues such as apportionment, time limits, notices out his own diligence? and arbitration.

The special conditions of sale are typically negotiated between the As noted at question 7.2, by virtue of the General Conditions of parties and reflect the nature of the transaction. For commercial the Contract for Sale the seller gives various contractual warranties real estate transactions, it is normal for the seller to seek to limit in respect of the property for sale. It is typical for a seller to limit the warranties being provided. Where the seller’s knowledge of the the scope of warranties through the careful drafting of Special property is limited, for example, a sale by a receiver, liquidator or Conditions in the Contract for Sale, in particular for commercial mortgagee, it is usual to exclude or limit many of the warranties property. Despite the existence of warranties, a prudent seller contained in the General Conditions.

144 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

(or his legal advisers) will still carry out his own due diligence ■ Central Bank Consumer Protection Code, 2012. of the property as the principle of caveat emptor is at the heart of ■ Central Bank Reform Act, 2010. commercial property transactions. ■ Central Bank (Supervision and Enforcement) Act, 2013. There are typically implied covenants as to ownership contained in ■ The Central Bank and Credit Institutions (Resolution) Act, a purchase deed but there is no form of title warranty. However, 2011. a buyer’s lawyer will investigate the seller’s title to the relevant ■ Central Bank (Supervision and Enforcement) Act 2013 property to ensure a buyer will acquire a good marketable title. The (section 48) Lending to Small and Medium-Sized Enterprises buyer’s lawyer also carries out a number of searches against both Regulations 2015. the seller and the property. The seller must explain and/or discharge ■ Companies Act, 2014.

any adverse matters resulting from the searches which affect the Ireland ■ Consumer Credit Act, 1995. seller and/or the relevant property before the completion of the sale can occur. ■ Conveyancing Acts, 1881–1911, the Land and Conveyancing Law Reform Acts, 2009 and 2013. ■ Credit Union Act, 1997. 7.5 Does the seller retain any liabilities in respect of the ■ Credit Union and Co-operation with Overseas Regulators property post sale? Please give details. Act, 2012. ■ Credit Institutions (Stabilisation) Act, 2010. As noted at question 7.3, a seller can be liable for misrepresentation or fraud. ■ Criminal Justice (Money Laundering) Act, 2010. ■ Code of Conduct on Mortgage Arrears, 2013. A seller may also retain liability for any contractual terms or undertakings which survive the acquisition of the property and the ■ European Communities (Consumer Credit Agreements) completion of the sale. Regulations, 2010. ■ European Communities (Unfair Terms in Consumer A seller may be liable for penalties to Revenue in respect of Contracts) Regulations, 1995. local property tax should it fail to provide information about the chargeable value of the residential property to the purchaser or make ■ European Union (Bank Recovery and Resolution) Regulations, 2015. a false statement regarding same to Revenue. ■ European Union (Consumer Mortgage Credit Agreements) Regulations, 2016. 7.6 What (if any) are the liabilities of the buyer (in addition ■ European Union (Financial Collateral Arrangements) to paying the sale price)? Regulations, 2010.

The buyer is also responsible for discharging the following costs: 8.2 What are the main methods by which a real estate ■ Stamp duty. lender seeks to protect itself from default by the ■ Surveyor/Architects’ fees. borrower? ■ Legal fees. ■ VAT (if applicable). A real estate lender will typically seek to protect itself from default ■ Registration fees. by the borrower by obtaining a contractual suite of covenants, undertakings and representations and warranties from the borrower, ■ Commissioner for Oaths’ fees. the breach of which would lead to an event of default. ■ Search fees. A real estate lender will provide finance that is secured over the ■ Local Property Tax (apportioned). relevant property. The real estate lender will then require that the security is registered as first ranking in the appropriate property 8 Finance and Banking register, thereby securing priority of the security for the benefit of the real estate lender. Where a lender is providing finance for development purposes, it 8.1 Please briefly describe any regulations concerning would be normal for the lender to receive collateral warranties from the lending of money to finance real estate. Are the rules different as between resident and non-resident the members of the professional team such as architects, designers persons and/or between individual persons and and engineers. The lender will also typically appoint its own project corporate entities? monitor (at the cost of the Borrower).

There are extensive differences between financing real estate as a 8.3 What are the common proceedings for realisation of corporate entity and as an individual, most notably from a practical mortgaged properties? Are there any options for a and legal perspective. mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the Real estate lenders have little regard as to the residential status of an mortgagor? individual, as long as the real estate is situated in Ireland.

The principal Acts, Regulations and Central Bank Codes of Conduct The powers of mortgagees under mortgages are derived from concerning the financing of real estate are as follows (in each case a combination of the terms of the mortgage itself and the law reference is made to the primary provision as amended): (including certain relevant statutory provisions). Generally, the ■ Asset Covered Securities Act, 2001. same principles apply in relation to enforcement against companies ■ Agricultural Credit Act, 1978. as apply to individuals. Various methods of enforcing security ■ Bills of Sale (Ireland) Act, 1879. over real property are available and the ability to avail of these will ■ Central Bank Acts, 1942 to 2014. depend on the circumstances of each case.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 145 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

In respect of security granted prior to 1 December 2009, there CRO searches. Under the 2014 Act, priority of registration speaks is no requirement on a mortgagee to go to court to exercise the from the date of registration at the CRO and not the date of creation remedies available to it, provided the borrower does not challenge of the charge itself, as was previously the case under the 1963 Act. the enforcement of the security. However, the 2009 Act contains In addition, it is generally accepted that registration is the certain provisions in relation to security granted on or after 1 appropriate perfection mechanism in respect of security interests December 2009, which compel a lender to go to court to seek an over real estate in Ireland. The specific formalities in relation to order for possession and an order for sale. These provisions can real estate in Ireland depend on whether the land is registered or be and are usually expressly contracted out of for security taken unregistered (refer to section 4 above). There are no specific time over commercial real estate but they cannot be contracted out of limits in respect of the registration of security in the Registry of in respect of residential housing loans. Therefore, in the case of

Ireland Deeds or at the Land Registry, albeit a delay or failure to register housing loans and security taken over residential real estate on or may impact on priority. after 1 December 2009, a mortgagee does have to go to court to get an order for sale and possession. A court appearance can be avoided if the borrower gives written consent to the sale not more than seven 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other days before the power of sale is exercised. creditors? The implementation of the 2009 Act repealed certain of the old statutory provisions that had applied prior to 1 December 2009 If there are other lenders, the parties will typically structure the (most notably parts of the Conveyancing Acts and the 1964 Act). priority of debts in the following ways: The belief was that the rights and powers conferred on the existing 1. Contractual subordination mortgagees by these statutory provisions had already been “acquired, accrued or incurred” by mortgagees by virtue of the provisions of the Contractual subordination is common in Ireland. It occurs where the Interpretation Act, 2005 and therefore the existing mortgagees could senior lender and the subordinated lender enter into an agreement continue to rely upon those provisions. A number of high-profile as a result of which the subordinated lender agrees that the senior decisions by the Irish courts resulted in a concern in the market debt will be paid out in full before the subordinated lender receives that, in essence, the statutory rights which were appealed could the payment of the subordinated debt. The subordinated lender is not have been “acquired” by existing mortgagees. The Land and contractually subordinated to the senior lender. Conveyancing Law Reform Act, 2013 was implemented to fill this 2. Structural subordination lacuna by confirming that certain provisions of the Conveyancing Structural subordination is also possible depending on the particular Acts and the 1964 Act will continue to apply to mortgages which terms of a transaction. Structural subordination arises where predate the enactment of the 2009 Act and therefore remove the one lender (the senior lender) lends to a company in a group of uncertainty in the market. companies which is lower in the group structure than another lender Certain provisions of the 2009 Act enable a mortgagee, where it (the subordinated lender). has reasonable grounds for believing a mortgagor has abandoned 3. Inter-creditor arrangements a mortgaged property and urgent action is required to prevent Inter-creditor arrangements are common in Ireland, depending on deterioration, to apply to court for an order authorising the mortgagee the nature of the particular transaction. Typical parties include a to enter into possession of the mortgaged property. senior lender, a junior lender, an inter-group lender and a borrower. Typical terms in an inter-creditor agreement include provisions as to 8.4 What minimum formalities are required for real estate priorities, standstill, representations and warranties and covenants. lending? As outlined at question 8.4 above, a real estate lender must register the charge/mortgage with the Irish Companies Registration Office The usual practice is for the terms of a property loan to be recorded in order to perfect the creation of the security. in a formal agreement. For big-ticket transactions, institutions will usually adapt a suitable Loan Market Association (“LMA”) precedent for the transaction. Use of an LMA precedent makes the 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? negotiation of terms more efficient. However, lenders, including banks, continue to use bespoke loan agreements for smaller The answer depends on whether the security is created by a company transactions. or by an individual or partnership. If a company has created a charge over real estate, to perfect the A charge created by a company over its assets (save for certain security, a relevant filing must be lodged with the Irish Companies types of financial asset such as bank accounts, financial instruments Registration Office CRO(“ ”) within 21 days of the creation of and claims and rights derivative thereof) must be registered with the security. This typically takes the form of a Form C1. If not the CRO within 21 days of its creation in accordance with the registered within this time frame, the security will generally be void procedures set out in the 2014 Act. against any liquidator or third party creditor. The 2014 Act also sets out the circumstances in which a charge The Companies Act, 2014 (the “2014 Act”) introduced changes to created by a company which is, or is on the brink of insolvency, the procedure in relation to the registration of charges: the one-stage may be set aside. A charge created by a company in the onset of procedure; and the two-stage procedure. The one-stage procedure insolvency may be set aside where it constitutes an improper transfer is similar to the previous regime under the Companies Act, 1963 of its assets to the detriment of its creditors or a liquidator of its (the “1963 Act”), while the two-stage procedure involves filing an assets. A floating charge created by a company when it is insolvent initial notice of a company’s intention to register a charge, followed may be set aside to the extent that no consideration is provided for it. by a second filing within 21 days of receipt of the first by the CRO, In this regard certain hardening periods apply depending on whether confirming the creation of the charge. The purpose of the latter the floating chargee is connected with the company (e.g. a director procedure is to remove the “blind spot” which exists for 21 days or person connected to a director, etc.). after a charge has been created, during which it may not appear on

146 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

A charge created by an individual or partnership may be set aside dealing with customers in arrears or pre-arrears. The four steps are: if it constitutes a fraud on its creditors and in this regard the test 1) communication; 2) financial information; 3) assessment; and 4) is the same as applies to corporate security – namely whether the resolution. Mortgagors must be afforded considerable support from transaction is an improper transfer of assets to the deprivation of the lender as regards the repayment of their security and offered creditors. Where an individual or partnership creates non-possessory a variety of alternative repayment options. Lenders’ compliance security over chattels, this must be registered in accordance with the with the CCMA will be taken into consideration by the court in Bills of Sale legislation – the requirements of which are problematic. determining whether to grant a request to repossess. This code There are numerous protections afforded to residential mortgagors requires a high standard of behaviour from lenders and may frustrate under Irish law and onerous obligations are placed on lenders attempts to enforce their security.

in terms of enforcing their security. Much of the regulation is Ireland focused on ensuring fairness and transparency to the mortgagor. 8.8 What is the impact of an insolvency process or a The following provisions should be considered in determining the corporate rehabilitation process on the position of a enforceability of any residential security: real estate lender? 1 European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 and 2000 In general, where a bank encounters financial difficulty, the Central If a term of the relevant security is heavily weighted against the Bank of Ireland (“CBI”) may apply to court for special measures to mortgagor, it will be considered “unfair” and in violation of the come into effect which are designed to preserve the business carried on Unfair Terms in Consumer Contracts Regulations. This will affect by the bank (if possible), protect depositors and manage in an orderly the value of all or part of the lender’s security. fashion the bank’s liabilities to bondholders and other creditors. These measures are taken pursuant to the European Union (Bank Recovery 2 European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004 (as and Resolution Regulations 2015 (“BRRD”)). If the bank is licensed amended) by the CBI and is incapable of rescue then it will be wound up pursuant to the Credit Institutions (Stabilisation) Act 2010 (“CISA 2010”) and If the security is entered into without the lender and the mortgagor CA 2014. This will entail the High Court appointing a liquidator to being simultaneously present it may be regarded as a distance the bank. Whether the bank is subject to reconstruction or resolution contract and come within the scope of the Distance Marketing pursuant to BRRD, or is in liquidation pursuant to CISA 2010/CA Regulations, if the mortgagor is a consumer. Under these regulations 2014, the insolvency officer will treat the loan as an asset of the bank the security may be rendered unenforceable if the lender failed to and will seek to enforce the bank’s rights against the borrower and give certain information to the mortgagor before a binding contract any persons providing security for the loan. Accordingly, insolvency was entered into, such as, details of certain contractual terms and or corporate rehabilitation of the lender will not in principle have any conditions and the total fee to be paid by the mortgagor. impact on the liabilities of the borrower and security providers. 3 Protection of the Family Home Where the lender is not subject to BRRD and CISA 2010/CA As noted in question 1.1, extensive statutory protection is afforded to 2014, it could go into corporate rehabilitation under Ireland’s family property in Ireland which renders the enforcement of security “examinership” regime under CA 2014, or be subject to the over family homes more difficult for lenders. In Irish law, a family appointment of a liquidator under CA 2014. In either case, the result home is a dwelling in which a married couple ordinarily resides. is the same as above: the loan and its related security will be treated Under the Family Home Protection Act 1976 (as amended) a spouse as an asset of the company and the company or its liquidator will who does not own the family home must give prior written consent look to recover/enforce in the usual way. to any disposal of an interest in the family home, including by way of In an event of default a lender will usually proceed to appoint a mortgage. If this consent has not been given or was ineffective, any receiver and manager over the borrower’s assets. The receiver and transaction disposing of the family home is at risk of being set aside manager is typically appointed pursuant to the terms of the charge; at the instance of the non-owning spouse within certain time limits. however, the 2009 Act also provides for the appointment of receiver by a mortgagee. The receiver will market the property and sale 8.7 What actions, if any, can a borrower take to frustrate proceeds will be used to discharge the borrower’s indebtedness. enforcement action by a lender?

8.9 What is the process for enforcing security over Case law shows that borrowers have employed a large variety of shares? Does a lender have a right to appropriate arguments in seeking to frustrate enforcement action by a lender. shares in a borrower given as collateral? If so, These include: can shares be appropriated when a borrower is in (a) Demonstrating that the instrument appointing a receiver has administration or has entered another insolvency or not been executed in accordance with the security deed. reorganisation procedure? (b) Where the party enforcing the security has purchased the secured debt from an original lender, challenging the title of The usual method of enforcing security over shares is for the lender that person. to appoint a receiver. The power to appoint a receiver will be (c) Proving that the lender has not complied with the procedural contained in a well-drafted security which will set out the receiver’s requirements of the MARP process (see below). powers – albeit where the chargor is an Irish company the receiver’s (d) On appeal, establishing that the lower court did not engage powers will be implied by CA 2014 also. It is unusual for a lender with an Unfair Contract Terms analysis of the underlying to step in and sell charged shares: appointing a receiver (who is loan/security documentation. technically deemed to be an agent of the chargor) is invariably the The Code of Conduct on Mortgage Arrears 2013 (“CCMA”) preferred method because this insulates the lender from liability is particularly relevant when it comes to the enforcement of arising from how the charged assets are dealt with in an enforcement residential security. Under this statutory code, lenders must operate scenario. Most receivers will be specialist insolvency practitioners a four-stage Mortgage Arrears Resolution Process (“MARP”) when from a major accountancy firm in Ireland.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 147 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

The remedy of foreclosure was abolished in Ireland pursuant to LCLRA 2009. Where the transaction is governed by the European 9.4 Are transfers of real estate subject to VAT? How Union (Financial Collateral Arrangements) Regulations 2016 much? Who is liable? Are there any exemptions? (“EUFCR”), the collateral taker may agree with the collateral provider that the former may appropriate the collateral provided this The sale of Irish real estate may be subject to Value Added Tax is clearly agreed and the method for valuation of the collateral is (“VAT”). As there are many variations and exemptions under the also agreed. Real estate security would not be within the scope of current Irish VAT regime, the VAT treatment should be addressed the EUFCR albeit that “credit claims” comprising a loan portfolio by the appropriate professional advisors pre-contract with the final secured on real estate could constitute collateral under the EUFCR. agreed position reflected in the contract. Broadly, the sale of land which has been developed in the previous Ireland 20 years, or buildings which have been developed or redeveloped in 9 Tax the previous five years (“new” property) will be subject to VAT. The sale of “old” property which falls outside these rules is exempt from 9.1 Are transfers of real estate subject to a transfer tax? VAT. In certain cases, where a sale would otherwise be exempt, the How much? Who is liable? buyer and seller can agree that the sale will be subject to VAT in order to avoid a clawback of VAT previously recovered in respect Ireland imposes stamp duty on transfers of Irish real estate and certain of the relevant property by the seller. The first sale of residential other property. The stamp duty is charged on the consideration property by the person who developed the property is always subject payable for the property, or the market value in certain instances. to VAT. Stamp duty is generally payable by the purchaser, although in The rate of VAT on transfers of real estate is 13.5% (a VAT rate of certain transactions, such as voluntary transfers, both parties to a 23% applies to VATable lettings). contract can be technically liable. There are provisions which apply to contracts to acquire land, as opposed to actual transfer documents, 9.5 What other tax or taxes (if any) are payable by the in cases where there is a “resting on contract” position. seller on the disposal of a property? The rate of stamp duty on transfers of residential property is 1% on consideration up to €1,000,000 and 2% on consideration over this The sale of Irish real estate, or of unquoted shares in companies threshold. deriving the greater part of their value from Irish real estate, will The stamp duty rate on transfers of non-residential (commercial) be subject to Irish capital gains tax. The current rate is 33%. The property is 6%. gain is calculated on the proceeds of sale less acquisition and Where non-residential property is transferred and is subsequently enhancement costs, and less the incidental costs of acquisition and utilised for construction of residential accommodation, a stamp duty the incidental costs of disposal. refund is available which effectively reduces the rate from 2% to Irish capital gains tax is subject to a withholding procedure. The 6%. This scheme is subject to a number of conditions. buyer must generally withhold 15% of the consideration and pay Generally, the Purchaser of the property is liable for stamp duty this amount to Revenue unless the seller provides a tax clearance which can be directly assessed. certificate from Revenue. A clearance certificate is automatically available on application to Revenue if the seller is resident in Ireland for tax purposes. A non-resident seller will need to agree and 9.2 When is the transfer tax paid? discharge its capital gains tax liability in order to obtain a clearance certificate. This withholding procedure only applies to a buyer Where an instrument is liable to stamp duty, a stamp duty return where the consideration payable to the seller exceeds the relevant must be filed online via Revenue’s e-stamping system. threshold current at the date of the transfer agreement (currently The full amount of the stamp duty must be paid within 30 days of €500,000 or €1,000,000 if the asset disposed of is a house). the date of execution of the instrument of transfer (typically the deed A capital gains tax exemption applies to disposals of land acquired of transfer). In practice, Irish Revenue allow a further period of 14 between 7 December 2011 and 31 December 2014 (inclusive), days in which to file an e-stamping return and pay the stamp duty. provided the land was held for four years. The relief applies to Failure to file and pay within this 44-day period will result in late residential and non-residential real estate located within any EEA filing and interest charges. state acquired by an Irish resident during the period set out above. In order to process a stamp duty return a tax reference number is required for both the seller and purchaser. 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? 9.3 Are transfers of real estate by individuals subject to income tax? Yes. Currently, stamp duty on the transfer of Irish shares deriving their value from real estate is charged at 1% of their value. The sale of real estate by an individual should not be subject to Transfers of corporate entities (such as Irish and non-Irish income tax unless that individual is carrying on the business of companies) and partnerships can be subject to 6% duty where trading in properties. the entity derives over 50% of its value from Irish land which is However, the gains or profits on the disposal of Irish real estate by intended for development, held as trading stock, or held with the an individual may be subject to Irish capital gains tax. The current sole or main object of realising a gain on disposal. This provision rate is 33%. An exemption from capital gains tax is available for is subject to a number of conditions, including that the transfer is individuals on the sale of the individual’s principal private residence, one which transfers control of the land. Minority holdings may not subject to certain conditions. be impacted.

148 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

Disposals by non-Irish residents of shares and securities which In most cases, tenants will seek to negotiate an option to break or derive their value from Irish real estate are subject to capital gains terminate the term of the lease, i.e. after five or 10 years of the term. tax. Disposals of shares or securities which are quoted on a stock Any business lease granted for a term in excess of five years would exchange are exempt from this charging provision. typically have a provision for the periodic review of rent to the current open market rents.

9.7 Are there any tax issues that a buyer of real estate Most business leases in Ireland are of a full repairing and insuring should always take into consideration/conduct due nature, whereby the tenant will be subject to extensive repairing diligence on? obligations. These will be imposed directly by a repairing covenant entered into by the tenant or, in the case of a multi-let development

A buyer of Irish real estate will request completion of standard like an office block, shopping centre or business park, indirectly Ireland Law Society Pre-Contract VAT Enquiries by the seller. These are through a service charge regime which will include reimbursing the intended to provide the buyer with a history of the VAT treatment landlord for repair works carried out to the structure and common of the relevant property. Buyers should also satisfy themselves that areas of the relevant development. any previous transfers of the property have been duly stamped. Usually the provisions of a business lease place restrictions on a tenant’s contractual right to assign or sub-let without the landlord’s prior written consent. Under Section 66 of the Landlord and Tenant 10 Leases of Business Premises (Amendment) Act, 1980, a landlord cannot unreasonably withhold consent which will override the contractual terms of any business 10.1 Please briefly describe the main laws that regulate lease. leases of business premises. Sharing a business premises with companies in the same corporate group is generally a matter for negotiation between the landlord and Historically, Ireland has had special legislation governing the tenant but it is commonplace for leases to have such a provision relationship between landlords and tenants, e.g., the Landlord permitting such sharing of occupation, subject usually to a and Tenant Law Amendment Act, 1860 (commonly referred to as requirement to notify the landlord and provided that the sharing is Deasy’s Act). by way of licence only. Since the establishment of the Irish State, a comprehensive and very It is less common to see provisions in a lease relating to wide-ranging code of landlord and tenant legislation has been enacted. reorganisation or change of control of the tenant. Again, these are Commercial business leases are freely negotiated subject only to matters for negotiation. While landlords will generally agree on statutory provisions. request to provisions allowing sub-letting to or sharing space with a group company without consent, it is rare that a landlord will permit The introduction of the Commercial Leases Register now requires assignment to a group company without consent. Normally, there the particulars and terms of all leases and related documentation to are no restrictions on the change of control of a tenant company be disclosed on a public register. included in a lease. In 2011, the draft Landlord and Tenant Law Reform Bill was published. While not yet enacted, the Bill is worthy of note as the objective is to consolidate and modernise much of the general law of landlord and 10.4 What taxes are payable on rent either by the landlord tenant under one act going forward, including landlord and tenant or tenant of a business lease? obligations and their enforcement, statutory rights and termination. Typically, rent paid in respect of Irish real estate will be subject to Irish taxation on account of it having an Irish source, regardless of 10.2 What types of business lease exist? the identity or location of the landlord. An Irish resident company is taxable at 25% on rental profits, and a foreign company is taxable at Typically, a business lease falls into two categories: a lease on 20%. Income tax is applied to rent received by individuals. a short-term basis for a term of up to five years; or a lease ona In the case of a commercial/business lease, a landlord can elect to medium- to long-term basis, which would generally be considered a apply VAT, in which case VAT applies to the rent at the relevant rate term from 10 years to 25 years. (currently 23%). Stamp Duty is incurred by the tenant on business leases. Stamp Duty 10.3 What are the typical provisions for leases of business is currently levied at 1% of the average annual rent (for commercial/ premises in your jurisdiction regarding: (a) length of business leases not exceeding a term of 35 years) with an additional term; (b) rent increases; (c) tenant’s right to sell or fixed charge of €12.50 if the commercial/business lease contains a sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a rent review clause. There is an additional Stamp Duty charge of corporate restructuring (e.g. merger); and (f) repairs? €12.50 for each counterpart of the business/commercial lease.

The term of a lease of business premises has traditionally ranged 10.5 In what circumstances are business leases usually from short-term up to 35 years, but recent legislative changes and terminated (e.g. at expiry, on default, by either party market forces are resulting in shorter term leases, with the maximum etc.)? Are there any special provisions allowing a term now being 15–20 years (typically including break options tenant to extend or renew the lease or for either party exercisable during the term). The structure of a typical medium- to be compensated by the other for any reason on termination? to long-term (10–25 years) commercial lease usually follows the same traditional format which, in addition to securing rent payments to the landlord, also passes the cost of maintaining, insuring and Usually, a business lease is terminated by the expiry of the term or occupying the relevant property from the landlord to the tenant. the exercise of a break/termination option or by agreement between This allows the landlord to enjoy the rent without deduction. the landlord and the tenant, i.e. by surrender.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 149 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

It is standard practice for a business lease to contain a re-entry clause, entitling a landlord to forfeit the lease for breach of obligation by the 10.8 Are there any trends in your market towards more tenant. The procedure in the case of the non-payment of rent (and flexible space for occupiers, such as shared short-term working spaces (co-working) or shared other payments for this reason usually reserved as rent, e.g. service residential spaces with greater levels of facilities/ charges and insurance premiums) is straightforward, but rather more activities for residents (co-living)? If so please provide complicated (including service of notice on the tenant) in the case of examples/details. breach of the other covenants in the lease. Re-entry can, however, be effected without a court order, if done peaceably; forcible re- Co-working spaces are on the rise in Ireland with companies such entry is, on the other hand, a criminal offence. If the tenant is still in as TCube Dublin and DoSpace CoWorking offering such facilities occupation and resists re-entry, the landlord must seek an ejectment

Ireland in Dublin city centre. Co-working spaces appear to be particularly order from the court. The tenant, any sub-tenants and third parties popular with start-up companies finding their feet and last year, like mortgagees can apply to the court for relief against forfeiture, international firm Savills launched a new website specifically which will only be granted on terms designed to correct the default dedicated to listing providers of co-working and shared office inducing the forfeiture and to protect the landlord’s interest in the spaces. Flexible office providers accounted for over 15% of take-up future. in lettings in the Dublin market in the first half of 2018. A commercial tenant who has been in continuous occupation for a As noted at question 6.4 above, co-living concepts including PRS/ minimum period of five years has a statutory right to a new tenancy Build to Rent schemes are becoming increasingly popular in Ireland. (known as the business equity), and, in certain circumstances, to compensation for improvements made or for disturbance. Contracting-out of the business equity is permitted and landlords 11 Leases of Residential Premises typically require a tenant to renounce their entitlement to claim a new tenancy prior to signing a new commercial/business lease. However, it may be the case that market conditions will, at times, 11.1 Please briefly describe the main laws that regulate leases of residential premises. enable a tenant to resist pressure to provide such a renunciation.

The Residential Tenancies Acts 2004–2016 (the “RTA”) is the 10.6 Does the landlord and/or the tenant of a business primary legislation governing leases of residential premises in lease cease to be liable for their respective Ireland (not exceeding a term of 35 years). Rented properties must obligations under the lease once they have sold their also meet the standard prescribed under the Housing (Standards interest? Can they be responsible after the sale in respect of pre-sale non-compliance? for Rented Houses) Regulations 2008 and the Housing (Standards for Rented Houses) (Amendment) Regulations 2009 as regards the conditions thereof and the facilities available. On the assignment of a lease with the landlord’s consent, the assignor has no further responsibility for complying with the lease and its liability ceases completely. In contrast with the UK, there 11.2 Do the laws differ if the premises are intended for is no practice in Ireland requiring an assignor to enter into an multiple different residential occupiers? authorised guarantee agreement guaranteeing the performance of the new tenant under the lease. No, the RTA applies.

10.7 Green leases seek to impose obligations on 11.3 What would typical provisions for a lease of landlords and tenants designed to promote greater residential premises be in your jurisdiction regarding: sustainable use of buildings and in the reduction of (a) length of term; (b) rent increases/controls; (c) the the “environmental footprint” of a building. Please tenant’s rights to remain in the premises at the end of briefly describe any “green obligations” commonly the term; and (d) the tenant’s contribution/obligation found in leases stating whether these are clearly to the property “costs” e.g. insurance and repair? defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for (a) Length of Term example aspirational objectives). In Ireland, a typical residential tenancy agreement would be for a contractual term of 12 months. There are currently no specific “green obligations” commonly found in leases in Ireland. (b) Rent Increases/Controls The European Union (Energy Performance of Buildings) A fundamental provision of the original RTA 2004 is that a landlord Regulations 2006–2012 and Statutory Instrument No. 243 of 2012 may not set rent at an amount greater than the market rent for the introduced the requirement that all buildings being sold or let must tenancy in question at the time. “Market Rent” is defined as the rent have a Building Energy Rating (“BER”) Certificate with certain which a willing tenant not already in occupation would give and a limited exceptions. The aim of the rating is to inform prospective willing landlord would take for the dwelling on the basis of vacant buyers and tenants of the energy performance of the building. The possession and having regard to: (i) the other terms of the tenancy; Building Energy Rating Certificate is accompanied by an Advisory and (ii) the letting values of dwellings of a similar size, type and Report which contains recommendations for improving the energy character to the dwelling and situated in a comparable area. In late performance of the relevant building. December 2016, rent predictability measures were enacted under the Planning and Development (Housing) and Residential Tenancies

150 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

Act 2016 for an initial period of three years in an effort to control (c) the landlord intends, within three months after the termination the rise in rents in the parts of the country (mainly urban areas such of the tenancy, to enter into an enforceable agreement for the as Dublin and Cork) where rents are highest and rising and where transfer to another, for full consideration, of the whole of his households have greatest difficulties in finding accommodation or her interest in the dwelling or the property containing the they can afford. In these areas, known as “Rent Pressure Zones”, dwelling; rents will only be able to rise according to a prescribed formula by a (d) the landlord requires the dwelling or the property containing maximum of 4% annually, subject to certain limited exclusions. The the dwelling for his or her own occupation or for occupation new measures regarding Rent Pressure Zones are at all times subject by a member of his or her family; to the aforementioned overriding principle that rents may not be set (e) the landlord intends to substantially refurbish or renovate the at a level higher than the prevailing market rate. The Residential dwelling or the property containing the dwelling in a way which requires the dwelling to be vacated for that purpose; or Ireland Tenancies (Greater Security of Tenure and Rent Certainty) Bill 2018 is currently before the Government for consideration and if enacted, (f) the landlord intends to change the use of the dwelling or the all administrative areas in the State, that are not at present designated property containing the dwelling to some other use. as such, will be deemed to be Rent Pressure Zones, for a three-year If termination of the tenancy by the landlord is permissible under the period. In addition, under the proposed legislation, annual increases RTA, a valid notice of termination must be served on the tenant in in rent will be limited to increases in the annual rate of inflation, as order for the landlord to achieve vacant possession. The minimum measured by the All Items Consumer Price Index published by the notice period required will depend on the duration of the tenant’s Central Statistics Office. occupation. In order to be valid, the notice must comply with the (c) Tenant’s Rights to Remain in the Premises at the End of the following requirements: Term ■ be in writing; Part 4 of the RTA 2004 gave tenants the right to stay in rented ■ be signed by the landlord or his or her authorised agent; accommodation for up to four years in total, following an initial six- ■ specify the date of service of the notice; month period. The term of tenure has recently been increased to a ■ state the reason for the termination (where the tenancy has total of six years in respect of tenancies created from 24 December lasted for more than six months or is a fixed-term tenancy); 2016. These security of tenure provisions are commonly known as ■ specify the termination date and also that the tenant has the “Part 4 tenancies”. After the first Part 4 tenancy has passed, a new whole of the 24 hours of this date to vacate possession of the Part 4 tenancy begins entitling the tenant to remain in the dwelling dwelling; and for a further six-year term. Where a tenant is in occupation under ■ state that any issue as to the validity of the notice or the right a fixed-term contractual tenancy, the tenant can notify the landlord of the landlord to serve it must be referred to the residential that it is availing of the security of tenure provisions and is claiming tenancies board within 28 days from the receipt of the notice. a Part 4 tenancy prior to the expiry of the contractual term. (d) Tenant’s Contribution/Obligation to the Property “Costs” 12 Public Law Permits and Obligations Under the RTA, it is generally the landlord’s responsibility to effect and maintain insurance in respect of the structure of the dwelling. The tenant is not obliged to contribute to insurance costs under 12.1 What are the main laws which govern zoning/ the RTA, save where the premium payable under such policy of permitting and related matters concerning the use, insurance has been increased as a result of any act of the tenant development and occupation of land? Please briefly or any act of another occupier or visitor to the dwelling which the describe them and include environmental laws. tenant has permitted, in which case the tenant is obliged to pay the landlord an amount equal to the amount of the increase in premium. The Planning and Development Acts 2010–2017 (the “Planning Acts”) govern planning and zoning matters. The Planning Acts The cost of repairs is also generally the landlord’s responsibility regulate the zoning of areas through a variety of development, under the RTA, save where the tenant has caused deterioration to the sustainability, landscape conservation and special amenity plans. dwelling that is beyond normal wear and tear. In these instances the Most of the functions reserved by the Planning Acts are exercised tenant is obliged to make good such damage at his or her own cost. by the local authority in the area where the relevant property is situated. There are currently 31 local authorities in Ireland, each a 11.4 Would there be rights for a landlord to terminate a planning authority for the purposes of the Planning Acts, responsible residential lease and what steps would be needed for monitoring and enforcing compliance with planning laws in to achieve vacant possession if the circumstances relation to property in its area and responsible for making decisions existed for the right to be exercised? regarding applications for planning permission. Where suitable grounds for appeal exist, the decision of the planning authority, Where the tenant is in occupation under a contractual tenancy or including conditions imposed, may be appealed by the applicant to lease, the tenancy can only be terminated where the tenant is in An Bord Pleanála (the Planning Appeals Board). breach of the terms of the tenancy. Where the tenant has exercised The main laws which govern zoning and related matters are as the security of tenure under Part 4 of the RTA and claimed a Part 4 follows: tenancy, termination by the landlord will then only be permissible in the following circumstances: ■ Planning and Development Acts 2010–2017. (a) the tenant has failed to comply with any of his or her ■ The Housing Acts 1966–2014. obligations in relation to the tenancy; The main laws which govern environmental matters are as follows: (b) the dwelling is no longer suitable to the accommodation ■ The Environment (Miscellaneous Provisions) Act 2015. needs of the tenant and of any persons residing with him or ■ The Environmental Protection Agency Acts 1992–2011. her, having regard to the number of bed spaces contained in the dwelling and the size and composition of the occupying ■ The Waste Management Acts 1996–2011. household; ■ European Union (Environmental Impact Assessment) Regulations.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 151 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

■ The Water Services Acts 2007–2015. land or property, unless the development is specifically exempted ■ The Air Pollution Acts 1987 and 2011. from this requirement. The term “development” includes the carrying ■ The Building Control Acts 1990–2007. out of works (building, demolition, alteration) on land or buildings and the making of a material change of use of land or buildings. ■ The Building Regulations 1997–2014. Planning permission may not be required for certain non-structural ■ The Building Control Regulations 1997–2015. works to the interior of a building or for works which do not ■ The Wildlife Acts 1976–2012. materially affect the external appearance of the structure. However, ■ Petroleum (Exploration and Extraction) Safety Act 2010. in accordance with Building Control Regulations, an application to ■ The Finance (Local Property Tax) (Amendment) Act 2015. the local authority for a Fire Safety Certificate may be required.

Ireland ■ The Climate Action and Low Carbon Development Act 2015. Generally the Building Control Regulations require a commencement notice to be lodged with the local authority prior to commencing 12.2 Can the state force land owners to sell land to works, together with plans and specifications, a preliminary it? If so please briefly describe including price/ inspection plan and various certificates and notices. It is an offence compensation mechanism. not to submit a Commencement Notice and failure to submit a Commencement Notice cannot be regularised at a later date. A Local authorities can compulsorily acquire lands in limited Certificate of Compliance on Completion must be submitted to and circumstances such as (1) where a site is derelict and poses a danger registered by the local authority before the building or works may be in the community, (2) for the purpose of developing infrastructure, opened, occupied or used. and (3) for conservation/preservation purposes. Where property is In addition, certain licences may be required depending on the compulsorily acquired by a local authority, compensation is payable specific type of property and the type of development proposed. to all persons with an interest in the lands. The assessment of These include licences issued under the Environmental Protection compensation generally falls under a number of headings of claim to Agency Acts 1992 to 2011 (the “EPA Acts”), the Water Services include the value of the land acquired, compensation for disturbance Acts 2007 to 2015 (the “Water Services Act”), the Air Pollution and any diminution in value of any retained lands. Acts 1987 and 2011 and the Waste Management Acts 1996 to 2011 Section 158 of the National Asset Management Agency Act, (the “WMA”). 2009 (the “NAMA Act”) outlines NAMA’s powers to acquire Furthermore, health and safety legislation must be considered where land compulsorily in certain circumstances where the compulsory individuals are engaged to carry out works at a property. The Safety, acquisition is necessary to allow NAMA to deal with the property Health and Welfare at Work Acts 2005 and 2010 must be complied charged to NAMA. with for all building works. Section 16 of the Industrial Development Act, 1986 (the “IDA Act”) enables the Industrial Development Agency (the “IDA”) to acquire 12.5 Are building/use permits and licences commonly lands either compulsorily or by agreement for the purpose of industrial obtained in your jurisdiction? Can implied permission development. A large part of the IDA’s role, under legislation, is be obtained in any way (e.g. by long use)? acquiring land for development and, as a result, the IDA’s power to compulsorily acquire land was considered broad. However, in a Planning permission is generally required for any development. recent decision of the Supreme Court delivered in November 2015, However, a limited number of exemptions exist, e.g. public works, this view was somewhat curtailed. The IDA sought to compulsorily certain internal works, works to improve a private road and other acquire land for which it had no immediate use so that if and when specific exemptions. In addition, where a local authority fails a particular undertaking should seek to develop the land, it would to make a decision on a planning application within a specific be immediately available at such time. The court, considering the time limit, default planning permission is deemed to have been constitutional protection given to property rights and applying the granted pursuant to Section 23 of the Planning and Development appropriate principles of construction, held that the IDA Act does (Amendment) Act 2010. not confer any power on the IDA to acquire lands not required for Where development occurs without planning permission having been immediate use, but which might be utilised at some future time. obtained, a party can make an application for retention permission save for developments within the scope of the environmental impact 12.3 Which bodies control land/building use and/or assessment regime. If unauthorised development has taken place occupation and environmental regulation? How do and the Planning Authority has not issued enforcement proceedings buyers obtain reliable information on these matters? within seven years, it is prevented from doing so at a later date. Exceptions to this are contained in Sections 47 and 48 of the Land/building use and/or occupation: As per question 11.1 Planning and Development (Amendment) Act 2010 in respect of above, the relevant local authority is the entity responsible for developments involving quarries and peat extraction. controlling land/building use and occupation. An independent third party appeals board, An Bord Pleanála, is responsible for the 12.6 What is the typical cost of building/use permits and determination of planning appeals. the time involved in obtaining them? Environmental regulation: The Environmental Protection Agency (the “EPA”), the Office of Environmental Enforcement and local Each local authority sets a fee for a planning application which is authorities are responsible for environmental regulation. dependent on the class of development proposed and the type of permission being sought. 12.4 What main permits or licences are required for The minimum period for determination of an application for building works and/or the use of real estate? planning permission is five weeks beginning on the date of receipt of the application. However, decisions are rarely issued on the Generally, planning permission is required for any development of expiration of this five-week period.

152 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

Generally, a valid and complete application for planning permission a declaration under the Planning Acts determining the proposed is dealt with within eight weeks from the date of receipt of the works would be considered exempt from the requirement to obtain application. However, this period can vary, particularly if the local planning permission. However, a declaration cannot exempt any authority seeks further information from the applicant. Within four works which would otherwise require planning permission. weeks of a planning decision being issued, any party who made a A search of the RPS will reveal if a structure is protected. If the written submission or observation in relation to the application can structure is protected, this will limit or restrict the development appeal the decision to An Bord Pleanála. There are certain limited potential of the structure. circumstances in which a third party can appeal even where they did not make any submissions or observations in relation to the application. An Bord Pleanála has a statutory objective to determine 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real Ireland appeals within 18 weeks of receipt of an appeal. estate? Is there a public register of contaminated land Public inquiries are not very common. However, public oral in your jurisdiction? hearings are sometimes held, particularly in relation to large/ strategic infrastructure projects. If the planning authority consents Certain statutory bodies are required to publish periodic reports to the application for permission it will issue a decision to grant which identify specific properties which are hazardous or which planning permission, which is not a full permission. Once the do not comply with certain environmental requirements. However, planning authority notifies the relevant parties of its decision, the Ireland has no dedicated register of contaminated land. applicant and any third party who made a submission or observation A potential buyer would always be advised to carry out its own in relation to the application have four weeks within which to appeal due diligence where non-compliance with environmental law is a this decision or any conditions attached to it. If there is no appeal, concern. then the planning authority will issue a formal grant of planning permission at the end of the appeal period. Recent planning legislation has offered a new fast-track planning 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? process for large-scale housing developments called “strategic housing developments” for a limited period of time – up to 31 December 2019. Strategic housing developments will consist of Environmental clean-up is mandatory where a party breaches the 100 or more houses or 200 or more student bed-spaces on land provisions of the Environment (Miscellaneous Provisions) Act 2015 zoned residential or mixed residential and other uses (provided and the EPA Acts, the WMA and the Water Services Act. Sections housing constitutes at least 75% of total gross floor area of the 55 to 58 of the WMA may require that a person who is holding, development). Under this initiative applicants will undergo a recovering or disposing of waste be liable for the costs of clean-up and detailed statutory nine-week pre-application planning process, any costs incurred by the relevant regulatory authority in investigating including consultation with the relevant local planning authority and an incident. A person found guilty of an offence under the WMA, the prescribed bodies, prior to the lodgement of a planning application EPA Acts or the Water Services Act may face criminal prosecution. with a new Strategic Housing Division of An Bord Pleanála. Upon lodgement, the local planning authority must send its opinions on the 12.10 Please briefly outline any regulatory requirements proposed development to An Bord Pleanála with a recommendation for the assessment and management of the energy as to whether permission should be granted or refused or, propose performance of buildings in your jurisdiction. amendments to the scheme. An Bord Pleanála is subject to a strict 16-week period in the determination of the application and if it fails Since 1 July 2008, a BER certificate and advisory report must be to abide by this timeline, it must pay a penalty to the applicant. supplied by all sellers/landlords to a prospective buyer/tenant Under the aforementioned recent legislation, an extension of when a building is constructed, sold or rented. A BER certificate duration of planning permission and the granting of a further is an energy label for buildings which rates the building from A1 extension of duration of permission by five years has been (most efficient) to G (least efficient). Since 9 January 2013, BER introduced for a limited period of time (again up to 31 December information must also be provided in advertisements for the sale 2019) in circumstances where the local planning authority is or rental of property. The Regulations provide for exemptions for satisfied that the ‘relevant development’ (20 or more houses) has certain categories of buildings. not been completed due to circumstances beyond the control of the applicant. This avoids the cost and time of undertaking a repeat of 13 Climate Change the initial planning permission process.

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

Currently, local authorities maintain a Record of Protected The EU Emissions Trading Scheme (“ETS”) came into operation Structures (the “RPS”). Inclusion of these structures in the RPS on 1 January 2005. The scheme operates on a “cap and trade” basis. means that they are legally protected from harm and all future EU Member State governments were required to set an emissions changes to the structure are controlled and managed through the cap for each installation in the scheme. The number of allowances local development control process. Structures which are listed on allocated to each installation must be set down in the National the RPS are subject to more restrictive development conditions; Allocation Plan for the period in question, which must be approved therefore, types of work, which in another building would be by the European Commission. considered exempted development, may not be exempted where The European Communities (Greenhouse Gas Emissions Trading) the building is a protected structure. The local authority may issue Amendment Regulations 2010 provided for the revised operation

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 153 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

of the EU-wide ETS since 2013. While the European Communities to 8% below 1990 levels. Ireland committed to limit the growth in (Greenhouse Gas Emissions Trading) (Aviation) Regulations 2010 annual greenhouse gas emissions to 13% above 1990 levels by the established a procedural framework for aircraft operators in Ireland period 2008 to 2012 and to at least 20% of 1990 levels by 2020 as to participate in the EU ETS. The EPA is the designated body for part of its contribution to the overall EU target. the purposes of the ETS in Ireland.

13.3 Are there any other regulatory measures (not already 13.2 Are there any national greenhouse gas emissions mentioned) which aim to improve the sustainability of reduction targets? both newly constructed and existing buildings?

Ireland Ireland ratified the Kyoto Protocol on 31 May 2002, along with the There is a requirement under the Recast Energy Performance of EU and all other Member States. Ireland has adopted two National Buildings Directive that all EU Member States, including Ireland, Climate Strategies in order to meet its commitments under the Kyoto must ensure that all new buildings will be nearly zero energy Protocol to reduce its greenhouse gas emissions. These strategies buildings (that is, have high energy performance, with energy seek to reduce emissions through a variety of measures. Under the requirements to a significant extent being met from renewable Kyoto Protocol, the EU agreed to reduce greenhouse gas emissions sources) by 31 December 2020.

154 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Maples and Calder Ireland

Diarmuid Mawe Craig Kenny Maples and Calder Maples and Calder 75 St Stephen’s Green 75 St Stephen’s Green Dublin 2 Dublin 2 Ireland Ireland

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

Maples and Calder is a leading international law firm advising financial, institutional, business and private clients around the world, on the laws of the British Virgin Islands, the Cayman Islands, Jersey and Luxembourg. The firm’s affiliated organisation, MaplesFS, provides specialised fiduciary, corporate formation and administrative services to corporate, finance and investment funds entities. The Maples group comprises over 1,700 staff in 17 offices. Since establishing in Ireland in 2006, the Dublin office has grown to over 350 people and has advised on many high-profile and complex transactions in Ireland.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 155 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 16

Israel Moshe Merdler

Ziv Lev & Co. Law Office Ziv Lev

the streets. This Act has a diminishing influence, due especially to 1 Real Estate Law an amendment which provides that under particular circumstances, businesses are to pay market-standard rent. 1.1 Please briefly describe the main laws that govern Finally, it is also worthwhile mentioning the Pledges Law, which real estate in your jurisdiction. Laws relating to regulates, amongst other matters, encumbrances of contractual rights. leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to 1.2 What is the impact (if any) on real estate of local question 12.1. Those relating to tax should be listed in common law in your jurisdiction? response to questions in Section 9. Israel’s legal system is based on common law derived from the The Israeli legislative framework consists of “Regular” laws or British Mandate period and the Precedents set by the Supreme acts and “Fundamental” or “Basic” laws, which are essentially Court. The latter is binding on all lower courts. constitutional in character and effect (although Israel has no constitution). “Regular” laws are interpreted according to the provisions of “Basic” laws. There are two “Basic” laws which 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted have an overall effect on real estate matters – Human Dignity and locally in EU countries. Liberty and Israel Lands. The latter was approved on 25 July 1960, and prohibits the transfer of ownership of state land (including land According to the prevailing legislation to date, international owned by state entities such as the Jewish National Fund, which laws are not relevant to real estate in Israel. Even in the case of altogether consists of more than 90% of Israel’s territory), whereas inheritance, local courts are required to give effect to foreign wills the former, approved on 17 March 1992, stipulates that basic human and/or probate orders. rights in Israel are founded on the recognition of human dignity and aims to protect human life, a human’s body, property, personal liberty, the right of a person to leave and enter the country, privacy 2 Ownership and confidentiality. As such, it defines the right to have a title on one’s property as a constitutional right. It should be noted that the Israel Lands Basic Law has led to the practice that state-owned land 2.1 Are there legal restrictions on ownership of real estate (both residential and commercial) is usually leased for long periods by particular classes of persons (e.g. non-resident persons)? (usually 49 years with an additional 49-year option). The Land Law is the primary legal instrument used to define rights in Legal restrictions only apply to state-owned land, where long- real estate property, and the manner in which real estate transactions term leases require specific approval of Israel Land’s Authority should be executed and registered, whereas the Real Estate Taxation (hereinafter: “RMI”). Law regulates the manner in which real estate transactions are taxed. The Rental and Borrowing Act regulates the rental of real estate (as well as of chattels) and the Sale Act (Apartments) and the Sale Act 3 Real Estate Rights (Apartments) (Assuring the Investments of Apartments’ Buyers) regulate transactions in newly built apartments (those both built and under construction) with a view to assuring down-payments of 3.1 What are the types of rights over land recognised in purchasers via bank guarantees provided by the constructor, as well your jurisdiction? Are any of them purely contractual between the parties? as of the building quality, by imposing long-term guarantee periods during which the constructor is responsible for repairing any faults or defects in the building and/or apartments. A reminder of the past can As noted, rights over land are defined under the provisions of be found in the Tenant Protection Act, which regulates the rights the Land Law and they include ownership, leasehold, mortgage, of tenants described as “Protected Tenants” in both residential and easement and pre-emption. business premises. Such tenants acquired their status between 1940 Ownership is the best and most exclusive right, allowing possession and 1960, when there were many poor people, resulting in a need and usage which are only subject to restrictions under law and/or to prevent landlords from raising rents and/or evicting tenants onto agreements. Leasehold provides the right to hold and use, albeit for

156 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

a limited period of time. Under Israeli law, there are various types of leasehold which are defined by the length of the lease. A lease which 4.4 What rights in land are not required to be registered? is 25 years or longer is regarded as a sub-right subject, amongst others, to taxation. A mortgage is a security interest (pledge) over As noted, there is no compulsion to register any right; however, the land and an easement is the right to use land in a particular manner Land Law provides that a real estate transaction is concluded only without possession. Pre-emption is a right of first offer. with registration. In addition, some rights require registration in order to prove proprietary rights, such as easements gained through a consecutive use of 30 years or more. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed thereon? 4.5 Where there are both unregistered and registered land Israel In practice, this scenario does not exist in Israel. Theoretically, this or rights is there a probationary period following first might be possible only in the case of an agreement, which divides registration or are there perhaps different classes or qualities of title on first registration? Please give the rights in the described manner, or in a case where the rights details. First registration means the occasion upon diverge due to practical reasons, e.g. in case a tunnel passes under a which unregistered land or rights are first registered plot of land. This scenario is only possible in practice in the case of in the registries. state (RMI)/municipal-owned land which is leased to a third party. There is no probationary period following first registration; however, 3.3 Is there a split between legal title and beneficial title its conclusion is subject to a notice in the Official Gazette. This is in your jurisdiction and what are the registration becoming quite rare as unregistered land has become only a fraction consequences of any split? Are there any proposals of the land in Israel. to change this?

4.6 On a land sale, when is title (or ownership) transferred One can split between a legal title and a right to benefit from land. to the buyer? In order to secure the beneficiary’s rights one can either register a notice over the legal title and/or a mortgage. Title to beneficiary Title is transferred once actual registration takes place at the Land can only be registered via a lease agreement, signed between the Registry. In order to execute the registration, one needs to submit holder of the legal title and the beneficiary. At the moment there is the sale and purchase deeds and tax certificates (both from the tax no known proposal to change this. authorities and from the local council). It should be noted that, considering the fact that the majority of lands in Israel are state- 4 System of Registration owned lands, they could also be transferred once registration takes place at RMI, in case the lease is not registered at the Land Registry.

4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later rights? Israel has a regulated land registry office, which provides computerised services and encompasses the majority of the land in In principle, an earlier transaction has priority over a later one, Israel. Under the existing system, there are two categories of land; unless the buyer in the later transaction relied on good faith on the firstly Regulated Property, which is land that has been subject to registration at the Land Registry and completed the registration a public verification procedure (including boundaries and related before the earlier transaction. rights) and is therefore registered under the Title Registration. Regulated Property is identified by parcel and block numbers. The second category of land is Unregulated Property, which has not been 5 The Registry / Registries subject to said verification procedure. Accordingly, the registration is in the Deeds Registration book and is identified by page numbers. 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules 4.2 Is there a state guarantee of title? What does it and requirements. guarantee? There are altogether nine regional offices of the Land Registry and There is no state guarantee of a title. Title Registration provides two additional branches which operate on a part-time basis. The conclusive evidence of the registered right, whereas the Deeds rules which govern their operation are the same and they only differ Registration book constitutes only a prima facie evidence thereof. in their geographical responsibility. In Israeli law, the principle of good faith has a prevailing effect and, therefore, a buyer of a right in regulated land, who relied on the registration in good faith and paid consideration, has a prevailing right. 5.2 How do the owners of registered real estate prove their title?

4.3 What rights in land are compulsory registrable? What As noted, Title Registration in the real estate Registrar provides (if any) is the consequence of non-registration? conclusive evidence of the registered right.

There is no obligation to register any rights. However, non- registration of a right results in an exposure to one’s rights which are merely contractual rights rather than proprietary ones and might lead to conflicts regarding the question of ownership.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 157 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

fixed percentage of the sale price (such as 1%–2%), an hourly rate, 5.3 Can any transaction relating to registered real estate or a combination of both. The remuneration of other professionals be completed electronically? What documents need is also based on either an hourly rate or on a certain percentage, to be provided to the land registry for the registration depending on the deal, the work involved, etc. of ownership right? Can information on ownership of registered real estate be accessed electronically? 6.3 Is there any change in the sources or the availability Transactions cannot be completed electronically; however, as of capital to finance real estate transactions in previously noted, information can be accessed electronically via the your jurisdiction, whether equity or debt? What are internet. The documents generally required in order to complete a the main sources of capital you see active in your

Israel market? transaction are sale and purchase deeds or transfer of lease deeds, tax certificates (both from the tax authorities and local authority) and, in the case of a corporation, a protocol of the board of directors/ Since the introduction of the reform of the Israeli financial markets, governors affirming the sale and a lawyer’s confirmation that the whereby the government ceased to issue subsidised government company is operating and in good standing order. bonds to institutional investors, these same institutional investors have acted not only as investors but also as lenders, creating finance packages for real estate transactions in Israel and resulting in a 5.4 Can compensation be claimed from the registry/ noticeable increase in the availability of capital to finance real estate registries if it/they make a mistake? transactions. Furthermore, an additional form of finance is bonds issued and traded on the Tel Aviv Stock Exchange. The bonds can Under Israeli Tort Law, the state may be held liable for damages. be issued without collateral and with limited covenants. The state is not liable in cases where it acts within its lawful boundaries and in cases where it has reasonable belief that it acted within its lawful authorisation. 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and what are the sectors/areas of most interest? Please 5.5 Are there restrictions on public access to the give examples. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and Considering Israel’s real estate market’s (small) size, investors and other rights affecting real estate and is this achieved developers are always looking beyond primary real estate markets. by a search of the register? If not, what additional However, opportunities are closely connected with infrastructure information/process is required? development. The residential sector has been subject to the most interest; however, the reform initiated by the government to lower The Land Registry is open to the public and any person (not only the prices of flats has brought a reduction in the overall numbers of the buyer) may obtain extracts, which include details about the title flats built and/or sold. holders’ identity (name and ID, both of present and past holders), any notices (such as of a transaction that has been signed regarding the property and/or easements and/or any formal order), and/or 6.5 Have you observed any trends in particular market information concerning a third party’s rights, such as in the case of sub sectors slowing down in your jurisdiction in a mortgage. In order to access the deeds, a buyer needs a power of terms of their attractiveness to investors/developers? Please give examples. attorney from the seller or a court warrant.

Israel’s Parliament has been fighting the high residential prices and 6 Real Estate Market their permanent rise, amongst others, by annulling tax benefits and imposing higher stamp duty and other related taxes on residential investors, thus rendering this form of investment less appealing. 6.1 Which parties (in addition to the buyer and seller On the other hand, the government has been encouraging the and the buyer’s finance provider) would normally development of the residential market in order to increase the be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or availability of residential projects with the view of further lowering duties. the prices of flats. Accordingly, developers of residential real estate projects, especially those aimed at first time buyers and non-luxurious As is common in other parts of the world, real estate transactions projects, are currently enjoying favourable terms and opportunities. involve one or more of the following: real estate agents; and lawyers. Additional parties are, inter alia, constructors, architects, 7 Liabilities of Buyers and Sellers in Real appraisers and surveyors, with the latter also acting on behalf of the Estate Transactions buyer’s finance provider.

6.2 How and on what basis are these persons 7.1 What (if any) are the minimum formalities for the sale remunerated? and purchase of real estate?

Real estate agents are normally paid anything between 1% and The Land Law provides that the sale and purchase of real estate 2% of the sale price, depending on the nature of the deal and its requires a written document which should include all of the essential complexity, as well as the question of whether they received details such as price, terms of payment and a description of the exclusivity or not. This also determines whether only one or both property. parties pay conveyance fees. Lawyers’ fees are either based on a

158 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

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

One of Israel’s most substantial principles is the obligation to act in As noted, the principle of acting in good faith extends to the buyer good faith. Accordingly, any party is under a duty to act in good as well. It is customary that a buyer registers a notice regarding the faith when in the course of a contractual relationship, commencing sale and purchase agreement, thus allowing the release of the first at the negotiation phase through to the actual signing of the contract instalment, which is normally deposited in an escrow account. In and its execution. The extent of disclosure is always a matter of addition, a buyer is subject to a purchase tax. Non-registration of

circumstances, and depends, amongst other matters, on the text of the said notice within a defined period of time (normally a few days) Israel the contract, especially on the buyer representations and warranties, will result in the release of the deposit. and the relationship between the parties. Without derogating from the aforesaid, especially considering the fact that Israeli courts tend to interpret the good faith principle in a very broad manner, the disclosure 8 Finance and Banking duty usually includes all the essential facts of the transactions. 8.1 Please briefly describe any regulations concerning 7.3 Can the seller be liable to the buyer for the lending of money to finance real estate. Are the misrepresentation? rules different as between resident and non-resident persons and/or between individual persons and corporate entities? As noted, especially considering the duty to act in good faith, a seller may be found liable for misrepresentation even in a case where he Real estate loans are regulated by the Bank of Israel, with special does not provide contractual representations and warranties. It emphasis on the allowed loan-to-value ratio, terms of repayment, should be noted in this respect that the good faith principle operates guarantees, information to borrowers and more. In general, lending in both directions, so a buyer who did not rely on a representation legislation applies equally to both individuals (whether residents and/or was aware of a problem in a property but decided to contract or foreigners) and corporations. It is worthwhile mentioning that, nevertheless cannot use non-disclosure or misrepresentation as a during the last few years, the Bank of Israel has made borrowing cause of action. more difficult, lowering the allowed loan-to-value ratio. It is also worthwhile mentioning that there are legislative 7.4 Do sellers usually give any form of title “guarantee” provisions, which determine the entitlement of residential premises or contractual warranties to the buyer? What would to subsidiaries. be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or 8.2 What are the main methods by which a real estate warranties act as a substitute for the buyer carrying lender seeks to protect itself from default by the out his own diligence? borrower?

As noted in question 7.2 – any party is under a duty to act in good First degree mortgages, registered on the borrowers’ rights in favour faith when in the course of a contractual relationship, commencing of the lenders, are the most common method used by real estate at the negotiation phase through to the actual signing of the lenders. Due to the fact that in many cases the borrower is not the contract and its execution. It is quite common that sellers provide registered owner of the asset at the date the finance is required, representations on essential matters relating to the transaction. A the mortgage is often registered on the seller’s rights but subject warrant regarding ownership is a common clause in sale contracts, to the lender’s guarantee to erase the mortgage in case the deal is this is usually buttressed by an extract from the Land Register and/ cancelled and it receives the loan back from the seller, or in case the or a confirmation letter from the RMI. consideration is fully paid – a non-recourse clause. Other methods Warranties do not replace a due diligence inspection by the buyer. of guaranteeing the lender’s rights when registration of a mortgage Most contracts containing representations and/or warranties by the is impossible (for example, due to non-completion of the registration seller also contain a declaration on behalf of the buyer, stating that of a communal house, differentiating each flat as a separate registry) he has conducted his own due diligence inspection. is to register a notice on the seller’s title (at the Land Registry) and In addition, special provisions exist with regard to newly built a pledge is registered over the contractual rights of the borrower. premises in the Sale Act (Apartments), extending the duty of Purchasers of residential premises are often required to provide representation with regard to the specification of the premises. personal guarantees, as well as to obtain life insurance and structure insurance naming the lender (the Bank) as the beneficiary.

7.5 Does the seller retain any liabilities in respect of the property post sale? Please give details. 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without It is not uncommon that a seller retains liabilities in respect of the involving court proceedings or the contribution of the property post sale. Liabilities depend on the transaction in hand and mortgagor? may be in a variety of matters but common ones are in respect of planning, such as obtaining a building permit for parts which were Proceedings for the realisation of a mortgaged property are either not licensed in the original permit, bearing the price of purifying conducted via the execution office or via court proceedings. In both contaminated land or vacating a tenant. cases, the lender submits a request to appoint a receiver. The difference is concerned with the limited authority the head of the execution office has, and therefore more complicated cases are submitted to court.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 159 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

cases the lender will seek to sell the shares and retrieve the debt 8.4 What minimum formalities are required for real estate rather than hold the shares. In cases of insolvency or reorganisation lending? – in case the lender has a first degree security over the shares – he will be regarded as a secured creditor and receive funds before other No formalities regarding real estate lending exist, but, in the case of creditors. In the case of a receiver – the lender will normally receive a company obtaining a mortgage, registration must be carried out payment and not shares. both with the Land Registry and with the Companies Registry in order to bind liquidators and creditors. 9 Tax

Israel 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other 9.1 Are transfers of real estate subject to a transfer tax? creditors? How much? Who is liable?

In cases where a mortgage of first degree is registered with the Transfers of real estate in Israel are subject to a transfer tax, also Land Registry on the borrower’s rights in the property, the lender referred to as purchase tax, which is imposed on the buyer. The rate is regarded as a secured creditor and therefore has a prevailing right is determined according to the type of property sold. Purchasers of over other creditors’ claims regarding the mortgaged property and non-residential real estate, namely commercial properties or land, the sale proceeds thereof. are normally subject to a flat rate of 6% of the value of the property, and purchasers of flats are subject to three-tiered rates ranging 8.6 Under what circumstances can security taken by a from 0% to 10% depending on whether the purchasers own more lender be avoided or rendered unenforceable? than one flat, and on the price of the flat. It should be noted that rates have been recently increased via a legislative change aimed at There are several causes, which can lead to such a result. First, there discouraging the purchase of more than one flat. are rules regarding the enforceability of mortgages against debtors, requiring a lender to comply with a list of terms and conditions 9.2 When is the transfer tax paid? prior to execution, inter alia, those imposed by the Bank of Israel regulatory bodies. Other cases, which might lead to the frustration It is obligatory to submit a tax calculation within 30 days from the of a security are when a lender has misrepresented the terms and date on which the sale and purchase agreement has been signed conditions of the loan or when the pledged property does not belong (recently shortened from 40 days). Up to 20 days thereafter, the tax to the debtor/borrower and he did not have the right to register a authorities are obliged to provide the purchaser with payment slips, mortgage. Without derogating from the aforesaid, such cases are not and payment becomes due. common as lenders usually use all necessary measures, including during due diligence, to avoid such occurrences. 9.3 Are transfers of real estate by individuals subject to income tax? 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? The answer to this question depends on whether the individual is a sole trader and if he deals in buying and selling real estate properties; A borrower/debtor can turn to court and/or to the execution bureau and in such a case, he is obliged to pay income tax rather than capital seek an injunction/declaratory judgment against the lender. It should gains tax (which is referred to in Israel as land appreciation tax; be noted in this respect that in Israel, as opposed to other jurisdictions, hereinafter: “land appreciation tax”). measures are legal rather operational in nature. Accordingly, a borrower cannot withhold information that a lender may require in order to take enforcement action, as it would be, in itself, a breach of 9.4 Are transfers of real estate subject to VAT? How the loan agreement and give rise to enforcement actions. much? Who is liable? Are there any exemptions?

The liability of paying VAT is primarily related to the question 8.8 What is the impact of an insolvency process or a whether a “dealer” (as defined under the VAT legislation) is corporate rehabilitation process on the position of a involved in the transaction. In general, the sale of residential real estate lender? properties between private individuals is exempt from VAT, and all other transactions involving dealers and/or organisations and/or The impact of the said processes on a real estate lender is dependent financial institutions are subject to VAT unless the buyer purchases on the type of securities the lender obtained and registered. the property for his personal use. The current rate of VAT in Israel is 17%. 8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, 9.5 What other tax or taxes (if any) are payable by the can shares be appropriated when a borrower is in seller on the disposal of a property? administration or has entered another insolvency or reorganisation procedure? The seller is subject to land appreciation tax, which is set at various rates depending on the period during which the owner has owned Israel’s legal system is a common law-based system and enforcement the property. Following the new tax reform, the obligation of paying of security over share is made via a nomination of a receiver. The the appreciation tax has been shifted to the buyer, who is obliged to ability to appropriate shares in a borrower is essentially dependant pay a down-payment once 40% of the consideration is due. The on the nature of the security and the goals of the lender, as in most sum of the down-payment is determined according to the date the

160 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

property was acquired by the seller – for purchases on or before 7 November 2001, the sum is equal to 15% of the consideration; if the 10.3 What are the typical provisions for leases of business property was purchased after 7 November 2001, the sum is equal premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or to 7.5% of the consideration. Furthermore, the calculation of the sub-lease; (d) insurance; (e) (i) change of control of tax varies when applied to different periods of ownership. It is also the tenant; and (ii) transfer of lease as a result of a worthwhile mentioning that recent changes in legislation, aimed corporate restructuring (e.g. merger); and (f) repairs? at reducing the prices of flats, has led to the abolition of different exemptions applied to the sale of flats, e.g. the exemption from land a) Length of term appreciation tax if a flat is sold four years or more after the date it Open to negotiation and usually does not exceed 25 years as, in such was purchased. Israel a case, the transaction is subject to tax. b) Rent increase 9.6 Is taxation different if ownership of a company (or Rent increases usually depend on several matters, one of which is other entity) owning real estate is transferred? the currency in which the rent is charged. Previously it was popular to charge the rent in US dollars and to link it to the US dollar with a A sale of shares in a company which owns real estate does not button rate of 4 NIS to 1 US Dollar. Today most leases are charged trigger tax liability unless the company is regarded as a “real estate in NIS and linked to the Consumer Price Index. Rent is periodically entity”; namely a corporation all or most of whose activities are increased as frequently as annually up to a five-yearly increase. concentrated in the holding of real estate. c) Tenant’s right to sell or sublease Under the provisions of the Rental and Borrowing Act, a landlord 9.7 Are there any tax issues that a buyer of real estate cannot unreasonably object to an assignment of rights and/or a should always take into consideration/conduct due diligence on? sublease and, according to the prevailing precedent, this cannot be waived and/or made obsolete in an agreement. Having said that, there is nevertheless a possibility to limit the tenant’s said rights by The main tax issues which a buyer has to take into account are setting clear criteria for the assignee and requiring undertakings and concerned with ensuring that the consideration is used to pay the guarantees which may render this exercise unpractical. taxes of the seller. Otherwise, the buyer might find himself in a position whereby he is unable to register the rights in the property d) Insurance in his name. Accordingly, the sale and purchase agreement should Landlords typically maintain property insurance but lease include specific provisions for payment of taxes and where necessary agreements provide that they are reimbursed by the tenants, who – the creation of an escrow account into which the consideration are also often required to maintain contents, third party and loss is paid and from which taxes are paid. As to due diligence, the of income insurance, as well as employer’s liability and all-risk buyer has to assess the tax liability of the seller so that the relevant insurance. This is especially relevant when a tenant carries out provisions include adequate sums to cover the potential tax liability. construction (adaptation) works. It should be noted that this is not only concerned with land taxation e) (i) Change of control of the tenant but also with regard to municipal taxation and payments to RMI e) (ii) Transfer of lease as a result of a corporate restructuring (e.g. (where applicable) – as registration of rights in land are subject to merger) the local council’s/RMI consent. It goes without saying that a buyer It is common that lease agreements prohibit changes in the control also has to assess his own personal tax liability, especially in case of a tenant without the landlord’s previous acknowledgment and finance is required. consent. f) Repairs 10 Leases of Business Premises Tenants often bear the liability of maintaining the premises, except for wear and tear.

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

10.2 What types of business lease exist? 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a Essentially there are no restrictions under law as to the types of tenant to extend or renew the lease or for either party leases (however, there are specific provisions relating to a business to be compensated by the other for any reason on lease of protected tenants) and these are freely negotiated between termination? property owners and lessors. It is common that under business leases in malls and/or commercial centres the tenant pays maintenance/ In most cases, business leases are terminated upon the term’s expiry. management fees and municipal taxes. There are no special provisions under law allowing the tenant to

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 161 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

extend and/or renew the lease. In a case where the lease is tacitly prolonged, each party can terminate at any time, subject to a notice. 11 Leases of Residential Premises The Borrowing and Rent Act provides that termination shall be within a period of three months or less. 11.1 Please briefly describe the main laws that regulate leases of residential premises. 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective The main law that regulates leases of residential premises is the 1971 obligations under the lease once they have sold their Lease and Borrowing Act which was recently amended to include interest? Can they be responsible after the sale in more favourable provisions to protect tenants. An additional,

Israel respect of pre-sale non-compliance? historical law, is the 1972 Protection of Tenant Act, which regulates the rights of protected tenants who benefit from secured rent rates. In essence, the answer to this question is negative; namely that rights and liabilities are transferred and vested in the new tenant/ 11.2 Do the laws differ if the premises are intended for landlord, although they obviously bear responsibility for the period multiple different residential occupiers? that precedes the transfer of rights.

There are no special provisions in cases where premises are intended 10.7 Green leases seek to impose obligations on for multiple different residential occupiers. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 11.3 What would typical provisions for a lease of briefly describe any “green obligations” commonly residential premises be in your jurisdiction regarding: found in leases stating whether these are clearly (a) length of term; (b) rent increases/controls; (c) the defined, enforceable legal obligations or something tenant’s rights to remain in the premises at the end of not amounting to enforceable legal obligations (for the term; and (d) the tenant’s contribution/obligation example aspirational objectives). to the property “costs” e.g. insurance and repair?

Green leases are not a common phenomenon in Israel. “Green” a) Length of term: typically, it would be a 12-month option requirements are becoming part of building permits; however, there followed by an option for an additional 12-month period. are no conclusive or encompassing rules thereof and it is very much b) Rent increase: commercially negotiable and not limited under at the discretion of the local planning authority to determine these law. Normally it would be around a 5% increase. requirements. c) Right to remain: unless the tenant has a specific right to prolong the rent period, they have no right to remain in the premises. The landlord is however obliged under law to 10.8 Are there any trends in your market towards more notify the tenant in advance if he wishes to prolong the rent flexible space for occupiers, such as shared period or not. short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ d) Tenant’s contribution: tenant is required to repair any damage activities for residents (co-living)? If so please provide resulting from using the flat in an unreasonable manner. examples/details. The landlord is responsible for repairing any other damage in the infrastructure of the premises, such as damage to the pipework, electricity, etc., no later than 30 days after it has Israel is a leading country in flexible, short-term working spaces and occurred. In cases where the damage prevents the usage of sees the presence of international firms such as WeWork or local the premises, the repair must be carried out no later than three firms operating on essentially similar standards. With respect to days after it occurred. In addition, the tenant is responsible shared residential spaces – Israel has focused on affordable living for paying any tax and or expense related to the usage of with the view of its master plan to lower prices of rent and properties the premises such as council tax, water, electricity, gas generally and enable younger people proper housing solutions. and management fees. Tenants are not obliged to bear any On 3 August 2011, the Knesset approved the Planning and Building insurance costs related to the construction/infrastructure of the premises nor any conveyancing costs, in case the agent Procedures Law for the Acceleration of Residential Building acted on behalf of the landlord. (Temporary Order), which allows for the establishment of national housing committees for rapid discussion of residential building plans. For affordable housing, and to determine its price, and 11.4 Would there be rights for a landlord to terminate a those who are entitled to it. On 5 February 2018, the Knesset residential lease and what steps would be needed approved the “Affordable Housing Law”. The law enables local and to achieve vacant possession if the circumstances existed for the right to be exercised? independent planning committees to allocate construction additions to the developers beyond the approved areas. This is provided that the apartments that will be built with the additional construction will The landlord has the right to terminate the residential lease in case be allocated for long-term rentals and a quarter of them at a discount of a breach or in case such a right is explicitly provided in the rent from the market price. In addition, several municipalities have agreement. It should be noted in this respect that the 1971 Lease and initiated projects for affordable residential spaces. This initiative is Borrowing Act has declared such clauses null and void in case the based on a lottery of designated apartments. Winners are entitled to right to terminate was not granted both to the landlord and the tenant rent apartments at reduced prices for a fixed term (e.g., in Tel Aviv and provided it was subject to a minimal notice term – the landlord – it is for a period of three years with an option for an additional not less than 90 days in advance and the tenant not less than 60 period of two years). days in advance. In case a landlord activates his right to terminate and the tenant fails to vacate the premises, the landlord can use a

162 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

special procedure, explicitly outlined in the 1984 Civil Ordinance, (environmental, transport, sheltered areas, etc.). Once the in which he can obtain a verdict within a period of ca. 90 days and construction works have finished, additional permits and approvals which enables him to issue a separate demand regarding the lawsuit are required both from the local authority and from other authorities, without having to apply for a permission to split the claims. such as the police and the fire prevention authorities, in order to allow the use of the newly-erected building and connect it to the existing infrastructure (water, sewage and electricity). As noted, 12 Public Law Permits and Obligations the Licensing of Businesses Law lists ca. 200 businesses which require a permit to operate. This is obtained from the licensing department at the local council but involves an interaction with all 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, the said bodies, namely the local planning and building committee, Israel development and occupation of land? Please briefly the Ministry of Health, the Ministry of Environment, the police and describe them and include environmental laws. the fire prevention authority.

Zoning and related matters are governed by the provisions of the 12.5 Are building/use permits and licences commonly Planning and Building Law and the regulations enacted under its obtained in your jurisdiction? Can implied permission provisions. It aims at governing the manner in which land is used be obtained in any way (e.g. by long use)? and it has a special emphasis on the manner in which zoning, as well as national plans, are adopted and implemented. Businesses Building and use permits as well as business permits are commonly are also regulated under the Licensing of Businesses Law, which obtained, albeit there are quite a few problems in the process, sets conditions regarding the operation of certain businesses in especially with regard to obtaining business permits. This is usually relation to their premises. Planning and Building Regulations a long and bureaucratic process which entails an internal paradox, (Environmental Impact Assessments) incorporate environmental namely that one has to open a business without a permit, because the considerations in the early stages of the zoning process, and the law requires that the business is up and running before a permit can Protection of the Coastal Environment Law is aimed at protecting be issued. Regardless of the aforementioned, an implied permission and preserving the coastal environment and natural resources. cannot be obtained and at most it can assist in avoiding criminal In addition, there are several other laws dealing with specific subject proceedings. matters which require an environmental permit. For example, the 1993 Hazardous Substances Law requires any premises selling hazardous 12.6 What is the typical cost of building/use permits and substances and any business dealing with poisons to obtain a permit. the time involved in obtaining them?

12.2 Can the state force land owners to sell land to The costs, as well as the time involved in obtaining building/use it? If so please briefly describe including price/ permits, depend on various factors; amongst others: how complex compensation mechanism. the project is and whether its size and shape, as well as the planned use, fall within the existing zoning plan framework or not. Obtaining The state can force land owners to sell land to it in cases where it permits is usually a lengthy and bureaucratic procedure which is used for a public purpose. The process is actually expropriation takes anything from a few months to years. This, and the ongoing and it exists in various laws, such as the Planning and Building shortage of residential premises, resulting in very high real estate Law, the Land Ordinance, the Water Act, the Law of Building and prices and, subsequently, recent protests in Israel, has brought the Evacuation of Development Areas, the Antiquities Act and more. government to review the recent Planning and Building Act, which Usually, a particular percentage of land can be expropriated without was legislated in the 1960s and which, as noted, is characterised any compensation, ranging from 25% to 40%. A compensation by bureaucratic processes. The new legislation is aimed at mechanism is plainly set via an appraiser, who determines the value substantially shortening the process (and subsequently the period) of the land expropriated. of obtaining a permit, setting it around 90 days. The costs involved are determined according to the size of the plot and the building, as the tolls, building fees and levies are calculated according to square 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do metres and/or volume. In addition, a land improvement levy may buyers obtain reliable information on these matters? also be imposed in cases where the permit provides an increase in the property’s value, for example, or in a case where the permitted Buyers can obtain reliable information from the local council, use deviates from the orders contained in the zoning plan. via the engineering and local planning and building committee, which controls and supervises land and building use. The local 12.7 Are there any regulations on the protection of historic planning and building committee issues permits and licences and monuments in your jurisdiction? If any, when and how all the information is contained in the engineering department’s are they likely to affect the transfer of rights in real archives, which are open to the public. In addition, the Ministry of estate or development/change of use? Environment operates an information centre which is open to the public. Israel ratified the Convention for the Protection of World Cultural and Natural Heritage on 6 January 2000, joining the 159 countries who were already party to the convention. Within a short time 12.4 What main permits or licences are required for of ratification, the Israel World Heritage Committee submitted building works and/or the use of real estate? a tentative list of 23 properties which it intended to nominate for inscription, followed by two additional sites in 2002. In addition, Building works require a building permit, which comprises not the Antiquities Law was enacted in order to protect Israel’s only a building plan but a rather long list of plans related thereto antiquities, which are defined as any object which was made by

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 163 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

man before 1700 CE, or any zoological or botanical remains from However, there are several standards for green and energy-efficiency before the year 1300 CE. Usually the problem entails building upon which are due to become regulatory requirements and are currently land which contains archaeological remains, and not in the transfer being adopted by an ever increasing amount of developers and of rights. In addition, municipalities and local councils often list builders as well as local councils and municipalities such as SI 5281. properties as historic buildings for preservation. Buildings and sites declared as historic monuments or as properties for preservation will be subject to strict limitations as to development and/or change 13 Climate Change of use, requiring close work with the authorities. Such an effort is usually a very complex one, but projects like the Sarona market, 13.1 Please briefly explain the nature and extent of any Israel which included, on one hand the preservation of many historical regulatory measures for reducing carbon dioxide houses of the Templers community, but on the other hand allowed emissions (including any mandatory emissions the construction of a food market, a residential project and the trading scheme). change of original use, shows that such projects are possible. Under the provisions of the Clean Air Law, carbon dioxide 12.8 How can e.g. a potential buyer obtain reliable (“CO2”) is regarded as a pollutant and the said law, as well as the information on contamination and pollution of real related regulations, are the only existing framework dealing with estate? Is there a public register of contaminated land CO2. Israel, which is classified as a non-Annex I country under in your jurisdiction? the Climate Change Convention, ratified the Kyoto Protocol in February 2004 and founded a Designated National Authority There is no public register of contaminated land in Israel. Israel’s (“NDA”), thus paving the way for implementing CDM projects in Knesset approved the Land Contamination Bill at the first reading its territory. The Israeli NDA is formed out of representatives from at the beginning of August 2011, and 2012 saw further discussions a number of Ministries, governmental and public bodies, such as the regarding its final approval. The proposed law provides a Ministry of Transportation, the Ministry of Industry and Trade and comprehensive response to the treatment of thousands of pollution the Manufacturers’ Association, and its role is to determine whether spots, which constitute a health and environmental hazard. One of a proposed CDM project complies with sustainable development the main provisions of the law is granting the Land Registrar the criteria, as per the above-mentioned Article 12. The NDA has authority to include a notice about the contamination of the land in formulated sustainable development indicators which will be used the Land Registry. in the assessment process of the Project Design Document. To At the moment, information regarding contaminated land exists date, the NDA has approved several projects for the reduction of in various authorities, including the local authority (at the greenhouse gas emissions in the fields of waste, renewable energy, environmental department), the water authority, the parks and production efficiency and wastewater treatment. However, there are nature authority, etc. Under the provisions of the 1998 Freedom of no mandatory emissions trading schemes in Israel to date. Information Law, governmental and public authorities are obliged to publish annual reports and the public is allowed access to the relevant 13.2 Are there any national greenhouse gas emissions data upon which these reports are based. Furthermore, citizens, reduction targets? as well as public organisations, are allowed access to information held by public agencies and public bodies, which include, amongst At COP15 in Copenhagen, former President S. Peres declared that others, government Ministries, Israel’s Parliament (the Knesset), Israel will do its best to reduce GHG emissions by 20% compared courts, local government, governmental corporations and statutory to “business as usual”, by the year 2020. This declaration was bodies. Despite the fact that the Freedom of Information Law formalised by a government decision, in March 2010, that also includes provisions which allow the relevant body or authority to established an intergovernmental committee comprising the deny access to information, it is obliged to release information on Directors General of relevant Ministries tasked with formulating a “substances that were emitted, discharged or released into the national plan to reduce GHG emissions. In addition, it should be environment”, or “results of measurements of noise, odours or noted in this respect that the Clean Air Law calls on the Ministry radiation measured on public property”. of Environmental Protection to submit a multi-annual programme Furthermore, the 2009 Freedom of Information Regulations (2012–2020) on improving air quality in Israel. The programme (provision of environment-related information to the public) have aims to improve air quality in Israel, while reviewing the existing fundamentally increased the public’s ability to access environment- policy on air pollution prevention from transport, industry, energy related information. and the domestic sector vis-à-vis ambient and target values, and determines future policy on abating air pollution from these sources. The programme will be updated every five years. On 11 December 12.9 In what circumstances (if any) is environmental clean- 2011, the Ministry of Environmental Protection distributed Israel’s up ever mandatory? first ever multi-annual national programme for the prevention and reduction of air pollution. The programme encompasses a wide Environmental clean-up is indirectly mandatory via orders handed range of guidelines, the implementation of which should bring about down according to the laws and regulations of the Business a continuous reduction and prevention of pollutant emissions into Licensing Law, the Hazardous Substance Law and many others. the air.

12.10 Please briefly outline any regulatory requirements 13.3 Are there any other regulatory measures (not already for the assessment and management of the energy mentioned) which aim to improve the sustainability of performance of buildings in your jurisdiction. both newly constructed and existing buildings?

There are no regulatory requirements for the assessment and/ Israel is located in an area, which is part of the Afro-Syria rift and or management of the energy performance of buildings in Israel. is therefore potentially exposed to earthquakes. Since the 1980s,

164 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ziv Lev & Co. Law Office Israel

every new construction has to conform to the Israeli standard for Other measures worth mentioning are the Green Building Standard, earthquakes, and the National Building Scheme Number 38 provides which applies both to new buildings and to building renovations, and incentives in the form of additional building rights to those who was introduced by the Ministry of Environmental Protection in July strengthen the construction of buildings which were built before the 2011 and, in addition, the Government Housing Administration’s 1980s. commitment to implementing Israel’s green building standard in all new government constructions and major renovations.

Moshe Merdler Ziv Lev Israel Ziv Lev & Co. Law Office Ziv Lev & Co. Law Office 98 Yigal Alon St., Electra Tower 98 Yigal Alon St., Electra Tower Tel-Aviv, 67891 Tel-Aviv, 67891 Israel Israel

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

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

Ziv Lev & Co. Law Office is a commercial and civil law firm, located in the heart of Tel Aviv’s business district. The firm offers the entire range of commercial, corporate and litigation services, with particular emphasis on Real Estate and Commercial Property, Commercial and Corporate Law, Project Finance, Environmental Law and Litigation. The firm represents some of Israel’s most prominent corporations (such as the Elco Group and Liberty Properties), as well as individual entrepreneurs, and also possesses significant international capabilities, with proven experience in the UK, Germany, Eastern Europe, Russia and the US. Ziv Lev & Co.’s Real Estate department has been involved in many high-profile real estate transactions with great success, turning it into one of Israel’s leading firms in this field, as recently acknowledged in the DUN’s 100 rankings and BDI Code. Its work ranges from commercial properties, complicated purchase and planning transactions to yielding properties and its team has all the requisite capabilities to tackle any project or transaction with professional yet intimate and client-oriented service and availability around the clock. The Commercial and Litigation departments comprise, with the Real Estate department, a real ‘one-stop-shop’ to any client’s needs, whilst providing both contentious and non-contentious solutions to any real-estate matter or transaction. In 2017 and 2018, Ziv Lev & Co. Law office was involved in several of the leading real estate transactions in Israel, including the closing of the sale transaction of 50% of the rights in the Electra tower (for ca. 650 million NIS), and the closing of sale transaction of the rights in the Elco Complex in Ramat Ha’sharon (for ca. 210 million NIS) as well as a 300 million NIS transaction to build ca. 250 flats in Ramla.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 165 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 17

Italy Davide Braghini

Gianni, Origoni, Grippo, Cappelli & Partners Domenico Tulli

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

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

166 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

ii) right of use (“uso” and “abitazione”), which grants limited Ownership of real estate is evidenced by the corresponding public right to an individual to use or live in a property; deed of sale and purchase or other contracts granting a title on iii) right to build (“diritto di superficie”), which grants the real estate. All such contracts, as well lease contracts for a term right to build on or under a given area and acquire full in excess of nine years, have to be registered in the land registries. ownership of the constructed building; When registered, title is enforceable against bona fide third parties iv) public concession, which grants rights to use and benefit with a potential interest in the real estate. from a governmental owned asset for a limited period of Land registries are organised on a local basis and managed by a time (up to 99 years); special branch of Agenzia delle Entrate, an administrative body v) lease (“locazione”), which may have a maximum term of controlled by the Ministry of Finance. 30 years; Italy vi) lease of a business (“affitto di azienda”) including real estate assets; 4.2 Is there a state guarantee of title? What does it guarantee? vii) bailment (“comodato”), which is a form of limited use normally without consideration; and There is no state guarantee of title. viii) rent-to-buy contracts, which allow a person to use a property while paying price instalments to buy the Title insurance is not commonly used because the legal system fully property. protects any person acquiring title from the registered owner. Also, any sale of property has to be executed before a notary, who 3.2 Are there any scenarios where the right to land diverges has a duty to perform a legal check on the title. from the right to a building constructed thereon? However, title insurance is becoming used to secure the acquisition of small properties in cases where the purchaser is not willing to The general principle is that real estate is indivisible and comprises: (i) conduct a due diligence on the title. land; (ii) buildings; and (iii) everything attached to land or buildings. Land and buildings located on it are usually registered together on 4.3 What rights in land are compulsory registrable? What the same title in the competent land registry. (if any) is the consequence of non-registration? The way to split the right over the land and the right over the construction erected thereon (or thereunder) is the right to build Any contracts (i) transferring freehold title on a property, (ii) (“diritto di superficie”). creating or transferring a usufruct or a right to build, (iii) creating a co-ownership on a property, (iv) creating or transferring an easement on a real estate property, (v) waiving any of the above rights, or (vi) 3.3 Is there a split between legal title and beneficial title granting a lease for a term exceeding nine years, must be registered in your jurisdiction and what are the registration consequences of any split? Are there any proposals in the land registry. In the absence of registration the title cannot be to change this? opposed to bona fide third parties which may have validly acquired and registered a title on the asset. In principle there is not a split between legal title and beneficial title Also mortgages are compulsorily registrable and registration is under Italian law. However, the Civil Code provides for the possibility required for the validity and existence of the mortgage. to limit the freehold title on real estate assets (which is unlimited in time) by granting a usufruct (“usufrutto”), which allows the beneficiary 4.4 What rights in land are not required to be registered? to make full use of the asset and take any economic benefit of it for a limited period of time (which cannot exceed the life of the beneficiary Leases (if their initial term does not exceed nine years), rent-to-buy or, for legal entities, 30 years). The usufruct is recorded in the land contracts, financial lease on real estate assets and bailment contracts registry and can be validly opposed by any third party. are not required to be registered in the land registry. All such Furthermore, following a recent law regarding support to disabled contracts, however, must be recorded in writing and filed with the persons, the Civil Code allows limitations on the use of a property local tax office (Agenzia delle Entrate) for registration tax purposes. to be recorded in the land registry to the benefit of specified The lack of registration of a lease may allow the tenant to claim the individuals, public entities, associations and other legal entities invalidity of the contract. involved in social support activities. A preliminary contract by which the parties undertake to sign a sale Finally, foreign trusts can be recognised in Italy. In this case, the and purchase contract can be registered in order to grant priority to title on the assets is recorded in the name of the trustee, indicating the future title of the promissory purchaser; however, the effects of his role and the fact that the property shall be managed in the interest the registration are limited to three years. of a beneficiary; this annotation, however, can have a maximum duration of 90 years. 4.5 Where there are both unregistered and registered land No changes to the existing legislation in this matter are currently or rights is there a probationary period following first expected. registration or are there perhaps different classes or qualities of title on first registration? Please give details. First registration means the occasion upon 4 System of Registration which unregistered land or rights are first registered in the registries.

4.1 Is all land in your jurisdiction required to be There is only one form of registration of a title and no probationary registered? What land (or rights) are unregistered? period applies. Limited to mortgages, it is possible to register more than one mortgage; in this case, the mortgages registered after the Private ownership of land must be registered. first one are granted a right which is subordinated to the first degree

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 167 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

mortgage, unless this latter is cancelled and consequently the second certificated contract (“scrittura privata autenticata”). Upon signing, registered mortgage acquires all of the benefits of a first registration. the notary is obliged to notify the land registry electronically in In addition, in some cases it is possible to anticipate the effects of order to get priority of registration, but this must be confirmed by registration by registering a preliminary sale and purchase contract delivering the original title deed for registration. or filing of a judicial suit aimed at ascertaining the title on a property; Information on ownership can be accessed electronically through in these cases, when the title is actually transferred or ascertained, a national portal. The competent land registry issues an online the effects date back to the time of the first registration. excerpt with all relevant facts of the property (titleholder and any registered third party rights).

Italy 4.6 On a land sale, when is title (or ownership) transferred to the buyer? 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? Transfer of title has to be formalised in a public deed before a notary public. After that, the buyer can register the title with the Yes, it is feasible to claim compensation from a land registrar who corresponding land registry to protect the title against third parties. makes mistakes during the registration process. The registrars are Title transfers on delivery of the real estate to the buyer, which legally liable for all damages and costs they might have caused. normally occurs (unless agreed otherwise) when a notarial deed is signed. It is possible deferring transfer of title to the satisfaction of 5.5 Are there restrictions on public access to the a condition precedent or until the price is fully paid. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved 4.7 Please briefly describe how some rights obtain priority by a search of the register? If not, what additional over other rights. Do earlier rights defeat later rights? information/process is required?

Registered rights prevail over other rights based on priority in There are no restrictions on public access to the land registry. applying for registration to the competent land registry. As indicated Any buyer or other interested person may obtain – by a search of in question 4.5 above, in some cases it is possible to anticipate the the registry online – any information on title and any registered effects of registration. encumbrances and also copies of the relevant notarial deed.

5 The Registry / Registries 6 Real Estate Market

5.1 How many land registries operate in your jurisdiction? 6.1 Which parties (in addition to the buyer and seller If more than one please specify their differing rules and the buyer’s finance provider) would normally and requirements. be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duties. Italian land registries are organised and maintained on a provincial basis. However, they are managed by the same governmental agency (“Agenzia del Territorio”) and access is unified through a Buyers and sellers are usually advised by real estate consultants national virtual portal. (one advisor per party) and, in most cases, one of them has acted also as broker of the deal. However, in some cases the broker can In some regions of North-Eastern Italy a somehow different be unrelated to either the purchaser or the seller. registration system applies (“sistema tavolare”), which is managed by the local provincial authority. Technical advisors for due diligence are also commonly used. Furthermore, the Cadastral registry (“Catasto”) contains useful A Notary must be involved for the execution of the deed of sale and information on real estate assets (including indication of the owner/s purchase or the lease agreement (if the term of the lease exceeds and a map describing the property), but its purpose is determining nine years). the taxable value of a property and not that of certifying the title on Legal advisors provide legal support and draft the legal the property. documentation in major transactions, while in minor transactions it is common for the parties to engage directly with the Notary.

5.2 How do the owners of registered real estate prove their title? 6.2 How and on what basis are these persons remunerated? The ownership of a registered real estate is proved by the transcription in the land registry of the relevant sale and purchase Each party bears the costs of its own transaction advisors. These agreement or contract creating the title on the real estate. remunerations are freely negotiated with the service providers and may be determined as a percentage of the purchase price or a fixed remuneration. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need The Notary has to be remunerated by both parties based on a specific to be provided to the land registry for the registration agreement (although making reference to a national tariff is common of ownership right? Can information on ownership of practice); it is a general principle of law and common practice that registered real estate be accessed electronically? the cost of the Notary is paid by the purchaser, who also selects him. Real estate brokers are entitled to claim a fee from both the seller and Transactions relating to registered real estate must be completed in the purchaser, unless their engagement letter provides differently. If writing, by means of a notarial deed (“atto pubblico”) or a notary not differently agreed, their fees are in the region of 2–3% of the price.

168 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

The preliminary contract contains the transactions terms and 6.3 Is there any change in the sources or the availability conditions, including: (i) the object of the sale; (ii) the purchase of capital to finance real estate transactions in your price; (iii) any conditions precedent; (iv) the timing for closing; (v) jurisdiction, whether equity or debt? What are the the payment of a security deposit (“caparra confirmatoria”); and main sources of capital you see active in your market? (vi) the seller representations, warranties and indemnities. The transcription of a preliminary contract in the land registries is not Foreign equity coming from Sovereign Funds, pension funds and mandatory and, if requested, has a validity limited to three years. private opportunistic funds have been a main driver of real estate transactions in Italy in the last five years. Insurance companies and Additional steps of a sale process may include: added-value funds are also a main equity player in Italian real estate. Pre-contractual arrangements Italy More recently, Italian and foreign family offices, as well as Italian Arrangements are usually related to: (i) confidentiality and non- privately owned groups, are becoming more active in the market. disclosure; (ii) temporary exclusivity for due diligence and negotiation purposes; and (iii) making offers (initial offers and 6.4 What is the appetite for investors and/or developers subsequent binding offers). Pre-contractual arrangements are fully to invest in your region compared to last year and binding on both parties limited to the above elements, but usually do what are the sectors/areas of most interest? Please not bind the parties to execute the sale contract. give examples. Vendor due diligence In some cases the seller engages consultants to conduct a pre- Real estate investments continue to be mainly focused on Milan. sale technical assessment of the property, aimed at assessing its Secondary markets are highly considered for logistic, tourism compliance with zoning, building and environmental regulations, and hospitality assets. High street retail also attracts interest in a compliance with the cadastral data, and investigating any existing few main cities. More recently, investors are focusing on student encumbrances. In many cases a notary is engaged to conduct a housing and senior housing developments. search in the land registries and certify the title of the seller and any existing encumbrances on the property. 6.5 Have you observed any trends in particular market Marketing sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? For major sale transactions, property companies and institutional Please give examples. investors usually engage a consultancy investment firm to make a pre-assessment of the value of the property, organise marketing Transactions on commercial centres and shopping malls have materials and conduct the sale process. somehow slowed down, as investors are focusing more and more on Commercial negotiation those commercial centres that are modernising their business model. Negotiations usually occur between representatives from both of the parties, assisted by lawyers and real estate advisers. In some 7 Liabilities of Buyers and Sellers in Real circumstances, negotiations are directly executed between the Estate Transactions parties’ lawyers and advisers.

7.2 Is the seller under a duty of disclosure? What matters 7.1 What (if any) are the minimum formalities for the sale must be disclosed? and purchase of real estate?

The seller must act in good faith without concealing any Formalities information that, if known by the buyer, would prevent the buyer Any contract transferring title on real estate must be executed and from completing the transaction. recorded in writing. In addition, execution in the presence of a The Italian Civil Code allows a buyer to challenge the validity of the notary is required to file the relevant contract in the land registries contract or to claim for a reduction of the price in case the seller has (and, for mortgages, for the validity of the title). wilfully omitted to disclose elements which may affect materially The contract must contain some mandatory information on the value of the property. the property, including: (a) the cadastral identification; (b) the Also, the Italian Civil Code allows a buyer to bring legal actions confirmation of consistency between the cadastral data and the against a seller for title defects and lack of conformity and/or quality effective conditions of the property; (c) the permitted use of the of the property. property; (d) the titles on the basis of which the buildings existing on the property were built; (e) the allegation of the energy performance Buyers also have access to public registries (land registries and certification; (f) the allegation of a seismic compliance certification cadastral registries) in order to make their own assessment on the (not yet applicable on a general basis); (g) the means of payment title of the seller. used to pay the price; and (h) the identification of the broker which has intermediated the transaction (if any). 7.3 Can the seller be liable to the buyer for The execution of the notarial sale contract is often preceded by misrepresentation? the signing of a binding preliminary contract, by which the parties undertake to transfer the real estate subject to specific terms and Yes. Pursuant to the Italian Civil Code, a seller is always liable in conditions. case it has wilfully omitted to provide information to the buyer Preliminary contract which could be relevant for the determination of the price or even for determining the decision to buy. A preliminary sale and purchase contract is usually executed once the parties agree the terms and conditions and satisfactory due diligence have taken place.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 169 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

The liability of the seller regarding elements not known to it can be mutually agreed among the parties in the contract. The parties may 8 Finance and Banking also agree that the seller is released from any liabilities, other than in case of lack of title (“evizione”). 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the rules different as between resident and non-resident 7.4 Do sellers usually give any form of title “guarantee” persons and/or between individual persons and or contractual warranties to the buyer? What would corporate entities? be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk,

Italy to give information)? Would any such guarantee or The Italian Civil Code provides general regulation of loans, while warranties act as a substitute for the buyer carrying the Unified Banking Act (Legislative Decree no. 385 of 1 September out his own diligence? 1993) regulates bank financing and some aspects of mortgage loan. Different rules (in particular regarding information duties and The Italian Civil Code provides that the seller is liable in case of enforcement in case of payment default) apply to loans to individual lack of title (total or partial), third parties right on the property and persons acting as ‘consumers’ and corporate entities. lack of conformity of the property (“garanzia per vizi”) and lack There are not different provisions regarding the lending to non- of quality (“mancanza di qualità”). However, the liability of the resident persons, but different formalities may apply (e.g., a non- seller for lack of conformity and quality under the Civil Code is resident person shall obtain, in most cases, an Italian tax ID code, limited to one year after the sale and claims are subject to a short the notarial security documents to be filed in Italy must be executed deadline (eight days from discovery). For this reason, it is usual that in Italian or translated into Italian by a certified translator). contracts for major transactions contain a negotiated set of seller’s representations and warranties and indemnification obligations, EU resident banks are also allowed to provide real estate financing which add to (or even replace) those provided in the Civil Code. at the same conditions as Italian banks, but the payment of interests on loans can be subject to taxation in Italy. The warranties most frequently given by the seller relate to: (i) powers of the seller to enter into the transaction; (ii) the non- existence of charges and encumbrances other than those registered 8.2 What are the main methods by which a real estate at the land registry; (iii) tenancy status and validity of the main lender seeks to protect itself from default by the conditions of the lease; (iv) compliance with applicable planning borrower? rules; (v) compliance with environmental legislation; (vi) regular payment of any applicable property tax; (vii) validity of property Loans for minor transactions often do not contain any provisions insurance policies; and (viii) the absence of legal disputes or court supplementing those provided by the law for mortgage loan, but proceedings affecting the property. often the lender seeks additional protection requesting a bank deposit, a personal guarantee by the borrower or any borrower Representations and warranties are mainly used to apportion the related person and a life and disability insurance on the borrower. risk between the seller and the buyer. In transactions between professional operators, it is not common that representations and Structured financing for major transactions usually include: warranties replace any due diligence by the buyer. (a) Security package. A security package for a real estate loan will usually comprise: (i) a mortgage over the asset; (ii) a charge over receivable rents; (iii) a charge over all bank 7.5 Does the seller retain any liabilities in respect of the accounts into which all rents must be paid; and (iv) a charge property post sale? Please give details. over all relevant contracts including leases, insurance policies and construction guarantees. According to Article 1490 of the Civil Code, the seller is obliged to (b) Corporate guarantees. Corporate guarantees are sometimes ensure that the item sold is free from defects. requested by lenders if the borrower is using SPVs. In the event that the sold property is defective, the buyer may (c) Insurance coverage. Lenders will require the borrowers to request the termination of the contract or a reduction in the purchase take out appropriate building insurance. price. The seller is also liable to compensate the buyer for the (d) Covenants. The loan documentation will also contain both damage suffered and the damage resulting from the defects of the financial covenants (loan to value, debt service cover) and sold property. The liability of the seller is limited to one year after nonfinancial covenants (obligations to maintain the asset in the sale and claims are subject to a short-term deadline (eight days good state of repair or disposal limitations) to be granted by from discovery). the borrower in order to ensure that the value of the asset is maintained. Furthermore, it the seller caused a contamination of the property, it remains liable for any remedial actions prescribed by environmental laws and regulations and any damages caused by such contamination. 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without 7.6 What (if any) are the liabilities of the buyer (in addition involving court proceedings or the contribution of the to paying the sale price)? mortgagor?

The buyer is responsible for paying the purchase price and any As a general rule, the lender with a secured loan needs to start a applicable transfer taxes, and paying its portion of the broker fees foreclosure proceeding, where the main step is the public auction (if any). of the asset.

170 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

There are two types of proceedings: (i) judicial proceedings, to be If this is the case, the creditor, in the insolvency process, will see followed before the Italian courts; and (ii) extrajudicial proceedings, his credit satisfied in a preferential manner compared to unsecured to be followed before a Notary. The extrajudicial proceedings may creditors. If this is not the case, the creditor must compete with only be followed if agreed upon by the parties. the other unsecured creditors in the distribution of the proceeds According to a recent legislation, a credit facilities contract may originated by the sale of the assets. provide for the right of the lender to take possession of the mortgaged asset or any other assets in case of payment default and sell it on 8.9 What is the process for enforcing security over the market: in case the market value or the sale price exceeds the shares? Does a lender have a right to appropriate residual debt, the lender must transfer the excess to the borrower; on shares in a borrower given as collateral? If so, the contrary, in case the sale price is less than the residual debt, the can shares be appropriated when a borrower is in Italy borrower is released from any residual obligation. administration or has entered another insolvency or reorganisation procedure?

8.4 What minimum formalities are required for real estate On the basis of the general rules established by Articles 2796 et seq. lending? of the Italian Civil Code, the procedures by which the pledgee can enforce the pledge on the shares are as follows: A mortgage over real estate must be granted in a notarial deed and 1) request the court to sell the pledged shares until the debt is is only valid when registered with the land registry. The draw of paid; or the money under the facilities agreement must also be recorded in a 2) request the competent court to assign the shares for payment, notarial deed, in order to have a direct enforcement title against the until the debt is paid, after carrying out an estimate to be borrower, without having to conduct proceedings in court in order to carried out with an expert’s report by an expert appointed by obtain an enforcement title. the court. A charge over income arising from lease tenants is usually notarised, Pursuant to Article 4 of Legislative Decree no. 170/2004, pledge on but notarisation is not mandatory. The tenants must be notified of shares can be enforced, and the shares can be appropriated, when the existence of the pledge in order to make it enforceable against a borrower is in administration or has entered another insolvency them. or reorganisation procedure, only where the creditor or debtor is a In share deals, it is common to grant a pledge over the shares of the public authority, a central bank, a prudentially supervised financial SPV acquired by the buyer; this must be granted before a notary institution, a central counterparty, a settlement agent or a clearing public. house and the other party to the agreement is one of the above mentioned institutions or a company (not an individual).

8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other 9 Tax creditors?

The protection of a real estate lender depends on the priority 9.1 Are transfers of real estate subject to a transfer tax? in ranking of the secured loans and this priority is subject to the How much? Who is liable? registration principle, unless mutually agreed between the borrower and the lender. In some cases, tax authority claims for unpaid taxes Any contract transferring or granting right on real estate is subject have priority over the lender’s mortgage. to a nominal stamp duty (“imposta di bollo”), to registration tax (“imposta di registro”), which is regulated by the Unified Registration Act (Presidential Decree no. 131 of 26 April 1986) and 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? to mortgage and cadastral taxes (“imposta ipotecaria e catastale”). Stamp duty is applied on a fixed basis and depends on the number of In case bankruptcy of the borrower is declared within 10 days of standardised pages composing the contract. the creation of the mortgage, the mortgage can be challenged by Registration tax is normally applied on a percentage basis, the bankruptcy officers. Other securities can also be challenged in on the value or price of the transaction (depending on various case of bankruptcy, if it appears that the lender was aware of the circumstances). Standard rates vary from 2% to 9%. Registration insolvency of the borrower. tax applies on a fixed nominal basis in case the transaction is subject to VAT. 8.7 What actions, if any, can a borrower take to frustrate Mortgage tax has a standard rate varying from 2% to 3% and enforcement action by a lender? Cadastral tax standard rate is 1%. Such rates are reduced by 50% in case of transactions involving real estate funds or SIIQ (Italian A borrower can file an objection against the enforcement action by REITs). Mortgage and Cadastral taxes can also apply on a fixed the lender if it is able to demonstrate that no default occurred or nominal basis in case the transaction is subject to VAT. that the lender omitted any of the formalities required to commence enforcement proceedings. 9.2 When is the transfer tax paid?

8.8 What is the impact of an insolvency process or a Transfer taxes have to be paid within 30 days of the transfer. corporate rehabilitation process on the position of a Payment is usually made by the Notary, which is jointly liable with real estate lender? the seller and the buyer for payment.

The impact varies considerably depending on whether or not the loan is secured by a mortgage on the property.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 171 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

9.3 Are transfers of real estate by individuals subject to 10.2 What types of business lease exist? income tax? There are mainly three types of business leases: The capital gain on disposal (i.e., the difference between the sale ■ leases regulated by the mandatory rules contained in Law no. value and the original acquisition value, including all costs) is fully 392/1978; taxable, unless the asset was used as primary house or was acquired ■ major leases (i.e., where the annual rent exceeds Euro more than five years before the disposal. 250,000), for which the parties may freely negotiate departing from the mandatory rules of Law no. 392/1978; and

Italy 9.4 Are transfers of real estate subject to VAT? How ■ leases of business concerns, to which Law no. 392/1978 does much? Who is liable? Are there any exemptions? not apply and are regulated by the Civil Code.

VAT is payable subject to option by the seller for all sales or 10.3 What are the typical provisions for leases of business purchases of real estate when the transaction takes place in the premises in your jurisdiction regarding: (a) length of framework of a business activity. VAT is compulsory in case the term; (b) rent increases; (c) tenant’s right to sell or sale is executed by a construction company within five years of the sub-lease; (d) insurance; (e) (i) change of control of construction or refurbishment of a property. the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? In case VAT applies, the seller charges VAT to the buyer and the seller then pays the VAT to the tax authorities. In many cases a reverse charge mechanism applies, allowing the buyer not to In leases regulated by Law no. 392/1978 the following mandatory disburse the VAT amount. provisions apply: (a) the term cannot be less than six years, renewable for six- The general rate of VAT is 22%. However, a reduced rate of 10% year periods (nine years for tourism, hospitality and most applies to some residential and instrumental buildings; a further entertainment properties); reduced 4% rate applies to the sale of residential properties which (b) rent increases are ordinarily limited to 75% of the annual becomes the primary house of the buyer. consumers’ inflation index; (c) the tenant’s right to assign the lease or sub-lease is subject 9.5 What other tax or taxes (if any) are payable by the to consent by the landlord; however, the tenant can always seller on the disposal of a property? assign the lease or sub-lease the property jointly with the assignment or lease of its business concern; The seller is responsible for income tax on the capital gain. The seller (d) change of control of the tenant and corporate restructuring do is also jointly liable with the buyer for the payment of transfer taxes. not affect the continued validity of the lease, unless specific provisions are included in the lease contract; 9.6 Is taxation different if ownership of a company (or (e) property insurance normally has to be paid by the landlord, other entity) owning real estate is transferred? while the tenant can be requested to buy tenant insurance; and (f) the tenant is responsible for ordinary maintenance, while the Taxation of share deals is completely different and, normally, landlord is responsible for any extraordinary maintenance significantly lower. However, tax authorities scrutinise with and repairs. attention real estate share deals in order to ascertain whether the parties have simulated a share deal only to reduce the tax burden of 10.4 What taxes are payable on rent either by the landlord the transaction, while their real purpose was transferring title on a or tenant of a business lease? real estate asset or portfolio. Leases are subject to registration tax with a standard 2% rate 9.7 Are there any tax issues that a buyer of real estate (reduced to 1% in case landlord is subject to VAT). should always take into consideration/conduct due In addition, the landlord may opt for the application of VAT, at the diligence on? standard 22% rate.

A buyer is always jointly and severally liable with the seller (and the notary) for the payment of the transfer taxes, regardless of any 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party allocation agreement between the seller and the buyer. etc.)? Are there any special provisions allowing a In case the seller omitted to pay any applicable property tax or tenant to extend or renew the lease or for either party transfer tax, the tax authorities may enforce a lien on the relevant to be compensated by the other for any reason on property, which, in some cases, may prevail over a mortgage. termination?

As a general rule, upon expiry of the initial six-year (or nine-year) 10 Leases of Business Premises term only the tenant may avoid the automatic renewal of the lease. The landlord may avoid the renewal only in case it intends to use the 10.1 Please briefly describe the main laws that regulate property for its own business or to carry out a major refurbishment leases of business premises. of the property. Also, Law no. 392/1978 provides that only the tenant can be granted The following laws regulate the lease of business premises: an early termination right; such a right can be granted to the landlord ■ the Italian Civil Code; and only in major leases. ■ Law no. 392 of 27 July 1978, which regulates leases of urban properties.

172 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

The contract can contain provisions allowing either party to ■ Law no. 392 of 27 July 1978, which regulates leases of urban terminate the lease in case of material breach of contract by the properties; other party. ■ Law no. 431 of 9 December 1998, which regulates leases of For retail leases, in case the landlord denies the renewal of the lease, residential properties; under the provisions of Law no. 392/1978 the tenant is entitled to ■ Law Decree no. 133 of 12 September 2014, which regulates receive compensation for loss of business continuance and has a rent-to-buy contracts; right of first refusal on any new lease. The tenant has also a right of ■ Law no. 208 of 28 December 2015, which regulates financial first refusal in case the landlord intends to sell the leased property. leasing of residential properties; and ■ Legislative Decree no. 206 of 6 September 2005, which regulates contracts granting a time share right on a real estate Italy 10.6 Does the landlord and/or the tenant of a business property. lease cease to be liable for their respective obligations under the lease once they have sold their interest? Can they be responsible after the sale in 11.2 Do the laws differ if the premises are intended for respect of pre-sale non-compliance? multiple different residential occupiers?

In case the tenant assigns the lease, it remains jointly liable with No, the same legislation applies to premises for single tenants and the assignee for any unpaid costs related to period before the premises intended for multiple residential occupiers. assignment. Different regulations may apply with respect to the lease of state or Municipality owned houses offered to low income families, and to 10.7 Green leases seek to impose obligations on temporary leases for touristic purposes. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 11.3 What would typical provisions for a lease of briefly describe any “green obligations” commonly residential premises be in your jurisdiction regarding: found in leases stating whether these are clearly (a) length of term; (b) rent increases/controls; (c) the defined, enforceable legal obligations or something tenant’s rights to remain in the premises at the end of not amounting to enforceable legal obligations (for the term; and (d) the tenant’s contribution/obligation example aspirational objectives). to the property “costs” e.g. insurance and repair?

The main “green obligation” lies with the landlord, since he is The following mandatory provisions apply to residential leases: obliged to provide an energy performance certificate to the tenant (a) the initial term cannot be less than four years, renewable for before signing the lease contract. four-year periods (the initial term may reduce to three years, with a renewal of at least two years, for leases that comply Recent leases of grade “A” properties often contain a best efforts with local agreements aimed at containing rent increases); provision by the tenant to maintain energy efficiency policies and to provide information to the landlord on its energy consumption levels. (b) rent increases are ordinarily limited to 100% of the annual consumers’ inflation index; (c) at the end of the initial term the landlord may avoid the renewal 10.8 Are there any trends in your market towards more only in limited circumstances: direct use of the premises for flexible space for occupiers, such as shared living purposes; refurbishment of the building; the tenant short-term working spaces (co-working) or shared has another house available in the same Municipality; the residential spaces with greater levels of facilities/ landlord intends to sell the premises provided that he does activities for residents (co-living)? If so please provide not have other properties available; and provided that he examples/details. grants the tenant a right of first refusal. At the end of the first renewal period any of the parties may commence a renewal The offer of flexible office spaces and co-working spaces is or termination procedure; and increasing significantly. This is usually based on service contracts, (d) tenant is generally responsible for ordinary maintenance, while whereby the client is authorised to make use of specific office landlord is responsible for any extraordinary maintenance and facilities, but does not obtain any rights on the relevant property. repairs. National agreements between owners’ and tenants’ The offer of short term leases is very limited because of constraints associations provide criteria for the allocation of operating in the applicable legislation. costs to the tenant and landlord. Operators are also considering actively serviced apartments, while shares residential spaces are not very common. Also in this case 11.4 Would there be rights for a landlord to terminate a constraints in the applicable legislation create some limitations in residential lease and what steps would be needed the implementation of new models. to achieve vacant possession if the circumstances existed for the right to be exercised?

11 Leases of Residential Premises The landlord can terminate the lease early in cases where the tenant is in default of payment of the rent (for even only one monthly instalment) by commencing special proceedings (“sfratto per 11.1 Please briefly describe the main laws that regulate morosità”). However, the tenant may stop proceedings (up to four leases of residential premises. times in a four-year period) by paying any amount due to the landlord before or during the proceedings. Once the eviction of the tenant is The following laws regulate the lease of residential business confirmed by the court, if the tenant does not release the premises, premises: the landlord may need to commence an enforcement procedure to ■ the Italian Civil Code; obtain vacant possession, which may stay for a number of months.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 173 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

the actual status of a property and its environmental compliance 12 Public Law Permits and Obligations is usually more complicated and collaboration by the owner is required. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, 12.4 What main permits or licences are required for development and occupation of land? Please briefly building works and/or the use of real estate? describe them and include environmental laws.

Permits required for building works differentiate considerably Regions and Municipalities in Italy are responsible for country and depending on the relevance of works and their impact on the Italy town planning in their designated territory. Consequently, there are building/land. multiple local planning systems in Italy. However, these systems are inspired by the same planning law system. Therefore, the systems The development of a new building is always subject to a prior have common institutions and regulations. permit granted by the local Municipality, or to a previous special planning agreement with the Municipality which sets the framework Municipalities are the most important authorities concerning town for subsequent construction. planning and are responsible for the following: Refurbishment of existing buildings can require a building permit if ■ determining the local planning system (“PRG – Piano Regolatore Generale” or “PGT – Piano di Governo del the permitted use of the building is affected, or its total surface or its Territorio”), which provides for the permitted use of land; aspect are materially changed; in most cases, however, construction works can be commenced without requesting a permit, provided ■ approving the local building regulation (“Regolamento Edilizio”), which sets the standard to be met in constructions that the relevant project is notified to the local authorities before the (in compliance with national guidelines and legislation and works are commenced. the general provisions of the Civil Code); Once construction is terminated, certification must be obtained ■ granting authorisations for special local planning, new attesting that the building is fit for occupancy, complies with anti- constructions, refurbishment of existing buildings and change seismic regulation and fire prevention regulation. As to occupancy of the permitted use of land and buildings; and and seismic compliance, the certification of technical consultants ■ expropriating land for public use. engaged by the developer in most cases replaces the need of a The protection of the environment and the implementation and certification by the Municipality, while fire prevention compliance application of the national environmental law (Legislative Decree needs to be certified by the local Fire Brigade. no. 152 of 3 April 2006) is also delegated to local agencies and Use of real estate legislation, organised at the Regional and Municipality level. Use of real estate may require an authorisation by the local authorities depending on the nature of such real estate (e.g., the use of public 12.2 Can the state force land owners to sell land to areas and other state owned infrastructures or natural resources and it? If so please briefly describe including price/ areas is subject to a concession) or the activity to be conducted in compensation mechanism. the property (e.g. restaurant, retail, entertainment, hospitality, health assistance, etc.). Yes; land owners can be forced to sell land which is included in a planning sector or has to be dedicated to construction of public 12.5 Are building/use permits and licences commonly infrastructure or public service/utility facilities and buildings. The obtained in your jurisdiction? Can implied permission authority to expropriate land is attributed not only to the central be obtained in any way (e.g. by long use)? Government, but also to Regions, Municipalities and other public agencies. As indicated in question 12.4, in many cases permits and licences The compensation for the owner is determined by the authority that can be replaced by a certification of a technical consultants. has promoted the expropriation process on the basis of cadastral However, in all cases where a permit or licence must be granted by values and other publicly available information; the owner may the Municipality, no implied permissions are allowed. challenge the proposed remuneration, which in such case is finally In some cases the procedure to obtain a permit or licence can be determined by an expert appointed by the local court. facilitated if the law provides that in case the Municipality fails to It must be taken into account that in most cases that valuation will reply within a given deadline, the permission/licence is intended to not be consistent with the open market value of the land at that time. be granted (“silenzio-assenso”).

12.3 Which bodies control land/building use and/or 12.6 What is the typical cost of building/use permits and occupation and environmental regulation? How do the time involved in obtaining them? buyers obtain reliable information on these matters? The fees for obtaining the relevant permits are defined locally by As indicated in question 12.1, land and building use and occupation municipal authorities and normally include: (a) a contribution for is controlled by the local municipalities and local police. Local urbanisation works strictly related to the project; (b) a contribution agencies at Regional and Municipal level (“ARPA – Agenzia for more general urbanisation works; and (c) a fee remunerating the Regionale Protezione Ambiente” and “ASL – Azienda Sanitaria allowed surface of the building. Locale”) and the local Fire Brigade are in charge of supervising Contributions under (a) and (b) are often replaced by the undertaking and controlling the correct application of environmental law and of the developer to carry out the relevant infrastructure works. building regulations that are relevant to human health. The standard term for obtaining a building permit is in the region of Buyers may obtain information on the permitted use of a land/ three months from the complete filing. However, the term can be building, building permits and local public constraints through delayed considerably in case the opinion of different commissions, access at the local Municipality offices. Obtaining information on

174 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

agencies or entities is required (e.g., opinion on the landscaping impact of the project, opinion of the local agency of the Ministry of Culture in 12.10 Please briefly outline any regulatory requirements case of historical buildings, opinion of the Fire Brigade, etc.). for the assessment and management of the energy performance of buildings in your jurisdiction.

12.7 Are there any regulations on the protection of historic Legislative Decree no. 192 of 19 August 2005 provides for the monuments in your jurisdiction? If any, when and how assessment of the energy performance of any building containing are they likely to affect the transfer of rights in real electrical and heating systems. The relevant energy performance estate or development/change of use? certificate issued by authorised consultants must be disclosed to the

purchaser and to the tenant of a property. Italy The Cultural Heritage and Landscape Act (“Codice dei beni culturali e del paesaggio” – Legislative Decree no. 42 of 22 January In addition, local regulations adopted at Municipality levels may 2004) provides for limitations on the ownership, transfer and provide for the granting of benefits in terms of additional permitted refurbishment of real estate assets having historical value and those surface or for discounts on construction costs for new or refurbished characterising or having a significant impact on the landscape. buildings that meet specific energy performance requirements. In particular, the Ministry of Culture and other local agencies have a right of first refusal in case of transfer of a property which 13 Climate Change was declared of historical, architectural or landscaping interest; accordingly, the deed of sale must be notified to the relevant authorities, which normally have 60 days to exercise the right of 13.1 Please briefly explain the nature and extent of any first refusal. Construction work on historically valuable buildings regulatory measures for reducing carbon dioxide must be approved by the Superintendence and such buildings cannot emissions (including any mandatory emissions trading scheme). be used for purposes which are incompatible with their historical or artistic character or which are detrimental to their conservation. EU Directive no. 31/2019 and Italian Legislative Decree no. 63 of 2013 provide that by the end of 2020 all new buildings must 12.8 How can e.g. a potential buyer obtain reliable meet the “zero energy consumption” standards. The deadline is information on contamination and pollution of real anticipated to be 2018 for public buildings. estate? Is there a public register of contaminated land in your jurisdiction? Various Italian Regions are implementing local schemes aimed at accelerating the implementation of the above legislation. Legislative Decree no. 152 of 3 April 2006 delegates the Regional Authorities to maintain a register of sites interested by an 13.2 Are there any national greenhouse gas emissions environmental clean-up procedure. reduction targets? However, only major contaminations that were ascertained by or denounced to the competent authorities are recorded in such Please see question 13.1 above. registers. Access to information on minor contamination is normally limited to the owner. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? Local regulations adopted at Municipality levels may provide for Environmental clean-up is always mandatory as from the the granting of benefits in terms of additional permitted surface declaration of contamination by the environmental authorities until or for discounts on construction costs for new building that meet the remediation is complete. As a general rule the originator of specific energy performance requirements. the contamination is responsible for the clean-up; however, under Additional requirements for “green housing” are set by private given circumstances the owner of a contaminated site can also be organisations (e.g. LEED, Casa Clima) and can be adopted on a responsible for the clean-up. In addition, in case the parties that voluntary basis. are responsible for the clean-up are in default, the public authorities may carry out the clean-up procedure and create a charge on the contaminated land to cover the relevant costs.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 175 © Published and reproduced with kind permission by Global Legal Group Ltd, London Gianni, Origoni, Grippo, Cappelli & Partners Italy

Davide Braghini Domenico Tulli Gianni, Origoni, Grippo, Cappelli & Partners Gianni, Origoni, Grippo, Cappelli & Partners Piazza Belgioioso, 2 Via delle Quattro Fontane, 20 20121 Milan 00184 Rome Italy Italy

Tel: +39 02 763 741 Tel: +39 06 478 751 Email: [email protected] Email: [email protected] URL: www.gop.it URL: www.gop.it Italy

Davide Braghini is an Italian lawyer, member of the Bar of Milan since Domenico Tulli has been a partner of Gianni, Origoni, Grippo, Cappelli January 1997, and a partner at law firm Gianni, Origoni, Grippo, & Partners since 2000 and co-head of the real estate department of Cappelli & Partners, where he is co-head of the real estate department. the firm. He was admitted to the Rome Bar in 1987 and also holds a Master’s Degree in Comparative Law from New York University. Davide, who has an international M&A background, specialises in real estate investments and developments. His practice includes Domenico comes from a corporate-M&A background, further negotiating sale and purchase of real estate assets and companies, specialising in real estate matters, with a special focus on cross- co-investment and joint venture agreements, setting up real estate border transactions involving real estate operators or institutional investment funds and alternative investment vehicles, negotiating investors entering into the Italian market. His practice includes the relevant management regulations and investment agreements, structuring acquisitions and divestitures creating the most efficient advising on real estate development projects, construction contracts, corporate structure, managing developments, re-developments and property management and lease agreements relating to different asset re-positioning of existing assets in the market, urban regenerations, classes (including office, retail, logistics, hospitality and residential). portfolio acquisitions and divestitures, managing regulated activities, including retail, hospitality and health care businesses carried out He has worked on the most complex real estate transactions that have within real estate assets and addressing real estate issues within the taken place in the last few years in Italy, including the development context of distressed or special situations, including those originating of the Porta Nuova district in Milan. His client base include domestic from NPLs. and international institutional investors, fund management companies, developers, family offices, insurance companies and corporate end- Domenico’s client base highlights include international institutional users. investors, real estate funds, wealthy individuals, developers, financial institutions and large end-user corporate entities in all spectrum of Davide lectures on a regular basis on real estate law matters. He corporate business activities, including industrial. is fluent in English and has an excellent knowledge of Spanish and French.

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

176 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 18

Japan

Anderson Mori & Tomotsune Kenichi Yamamoto

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to Generally, there are no restrictions for non-resident persons to question 12.1. Those relating to tax should be listed in obtain and own real estate in Japan. However, it should be noted response to questions in Section 9. that non-resident persons in Japan are required to make a post-fact report regarding real estate transactions to the relevant governmental The Civil Code is the law that governs real estate in Japan, regulating authority, in certain cases in accordance with the Foreign Exchange ownership, assignment, mortgage and other relevant matters and Foreign Trade Law. including contracts such as sale and purchase agreements, as well as lease agreements. Other laws relevant to real estate are as follows: Real Estate Registration 3 Real Estate Rights In order to perfect the transfer of real estate ownership or the establishment of establish a mortgage, it is necessary to register 3.1 What are the types of rights over land recognised in such transfer or mortgage. The Law of Real Estate Registration your jurisdiction? Are any of them purely contractual governs this registration process. between the parties? Brokerage The Real Estate Transactions Business Law governs the brokerage Ownership aspect of real estate business. For example, it is necessary to obtain In general, a person who has an ownership in real estate has a right a licence from the relevant authority in order to engage in real estate to use, profit from and dispose of such real estate in accordance with brokerage in accordance with the Real Estate Transactions Business the Civil Code. Ownership is not purely contractual. Law. Joint ownership of real estate (kyoyu), governed by the Civil Construction Code, is a form of ownership that can be held by multiple persons. The Building Standard Law provides for standards relating to the On the other hand, unit ownership (kubunshoyu) of a building construction of buildings. under condominium ownership which is subject to the Law for Condominiums, as well as the Civil Code, is a form of ownership that can be held by a single person separately from other condominium 1.2 What is the impact (if any) on real estate of local owners in the same building. common law in your jurisdiction? Other form of rights to use another person’s real estate: In principle, no property rights can be established other than those 1 Superficies (Chijyoken) prescribed by statutory laws including the Civil Code. In terms of Superficies is a right to use land in order to enjoy ownership of a contractual relationship, there may be some local customary laws structures such as a building located on the land. While a superficies which may be relevant. is established based on an agreement between the owner of the land and a user, a registered superficies can be claimed against a third party. Thus a superficies is not purely contractual. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted 2 Servitude (Chiekiken) locally in EU countries. Servitude is a right to use land for the enjoyment of other land (e.g. right of way). While servitude is established based on an agreement There are no international laws relevant to real estate in Japan in any between an owner of the land and a user, a registered superficies material respect. can be claimed against a third party. Thus servitude is not purely contractual.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 177 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

3 Leases registration is not mandatory. However, the purchaser will be A lease is a contractual right and obligation under the Civil Code. unable to assert its ownership against third parties if the ownership However, a lease can be perfected through registration, or otherwise is not registered. recognised under the Act on Land and Building Lease. A tenant who obtains such perfection can assert his right against a new owner of 4.4 What rights in land are not required to be registered? the leased property. In this sense, a lease is not purely contractual. See the answer to question 4.3 above. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed

Japan 4.5 Where there are both unregistered and registered land thereon? or rights is there a probationary period following first registration or are there perhaps different classes Under Japanese law, a building is recognised as independent real or qualities of title on first registration? Please give property. Thus, ownership of land and the building which stands details. First registration means the occasion upon on such land can be separate, and can belong to different persons. which unregistered land or rights are first registered When a person intends to purchase a building on another person’s in the registries. land, he or she has the option of obtaining either: (i) the title to the land; or (ii) a right to use the land such as a superficies or a lease There is no probationary period or different class of title in relation right as described in question 3.1 above. to a first registration.

3.3 Is there a split between legal title and beneficial title 4.6 On a land sale, when is title (or ownership) transferred in your jurisdiction and what are the registration to the buyer? consequences of any split? Are there any proposals to change this? Ownership is transferred to the buyer in accordance with the agreement between the seller and the buyer. No formality is required In principle, there is no split between legal title and beneficial title to transfer ownership. of real estate. However, it is possible to create a trust over an estate. If a trust over an estate is granted to a third party, the legal title of 4.7 Please briefly describe how some rights obtain the estate is recorded in the name of the third party as “a trustee”. priority over other rights. Do earlier rights defeat later rights? 4 System of Registration Basically, without perfection through registration, no right in real estate obtains priority over other rights. The priority of a perfected 4.1 Is all land in your jurisdiction required to be right in real estate is determined by the chronological order in which registered? What land (or rights) are unregistered? perfection is obtained. Thus an earlier registered right has priority over subsequently registered rights. In general, all land is registered. However, there are some exceptions such as government land, which is not registered. Buildings are required to be registered under the Law of Real Estate Registration. 5 The Registry / Registries Although, it is possible that some buildings remain unregistered in reality, they usually become registered when they are sold on, so 5.1 How many land registries operate in your jurisdiction? that the new buyer can perfect ownership against a third party. If more than one please specify their differing rules and requirements.

4.2 Is there a state guarantee of title? What does it guarantee? One nationwide real estate registration system operates in Japan.

There is no state guarantee of title, as the real estate register does 5.2 How do the owners of registered real estate prove not necessarily reflect the true holder of the title or right. In their title? practice, parties who plan to enter into a real estate transaction usually rely upon the register, as it is generally the best indication In practice, the register is generally the best indication of the true of the true owner of the real estate-related title or right. However, owner of the real estate-related title or right. The registry office a party has no recourse to anyone but the seller if, relying on the does not issue any physical title document. However, anyone can register, it purchases real estate or a related right from a seller and obtain a certified copy of a registration from the land registry. the information contained in the register turns out to be incorrect. The purchaser may seek reimbursement from the seller pursuant 5.3 Can any transaction relating to registered real estate to statutory warranties or contractual warranties, but, generally be completed electronically? What documents need speaking, the purchaser cannot acquire the ownership of or title to to be provided to the land registry for the registration the real estate in such circumstances. of ownership right? Can information on ownership of registered real estate be accessed electronically? 4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? Real estate transactions can be registered electronically. In the case of an ownership transfer resulting from a sale and purchase No rights in land are compulsorily registrable. Even if there is a transaction, the following documents are required for registration: (i) transfer of ownership in land under a sale and purchase agreement, information certifying the cause of registration (touki genin shomei

178 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

joho), such as the sale and purchase agreement or a document Business Law: (i) 6% of the transaction amount if the broker acts as summarising the necessary information; (ii) information for an agent; and (ii) 3% of the transaction amount if the broker acts as registration identification (touki shikibetsu joho) or a title document an intermediary. In the case of (ii), the broker can be compensated of the seller; (iii) a certificate with seal impression of the seller; and by both the seller and the buyer if both are his/her clients, hence total (iv) a power of attorney from both the seller and purchaser. When compensation received by the broker may amount to 6%. the application for registration is made electronically (i.e., online application), the electronic certificates can be used in place of the 6.3 Is there any change in the sources or the availability certificate with seal impression. of capital to finance real estate transactions in Information on the ownership of registered real estate can be your jurisdiction, whether equity or debt? What are accessed electronically. the main sources of capital you see active in your Japan market?

5.4 Can compensation be claimed from the registry/ Since the Bank of Japan introduced the zero-interest-rate policy, registries if it/they make a mistake? Japanese banks have been encouraged to lend and there has been fierce competition in lending between the banks for real estate Under the State Redress Law, if the relevant public officer has, in the transactions in Japan as a result. It can be said, it is easier to obtain course of registration, unlawfully inflicted damage on another person real estate finance at present than it has been since 2010. intentionally or negligently, the State shall assume responsibility to compensate therefor. Domestic investors are the main source of capital for the finance of real estate transactions in Japan, although foreign investors are increasing their presence in the market. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and 6.4 What is the appetite for investors and/or developers other rights affecting real estate and is this achieved to invest in your region compared to last year and by a search of the register? If not, what additional what are the sectors/areas of most interest? Please information/process is required? give examples.

Anyone can obtain a certified copy of the registration from the land A lot of new logistics assets are being built and are steadily expanding. registry. So, basically a buyer can obtain almost all information Hotels are also attracting investors, as Japan is experiencing a historic he might reasonably need regarding encumbrances and other rights tourism boom drawing 20 million leisure visitors last year. affecting real estate. However, it should be noted that there are some rights that are not necessarily registered. For example, a certain 6.5 Have you observed any trends in particular market land lease right can be perfected by an ownership registration on the sub sectors slowing down in your jurisdiction in building register, which means that the land lease can be perfected terms of their attractiveness to investors/developers? without registration with the land registry. So, it is recommended to Please give examples. check both the building registry and the land registry. There is no specific trend indicating a slowdown in any market sub- sector. 6 Real Estate Market

7 Liabilities of Buyers and Sellers in Real 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally Estate Transactions be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duties. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? In general, real estate brokers are a feature of real estate transactions Ownership is transferred to the buyer in accordance with the in Japan, and governmental approval is required to engage in the agreement between the seller and the buyer. No formality is business of real estate brokerage. required to transfer ownership. In addition, a judicial scrivener is involved in almost all real estate transactions. As the registration process is very technical, their involvement is crucial to ensure that the process is completed 7.2 Is the seller under a duty of disclosure? What matters smoothly. must be disclosed? Depending on the size and complexity of a transaction, legal, tax and In general, the seller is not under a duty of disclosure. It should technical advisors are sometimes engaged for due diligence work. be noted, however, that the seller is liable for any defects or encumbrances which are unknown to the buyer pursuant to the Civil 6.2 How and on what basis are these persons Code. The buyer can seek damages for the unknown defects or remunerated? encumbrances, and even cancel the agreement if the purpose of the agreement cannot be achieved due to the defects or encumbrances. It depends on the terms of the agreement as to how and on what While the seller is not obligated to make disclosure, a real estate basis various parties, involved in the transaction, are remunerated in broker involved in the transaction has an obligation to provide any given transaction. certain material information concerning the real estate in writing However, with regard to a real estate broker, there are upper limits to the buyer pursuant to the Real Estate Transactions Business Law. on the amount of compensation under the Real Estate Transactions

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 179 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

7.3 Can the seller be liable to the buyer for 8.3 What are the common proceedings for realisation of misrepresentation? mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without The seller can be held liable to the buyer for fraudulent involving court proceedings or the contribution of the mortgagor? misrepresentation. If the buyer is induced to enter into a real estate transaction through fraudulent misrepresentation by the seller, the buyer can cancel such transaction and/or seek damages under the There are specific proceedings for the realisation of mortgaged Civil Code. properties. Foreclosure is one such legal process involving court proceedings. Japan This is a fair and transparent process, but it could take a considerable 7.4 Do sellers usually give any form of title “guarantee” length of time to accomplish. Moreover, the sale price through or contractual warranties to the buyer? What would be the scope of these? What is the function of any foreclosure tends to be lower than the actual market price, because such guarantee or warranties (e.g. to apportion risk, potential buyers are typically not given the opportunity to conduct to give information)? Would any such guarantee or their own investigations of the property. Additionally, a report of warranties act as a substitute for the buyer carrying a property prepared by a court execution officer is not sufficient out his own diligence? for the purposes of due diligence. As such, foreclosure is not the preferred process for realisation of mortgaged properties. Traditionally, contractual warranties, to be provided to the buyer, On the other hand, one common process for the realisation of have not been popular in Japan, because the seller is already liable for mortgaged properties is a voluntary sale (nin-i baikyaku), through any latent defects, in accordance with the Civil Code as we explained which the property can be sold at a price close to the market value in question 7.2, without explicit warranties provided pursuant in a timely manner. Therefore, voluntary sales are much more to contract. With that said, we have seen quite a few contractual beneficial for the mortgagee and even the mortgagor (in certain warranties recently in large real estate transactions. In practice, cases) than the foreclosure route. warranties could cover any matters relating to real estate. Normally, warranties would mainly work as risk apportionment, but depending on the case could also work as a substitute for due diligence. 8.4 What minimum formalities are required for real estate lending?

7.5 Does the seller retain any liabilities in respect of the No formalities are required specifically for real estate lending. property post sale? Please give details. However, if a mortgage is to be established for security, the registration process will be necessary for the perfection of such As we mentioned in question 7.2, in principle, the seller is liable for security. the defects or encumbrances which are unknown to the buyer, unless such liabilities are expressly set out in the agreement. 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other 7.6 What (if any) are the liabilities of the buyer (in addition creditors? to paying the sale price)? A mortgagee or a revolving mortgagee can perfect its rights by In general, the buyer has no liabilities in addition to paying the sale registration. If the mortgage or revolving mortgage is registered in price. the registry earlier, he or she is able to assert its preference against other creditors who subsequently register (or are not yet registered) a mortgage or other rights. 8 Finance and Banking

8.6 Under what circumstances can security taken by a 8.1 Please briefly describe any regulations concerning lender be avoided or rendered unenforceable? the lending of money to finance real estate. Are the rules different as between resident and non-resident persons and/or between individual persons and The following acts may be avoided if they create a security interest corporate entities? against an existing claim, or extinguish any existing claim: (a) an act conducted by the debtor after the debtor becomes As a general rule, it is necessary to register as a money lender continuously unable to pay its debts as they fall due (shiharai under the Money Lending Business Law (kashikingyoho) in order funo), if the creditor knew that the debtor was unable to pay its debts or the debtor had suspended its payment at the to engage in the money lending business. This rule does not vary timing of the act; between resident and non-resident, or between individual persons and corporate entities. There are no regulations regarding the (b) an act conducted by the debtor after the filing of a petition for insolvency proceedings, if the creditor knew that the act was lending of money specifically for finance real estate. conducted after such petition was filed at the timing of the fact; and 8.2 What are the main methods by which a real estate lender (c) an act that the debtor is not obligated to do, either with seeks to protect itself from default by the borrower? respect to the act itself or with respect to the timing of the act, if the act was conducted within 30 days prior to the debtor A mortgage is the main method for a real estate lender to secure becoming unable to pay its debts and the creditor knew the its loan. Another method is a revolving mortgage (neteito), which fact that such act would prejudice other creditors. secures unspecified loans up to a specified amount agreed inthe In addition, in accordance with the Civil Code, security taken by mortgage agreement. a lender can be rescinded as a fraudulent action if the property

180 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

owner establishes the security knowing that it will prejudice other Stamp tax creditors, and the lender knows at the time of such establishment the The contract regarding transfer of real property is subject to stamp fact that other creditors would be prejudiced. duty (up to 600,000 yen).

8.7 What actions, if any, can a borrower take to frustrate 9.2 When is the transfer tax paid? enforcement action by a lender? The real property tax is payable post-transaction. The amount of One who obstructs enforcement action can be punished in the payment and the deadline for payment are notified by the tax accordance with the Criminal Code. The borrower would not be

authority several months after the transaction. Japan able to lawfully and effectively obstruct enforcement action by a lender. Registration tax is payable at the time of application. Stamp duty is payable upon the execution of the contract.

8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a 9.3 Are transfers of real estate by individuals subject to real estate lender? income tax?

In Bankruptcy proceedings, a secured creditor can generally enforce Capital gain from the sale of real estate is taxable. The tax rate is its security interest through a foreclosure outside of bankruptcy dependent on the period of time in which the real estate is held. In proceedings. cases where the real estate, to be sold, has been held by the seller for In Civil Rehabilitation proceedings, secured creditors are not stayed less than five years, the tax rate is relatively high at 39.63% (30% from exercising their security interests, but they may become income tax, 0.63% special income tax for reconstruction and 9% subject to a suspension order by the court having the effect of a individual inhabitant tax). On the other hand, if the holding period temporary stay. is more than five years, a lower tax rate is applied at 20.315% (15% income tax, 0.315% special income tax for reconstruction and 5% In Corporate Reorganisation proceedings, secured creditors are individual inhabitant tax). stayed from exercising their rights (security interests) outside of the proceedings. 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? 8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, A consumption tax is payable in the case of a transfer of ownership can shares be appropriated when a borrower is in of a building. The tax rate currently stands at 8%, but this is expected administration or has entered another insolvency or to increase to 10% on October 1, 2019. The seller is liable for the reorganisation procedure? payment of consumption tax, except in the case where the seller is an individual and the property is his/her residence. A share pledge is the most common way to establish a security over shares. As a general rule, a lender cannot have a right to appropriate 9.5 What other tax or taxes (if any) are payable by the pledged properties. However, if the lender is a corporation seller on the disposal of a property? incorporated under the Corporate Law, the lender can have a right to appropriate the pledged properties if so provided in the share pledge In the case where the seller is a corporation, net income is subject to agreement. In bankruptcy proceeding, shares can be appropriated corporation tax, with the effective rate standing at 30–35%. outside of the bankruptcy proceedings. As for the cases in Civil Rehabilitation proceedings or corporate reorganisation proceedings, please see question 8.8 above. 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred?

9 Tax The transfer of ownership of a company which owns real estate does not trigger real estate acquisition tax, registration tax or stamp tax, which are normally imposed in transfers of real estate. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? In relation to corporation tax, there would be no difference in the respective rates applied to a parent company and a subsidiary for Real property acquisition tax such transfers, assuming that capital gains resulting from the transfer of ownership by a parent company are equal to the capital gains that A person who is acquiring real property is subject to real property result from the transfer of real estate by its subsidiary, and provided acquisition tax. This tax is calculated based on the amount of the that the subsidiary has no other assets other than the real estate. property value assessed by the tax authority (approximately 70% of the market value if the property is land). On or before March 31, 2021, the tax rate is 3% in the case of the acquisition of land or 9.7 Are there any tax issues that a buyer of real estate residential house. should always take into consideration/conduct due diligence on? Registration tax

A person who is applying for registration is subject to registration Real estate acquisition tax is not imposed on either the entrustment tax. This tax is calculated based on the amount of property value of real estate from the seller to the trust, or the transfer of the assessed by the tax authority. On or before March 31, 2019, the tax beneficial interest from the seller to the buyer. This can be a useful rate is 1.5%. cost-saving method in the context of real estate investment.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 181 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

The right to request an increase can be modified in the lease 10 Leases of Business Premises agreement, but the right to request a decrease generally cannot be excluded from the agreement, except where the right to request a 10.1 Please briefly describe the main laws that regulate decrease can be excluded in the case of fixed-term building leases if leases of business premises. certain requirements are met. c) The tenant’s right to sell or sub-lease The Civil Code regulates matters concerning the lease of real It is standard practice to prohibit the lessee from assigning the lease estate as part of general law. Act on Land and Building Lease (the or sub-leasing without the consent of the lessor. “ALBL”) regulates as a special law land leases which facilitate the d) Insurance Japan ownership of buildings, as well as building leases (including office buildings and residential buildings). In general, there is no provision in relation to insurance in a lease agreement. e) (i) Change of control of the tenant 10.2 What types of business lease exist? In general, there is no prohibition on the change of control of the lessee in a lease agreement. There are two types of real estate leases in Japan, namely ordinary renewable leases and fixed-term leases. (ii) Transfer of lease as a result of a corporate restructuring (e.g. merger) Ordinary lease It is standard practice to prohibit the transfer of the lease resulting In principle, the lease of real estate is entered into as an ordinary from a corporate restructuring such as a business transfer. lease. It should be noted that an ordinary land lease to facilitate f) Repairs the ownership of a building and an ordinary building lease can be renewed even if the agreed lease period has already expired. The It is common that the lessor is obligated, under the lease agreement, lessor cannot reject the renewal of the lease agreement without to carry out repairs to the property. It is also common that the justifiable reasons, which, generally speaking, are not easily found. lessee is obligated to restore the property to its original state, when vacating the property at the end of the lease, or upon termination. Fixed-term lease A fixed-term lease is not renewable under the ALBL. The most commonly used fixed-term leases for land are: (i) the general 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? fixed-term land lease available for both residential purposes and businesses; and (ii) the business purpose fixed-term land lease. A consumption tax is imposed on the rent for business building leases. 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or 10.5 In what circumstances are business leases usually sub-lease; (d) insurance; (e) (i) change of control of terminated (e.g. at expiry, on default, by either party the tenant; and (ii) transfer of lease as a result of a etc.)? Are there any special provisions allowing a corporate restructuring (e.g. merger); and (f) repairs? tenant to extend or renew the lease or for either party to be compensated by the other for any reason on a) Length of term termination? 1. Ordinary land lease Termination A minimum 30-year term is statutorily required in an ordinary land Under the Civil Code, a lease agreement can be terminated by lease for the purpose of owning buildings (shakuchi ken). However, one of the parties, if the other party fails to perform its obligation if a longer period is agreed by contract, such longer term shall thereunder. However, under case law, a lease agreement cannot be effective. On the other hand, the duration of the term of the be terminated if a tenant can prove there is still a relationship of ordinary building lease is contingent on the term that is specified in mutual trust between the parties of the lease agreement, even after the agreement. the occurrence of the breach. Non-payment of rent in one instance, 2. Fixed-term land lease does not usually entitle a landlord to terminate the lease, because Under the ALBL, the term of the general fixed-term land lease such non-payment would not suffice to destroy a relationship of for owning a building shall be 50 years or more. The term of the mutual trust between the parties. business purpose fixed-term lease shall be 10 years or more, but Renewal shall be less than 50 years. The duration of the term of the fixed- term building lease is contingent on the agreement. As we mentioned in question 10.2, an ordinary land lease for owning a building and an ordinary building lease can be renewed b) Rent increases even if the agreed lease period has already expired. In the context Under the ALBL, when the rate of rent becomes unreasonable, as a of lease renewals, the lessor cannot terminate the lease agreement or result of the increase or decrease in tax and other burdens relating refuse to renew the lease without justifiable reasons. The courts will to the land or the buildings resulting from the rise or fall of land consider various factors in determining whether a justifiable reason or building prices or fluctuations in the broader economy, or in exists, and, generally speaking, it is often difficult for a lessor to comparison to the rates of rent for other similar buildings in the establish a justifiable reason for lease termination. The following vicinity, the lessor and lessee can, notwithstanding the conditions are some of the factors that are considered by the courts: (i) necessity set out in the contract, request future increases or decreases in the of use by landlord and tenant; (ii) past history relating to the lease; rate of rent. However, if there are special provisions set out in the (iii) current use and condition of the leased premises; and (iv) offer contract to the effect that building rent shall not be increased for a of certain benefits to the tenant in exchange for the tenant vacating fixed period, those special provisions shall apply. the property. An offer of compensation by the lessor, provided it is

182 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

a sufficient amount with regard to the situation, can be considered as a justifiable reason. In practice, a lessor intending to reject the 11 Leases of Residential Premises renewal of a lease often makes an offer of compensation. On the contrary, a fixed-term lease terminates upon the expiration 11.1 Please briefly describe the main laws that regulate of the lease term. leases of residential premises.

Please see the answer to question 10.1 above. 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective obligations under the lease once they have sold their 11.2 Do the laws differ if the premises are intended for interest? Can they be responsible after the sale in multiple different residential occupiers? Japan respect of pre-sale non-compliance? There is no difference in whether or not the premises are intended If a lessor has transferred the ownership of the subject property, its for multiple residential occupiers. status as a lessor under the lease agreement is transferred to a new owner and the former lessor ceases to be liable for the obligations as a lessor under the lease agreement. It should be noted that any 11.3 What would typical provisions for a lease of obligations arising out of the lease prior to the transfer cannot be residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the assigned without execution of a specific agreement, and accordingly, tenant’s rights to remain in the premises at the end of the former lessor can be responsible in respect of any liability arising the term; and (d) the tenant’s contribution/obligation in respect of the pre-sale period of the lease. to the property “costs” e.g. insurance and repair? If a lessee is to transfer its status as a tenant under the lease agreement, the tenant would first need to seek consent from the lessor because a) Length of term the lessee is usually prohibited from assigning the lease without the Please see the answer to question 10.3 above. consent of the lessor in the lease agreement. If consent is obtained, b) Rent increases/controls the status as a lessee under the lease agreement can be transferred to a Please see the answer to question 10.3 above. new tenant and the former tenant cease to be liable for the obligations as a lessee under the lease agreement. It should be noted that any c) The tenant’s rights to remain in the premises at the end of obligations arising out of the lease period prior to the transfer cannot the term be assigned without any specific agreement, and accordingly, the An ordinary land lease for ownership of a building and an ordinary former lessee can be held responsible in respect of such obligations. building lease can be renewed even if the agreed lease period has already expired. The lessor cannot decline a request to renew a lease agreement without justifiable reasons, which, generally speaking, 10.7 Green leases seek to impose obligations on are not easily found. A fixed-term lease is not renewable under the landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of ALBL. the “environmental footprint” of a building. Please d) The tenant’s contribution/obligation to the property briefly describe any “green obligations” commonly “costs” e.g. insurance and repair found in leases stating whether these are clearly In general, there is no provision in relation to insurance in a lease defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for agreement. It is common that the lessor is obligated to make repairs example aspirational objectives). in the lease agreement. It is also common that the lessee is obligated to restore the property to its original state upon vacating at the expiry Although it is not yet standard practice to include green lease of the lease, or upon termination. clauses in a lease agreement, templates of green lease clauses have been publicly announced by the Ministry of Land, Infrastructure, 11.4 Would there be rights for a landlord to terminate a Transport and Tourism. One example of a green lease clause residential lease and what steps would be needed stipulates that the lessor and lessee shall establish reduction targets to achieve vacant possession if the circumstances regarding the consumption of electricity, gas and other fuels, as well existed for the right to be exercised? as the CO2 emissions, the consumption of water and the generation of waste. The expressed overarching goal of this template clause A lessor’s right to terminate a lease agreement is restricted. is to work together to achieve the aforementioned targets. Most Even in the case where a lessee breaches the agreement, a lease green lease clauses seem to come in the form of obligations to make agreement cannot be terminated if a lessee can prove that there is efforts towards realisation of aspirational objectives. still a relationship of mutual trust between the parties of the lease agreement. Moreover, the lessor cannot reject the renewal of the lease agreement without justifiable reasons. In the case where a 10.8 Are there any trends in your market towards more lessee does not vacate the building, it would be necessary for a flexible space for occupiers, such as shared short-term working spaces (co-working) or shared lessor to file a lawsuit against the lessee for termination of the lease. residential spaces with greater levels of facilities/ The lessor would then have to file an application with the court for activities for residents (co-living)? If so please provide a compulsory execution. examples/details.

The spread of shared short-term working spaces is at an early phase in Japan.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 183 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

commence. If land development is involved, permits under the City 12 Public Law Permits and Obligations Planning Law and other relevant laws are required. In the case of the use of land for agricultural purposes, a permit may be necessary 12.1 What are the main laws which govern zoning/ depending on the case. permitting and related matters concerning the use, development and occupation of land? Please briefly describe them and include environmental laws. 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? Zoning

Japan The City Planning Law is the main law which governs zoning in A building/use confirmation is commonly obtained in Japan. The Japan. This law sets restrictions on land developments depending application for the confirmation cannot be rejected if the building/ on the classification of the areas. For example, if the land is located use satisfies the requirements under the relevant law. Implied in an urbanisation control area (shigaikachouseikuiki), such land permission cannot be obtained. developments would be under strict control. Other key laws that apply to land use are as follows: 12.6 What is the typical cost of building/use permits and ■ Agricultural Land Act; the time involved in obtaining them? ■ Act on Establishment of Agricultural Promotion Regions; ■ Building Standards Act; It depends on the case. For building confirmation for residential ■ Forest Act; house building, the fees to apply for such confirmation would be less ■ Natural Parks Act; than JPY 1,000,000, and the confirmation would take a few weeks to process. ■ Cultural Assets Preservation Act; ■ National Land Use Planning Act; ■ Urban Renewal Act; 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how ■ Land Readjustment Act; and are they likely to affect the transfer of rights in real ■ Landscape Act. estate or development/change of use? Environmental Law The Soil Contamination Countermeasures Law is the main There are regulations on the protection of historic monuments in Japan, environmental law relating to land. If land is categorised either as a such as the Cultural Assets Preservation Act. If the land is located Designated Area Requiring Action (defined hereinafter: “DAA”) or within a Well-known Place Containing a Buried Cultural Property a Designated Area Requiring Notification upon Change of the Land (as defined under the Cultural Assets Preservation Act), a prior Character (defined hereinafter; “DAN”), the owner, manager or notification is required to excavate such land for civil construction occupier of the land will be subject to various regulations applicable work and/or other purposes. If the development of such land has the to each category, including orders rendered by an authority. Among potential to change the status or influence the preservation of historic, these regulations, one of the most important regulations, which is scenic and natural monuments, a permit would be required. applicable only to the DAA, is the removal of contamination. 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real 12.2 Can the state force land owners to sell land to estate? Is there a public register of contaminated land it? If so please briefly describe including price/ compensation mechanism. in your jurisdiction?

In general, the state cannot compel land owners to sell land to the state. Information on areas which are already designated as contaminated However, under the Land Expropriation Law, the state can exercise areas under the Soil Contamination Countermeasures Law is publicly the right of eminent domain in specific cases where it is necessary to available at the offices of prefectural governments. Please note that exercise this right in the public interest (e.g., such land is located in an such information is not absolute or exhaustive, and it is possible that area designated for planned public facilities such as roads). The price land could be contaminated or polluted, even if such land is not in is determined in accordance with the Land Expropriation Law, with an area designated as contaminated under the Soil Contamination regard to market prices of neighbouring areas, etc. Countermeasures Law. Buyers should consider conducting surveys before purchasing land suspected of being contaminated.

12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do 12.9 In what circumstances (if any) is environmental clean- buyers obtain reliable information on these matters? up ever mandatory?

The laws listed in question 12.1 above apply nationally, but they are Under the Soil Contamination Countermeasures Law, a soil mainly administrated at local level by city, town and village authorities. contamination investigation is required in certain instances. For The buyers can obtain information concerning these matters by making example, when a prefectural governor finds soil contamination which inquiries to the relevant city, town and village authorities. poses a risk to human health, the prefectural governor can order an investigation. If the land does not satisfy the relevant criteria upon the results of the investigation, the prefectural governor can designate the 12.4 What main permits or licences are required for building works and/or the use of real estate? area covering such land as contaminated. When such designation has been made, the prefectural governor can instruct the owner, manager In general, confirmation from the authorised bodies under the or occupier of the area to clean-up the land, but only to the extent Building Standard Law is required before building works can necessary to prevent harm to human health due to contamination.

184 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan

12.10 Please briefly outline any regulatory requirements 13.3 Are there any other regulatory measures (not already for the assessment and management of the energy mentioned) which aim to improve the sustainability of performance of buildings in your jurisdiction. both newly constructed and existing buildings?

Under the Act on the Improvement of Energy Consumption No other specific regulatory measures have been taken to improve Performance of Buildings, when a new construction/extension/ the sustainability of both newly constructed and existing buildings renovation over a certain size (at least 300 square metres of floor at nationwide level. However, some measures have been taken at space) is to be conducted, a certificate of conformity with energy prefectural level. efficiency standards must be obtained. Large-scale, non-residential Japan buildings that are not compliant with energy efficiency standards are ineligible for certification pursuant to the Building Standards Law.

13 Climate Change

13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions trading scheme). Kenichi Yamamoto Under the Act on Promotion of Global Warming Countermeasures Anderson Mori & Tomotsune and the Energy Saving Law, a company that produces considerable Otemachi Park Building 1-1-1 Otemachi Chiyoda-ku amounts of greenhouse gas emissions (the threshold is provided in Tokyo 100-8136 the relevant ministerial order) is obliged to submit reports regarding Japan the company’s greenhouse gas emission levels. There is no Tel: +81 3 6775 1075 nationwide mandatory emissions trading scheme in Japan. Email: [email protected] It should be noted that an owner of a building in Tokyo may, URL: www.amt-law.com depending on the amount of energy the building uses, be required to submit regular reports on greenhouse gas emission amounts to the Kenichi Yamamoto is a partner with Anderson Mori & Tomotsune in Tokyo Metropolitan Governor. Tokyo, Japan. He has held important legal advisory roles in several landmark real estate investment transactions in Japan. He has extensive experience advising real estate investors and lenders on 13.2 Are there any national greenhouse gas emissions transactions covering a diverse range of real estate assets, including reduction targets? the financing and development of office buildings, residential buildings, commercial facilities, warehouses, hotels, senior living facilities and hospitals. He also has considerable expertise in other aspects of The Government of Japan has set its level of reduction of greenhouse the investment cycle, advising on real estate matters in the context gas emissions at 26% and 80% by fiscal year 2030 and 2050 of corporate workouts, restructurings, bankruptcies and “fire sales” of respectively, from the emission levels recorded in 2013. distressed real estate assets.

Anderson Mori & Tomotsune is among the largest and most diversified law firms in Japan offering full corporate services. Our flexible operational structure enables us to provide our corporate clients with effective and time-sensitive solutions to legal issues of any kind. We are pleased to serve Japanese companies as well as foreign companies doing business in Japan. In response to the increasingly complex and varied legal needs of our clients, we have grown significantly, augmenting both the breadth and depth of expertise of our practice. Our principal areas of practice consist of Corporate, M&A, Capital Market, Finance and Financial Institutions, Real Estate, Labour and Employment, Intellectual Property/Life Sciences/ TMT, Competition/Antitrust, Tax, Energy and Natural Resources, Litigation/Arbitration/Dispute Resolution, Bankruptcy and Insolvency/Restructuring, International Trade and International Practice (China, India, Asia, US, EU and others).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 185 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 19

Netherlands Mark van Weeren

Blenheim Tim Pruntel

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to Apart from ownership, Dutch law features other, less encompassing, question 12.1. Those relating to tax should be listed in real rights, viz. erfdienstbehaarheden (easements, servitudes), erfpacht response to questions in Section 9. (leasehold, or emphytuesis), gebruik (usus), and hypotheek (mortgage). The law of property demonstrates as other parts of Dutch law that Easement is regulated in article 5:70 DCC. An easement is an the Dutch legal system belongs to the Romano-Germanic family. encumbrance imposed on an immovable servient property, in favour Real estate is mainly governed by written laws on a governmental of another immovable dominant property. An easement can only give level, for instance the Dutch Civil Code (DCC) and land register rise to a negative obligation, a debt. For example: if an immovable laws. property is not directly accessible from the public road, an easement can be established. This means that the owner of the property beyond the property in the forefront with access to the public road, 1.2 What is the impact (if any) on real estate of local can make use of the property in the forefront to gain access to the common law in your jurisdiction? public road. Example: right of passage or access. This is obvious if a property is only accessible by way of another property. Regarding In principle, Dutch law has little or no common law. Despite this, residences, it is common that access to the backyard requires passage there exists on valid case law in which legislation is interpreted by over another property. If this is true, the right of easement applies judges. Such jurisprudence is applied to cases with similar facts. as well, even though the front door has access to the main road. Regarding a leasehold, the holder of this right, the leaseholder, has 1.3 Are international laws relevant to real estate in your the authority to be in possession of an immovable property owned jurisdiction? Please ignore EU legislation enacted by another party, for both its use and possession. This arrangement locally in EU countries. is useful in practice since, conditions not possible within the context of ownership can be attached to a lease (such as the opening of This is not applicable. a branch for a specific period). The owner is called the‘bloot eigenaar’ or bare owner. 2 Ownership A mortgage is a real right that can be established on all transferable registered property (articles 3:277 (1), 3:228 DCC). Its serves as security. In case of non-performance, the creditor has a priority in 2.1 Are there legal restrictions on ownership of real estate recovering his debts, but he is never entitled to keep the property. by particular classes of persons (e.g. non-resident The right to use the land (uses) is solely based on contractual persons)? agreements between the parties.

The Netherlands has no restrictions on the ownership of real estate by foreigners and does not have a qualitative requirement for the 3.2 Are there any scenarios where the right to land diverges shareholders in a company if this company is the owner of real from the right to a building constructed thereon? estate. Yes, opstal (the Roman superficies). The right of superficies provides its holder with the right to own or acquire, in, on or above, the immovable property of another buildings, works or vegetation (article 5:101 up to and including article 5:105 DCC).

186 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

(usus); bewoning (habitatio); huur (rental); and bruikleen (loan). 3.3 Is there a split between legal title and beneficial title Contrary to real rights, personal rights are not registered. in your jurisdiction and what are the registration consequences of any split? Are there any proposals to change this? 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first Beneficial ownership is a right to use a good of which thelegal registration or are there perhaps different classes or qualities of title on first registration? Please give ownership is within the hands of a third party. Ownership is details. First registration means the occasion upon transferred, but legal ownership remains with the transferor. The which unregistered land or rights are first registered beneficial owner usually also has the right to delivery of the good in the registries. later. In the case of beneficial ownership, ownership is effectively transferred, but legal ownership remains with the transferor. This is not applicable, see the answer to question 4.1. Netherlands The legal and beneficial ownership of real estate can be split. The legal entitlement is registered with the land registry. If the entity 4.6 On a land sale, when is title (or ownership) transferred entitled to the legal ownership is not entitled to the beneficial to the buyer? ownership, the land registry does not reflect this division in all cases. The split of legal and beneficial ownership is apparent from To achieve transfer of title, tradition (conveyance) of property must the land register if the legal owner acquired the legal ownership in be affected by a party who has a right to dispose of the property his capacity of, for example, custodian of the beneficial owner, or and by a valid causa. For immovable property and other registered if the legal ownership and beneficial ownership ware transferred by property, the law requires delivery by notarial deed and registration a seller to the purchasers in the same deed of transfer. However, if of that deed in the public registers intended for that purpose (articles the full title was transferred and the titleholder transfers solely the 3:89 (1) and (4) DCC). Delivery is only complete when the deed beneficial ownership, this is not registered with the land registry. is registered in the public registers. For the delivery of registered Beneficial ownership in practice is distinguished from legal goods, at the moment of delivery (the registration of the deed in the ownership. Beneficial ownership is not a right addressed inthe public register), the other two requirements of transfer of ownership DCC. There are currently no legislative proposals which wish to must also apply: a valid title; and power of disposal. change this.

4.7 Please briefly describe how some rights obtain 4 System of Registration priority over other rights. Do earlier rights defeat later rights?

4.1 Is all land in your jurisdiction required to be Ranking between the different liens is dependent on the time of registered? What land (or rights) are unregistered? the establishment: an older lien has priority over a younger lien (priority principle). An exception to this rule is if the younger lien Yes, all land is required to be registered. is established on goods already pledged and these goods are then brought into the possession of the holder of the younger lien (or a 4.2 Is there a state guarantee of title? What does it third party). In that case, a change in the ranking takes place, and guarantee? the younger lien takes precedence over the older lien.

No, such title does not exist in the Netherlands. 5 The Registry / Registries

4.3 What rights in land are compulsory registrable? What 5.1 How many land registries operate in your jurisdiction? (if any) is the consequence of non-registration? If more than one please specify their differing rules and requirements. Registration in a public directory is sometimes required before legal effects initiates. As an example, the delivery of registered goods, The Netherlands has one land register (Kadaster). The land register e.g. easements, leasehold, superficies and mortgage. These exist of is an open directory of registered property maintained by the two components, namely a notarial deed followed by the registration government, wherein, immovable property and rights thereupon are of a copy thereof in the public registers. Without registration there registered. is no delivery or establishment of the right. Registration is mandatory for: 5.2 How do the owners of registered real estate prove ■ transfer, establishment, waiver and allocation (of limited their title? rights) to registered property; ■ the seizure of registered property; Based on the deed/or deed of transfer. This deed states among other ■ establishing an obligation upon a registered property; and things: ■ conversion of ownership of an immovable to co-ownership. ■ who the (legal) owner is; ■ who can make use of the whole or part of the property; 4.4 What rights in land are not required to be registered? ■ which limitation apply to its use (for instance, if the property is a monument); A real right means a right that entitles the holder to an immovable ■ the encompassing area (not applicable to apartments); property. A real right contrasts with a personal right which entitles ■ the title of the transfer; and a person to a performance. Personal rights are for example: gebruik ■ the purchasing price of the last deed of sale (if known).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 187 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

2. The real estate agent often drafts the purchase agreement. 5.3 Can any transaction relating to registered real estate However, the use of a real estate agent is not mandatory. be completed electronically? What documents need 3. In addition, the buying party often enlists a real estate agent to be provided to the land registry for the registration and/or structural engineer to assess the condition of the of ownership right? Can information on ownership of building. registered real estate be accessed electronically?

A transaction in relation to immovable property cannot be completed 6.2 How and on what basis are these persons electronically. The rights described in the deed of transfer and remunerated? mortgage deeds must be entered in the register. Ownership information can be consulted online through the website of the land 1. Notary: Notaries are free to ask whatever remuneration for register. their services. The drawing up of the deed of transfer is Netherlands usually subject to a fixed fee. 2. Real estate agent: Remuneration received by a real estate 5.4 Can compensation be claimed from the registry/ agent at the sale of a property exists of a percentage of the registries if it/they make a mistake? purchase price. This amount is referred to as commission or real estate commission. Besides this, there are costs attached An injured party can hold the land register accountable for a mistake to the drafting of taxation reports, these are commonly fixed in registration, this can be done through starting legal proceedings. prices set by the real estate agent. 3. Structural engineer: The structural engineer is free to ask whatever remuneration for their services. The costs for the 5.5 Are there restrictions on public access to the drawing up of a structural report are often dependent on the register? Can a buyer obtain all the information he object of the inspection. might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved by a search of the register? If not, what additional 6.3 Is there any change in the sources or the availability information/process is required? of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are The land register, registers immovable property, such as houses and the main sources of capital you see active in your business premises and the rights and encumbrances that are attached market? to them. This information is open to the public so that no mistake can arise from uncertainty concerning who has a right to what. Regarding a mortgage through a bank or other financial institutions, Fast and direct access to information from the register is essential there has been a shift in the Dutch financial market. The amount one for legal certainty and the transparency of the real-estate market. can loan is decreasing, moreover, one must present more capital. For purchase, selling, and investment reasons it is essential that The Dutch government has organised an arrangement, whereby you are dealing with the correct person or entity. Without reliable parents can, donate to their children, between the ages 18 and 40, an information, people are less willing to do business with each other. amount of EUR 100,800 – tax-free. This donation must be used for For this reason, public access to such information is legally ensured. the purchase, improvement or maintenance of their home or for the This is true for property which has been seized as well. This is repayment of debt on their home. As an alternative to a loan from no different under the new privacy rules (General Data Protection a bank, an increasing number of mortgages are arranged with third Regulation) because an exception for public registers is included. parties; for example, a family member or private investor. All personal details disclosed in purchase and mortgage deeds are open to the public. This includes the following personal details: 6.4 What is the appetite for investors and/or developers ■ Name of the entitled person (first and last name). to invest in your region compared to last year and what are the sectors/areas of most interest? Please ■ Address. give examples. ■ Date and place of birth. ■ Residency at the time of acquisition of title. The demand for financing of the purchase of rented housing has ■ Name of partner. increased substantially in recent years. It is seen as an investment ■ Number of identification documents (passport, driver licence; where one can make some form of return and enjoy the appreciation only upon request of the whole document). The social of the property(s). security number is not disclosed by the land register. The great pressure on the housing market has led to all means being employed to create (inner-city) living space. The third trend is 6 Real Estate Market refinancing of existing real estate (portfolios) because the interest rate is historically low. Finally, sustainability starts to play a major role in the real estate sector. A lot of real estate needs to be improved 6.1 Which parties (in addition to the buyer and seller to receive better energy labels and everything must be sustainable and the buyer’s finance provider) would normally or even recycled. be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duties. 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in 1. Notary. Delivery can only take place with the involvement of terms of their attractiveness to investors/developers? Please give examples. a notary. A notary drafts the necessary transfer deed (notarial deed). No, momentarily there are no sub sectors slowing down.

188 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

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

The buyer is obliged to fulfil the agreement. The seller can request 7.1 What (if any) are the minimum formalities for the sale the buyer to deposit 10% of the purchase price at a notary (if agreed and purchase of real estate? upon) as a guarantee that he will fulfil his or her obligations.

The purchase of real estate, in the event the purchaser is a natural person who is not exercising on behalf of a profession or company, 8 Finance and Banking is to be done in written form (article 7:2 DCC).

8.1 Please briefly describe any regulations concerning Netherlands 7.2 Is the seller under a duty of disclosure? What matters the lending of money to finance real estate. Are the must be disclosed? rules different as between resident and non-resident persons and/or between individual persons and As a seller you have an obligation to provide information. You must corporate entities? inform the buyer about (hidden) defects, any charges and limitations and, for example, easements. In the field of property financing, largely the following laws apply in addition to the Civil Code: The General Administrative Law Act, the Financial Supervision Act, the Act on the Prevention of Money 7.3 Can the seller be liable to the buyer for misrepresentation? Laundering and the Financing of Terrorism, and Enforcement of Consumer Protection Act. Yes, this is possible if the goods do not meet the requirements that may be expected of the good. The seller is held liable on the grounds 8.2 What are the main methods by which a real estate of an error and/or deception if he was aware of this shortcoming at lender seeks to protect itself from default by the the time of the sale. borrower?

The right of a lien and the right of a mortgage are limited rights, they 7.4 Do sellers usually give any form of title “guarantee” extend to the claim of payment of a sum of money which is prioritised or contractual warranties to the buyer? What would be the scope of these? What is the function of any above the claim of other creditors. If this right is encumbered upon such guarantee or warranties (e.g. to apportion risk, registered property, then it is categorised as a mortgage, if it is to give information)? Would any such guarantee or encumbered upon another property, then it is seen as a right of lien. warranties act as a substitute for the buyer carrying A right of lien or mortgage upon a thing attaches to all that ownership out his own diligence? encompasses (article 3:227 DCC).

Contractually, in pursuance of the freedom of contract, anything 8.3 What are the common proceedings for realisation of can be agreed upon if it does not violate the law. This also applies mortgaged properties? Are there any options for a to the guarantees issued which exclude risks for the buyer/seller. mortgagee to realise a mortgaged property without If the wording of the agreement is not clear, then the contract may involving court proceedings or the contribution of the be interpreted as to what the parties intended. Guarantees cannot, mortgagor? however, exclude the buyer’s obligations to investigate. Especially parties within their professional capacity are expected to fulfil their The mortgagee and mortgagor cannot agree amongst themselves to obligation to investigate. Based on these investigations, guarantees the sale of the good, even after default occurs. The permission of are drawn up. Otherwise, it is not clear which risks fall under which a preliminary judge can only be received once the judge has seen guarantees. The standardised NVM purchase agreement (the NVM the purchase agreement. The sale of the mortgaged goods and of is a Dutch branch organisation of real estate agents and appraisers) the shared encumbered by the right of lien takes place according to states that the immovable property that is transferred to the buyer is a statutory procedure in the presence of a notary and the delivery is in the state in which it is at the completion of the contract, with all done through a notarial deed (followed by registration in the land the associated rights and claims, visible and invisible defects. The register in case of an immovable property). No special requirements starting point is therefore that the buyer accepts the matter in the are attached to the sale and delivery of other goods encumbered by state in which it is at the transfer of ownership. the right of lien, other than the requirements for the public sales procedure. 7.5 Does the seller retain any liabilities in respect of the property post sale? Please give details. 8.4 What minimum formalities are required for real estate lending? The seller can retain liability when the goods do not meet the expectation that must/can be made at the sale. Liability based on The establishment of a new mortgage certificate is to be notarised, this occurs especially when hidden defects occur. The seller can be and a perspective application is to be filed with the land register. At held liable for this if he was aware of this defect during the sale, a the same time, there are no formalities in place regarding entering possible appeal to a mistake is open. a credit facility.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 189 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

Specific rules apply to the sale of shares, for instance, regarding co- 8.5 How is a real estate lender protected from claims shareholders and pricing. against the borrower or the real estate asset by other creditors? 9 Tax Mortgages have a certain assigned rank among each other. In general, the claims based on mortgage certificates prevail over unsecured or unprivileged claims. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable?

8.6 Under what circumstances can security taken by a A person who purchases a house in the Netherlands pays transfer lender be avoided or rendered unenforceable? tax. One also pays transfer tax on rights over immovable property, Netherlands for instance a lease and upon shares that you receive of a BV, NV To find a balance in interests, the curator in bankruptcy has the or partnership of which its capital almost predominantly exists of authority, under article 58 of the Bankruptcy Act (Faillissementswet), immovable assets. The transfer tax for residences amounts to 2%. to provide the secured creditor a reasonable period to secure his For other immovable assets, such as business premises, a rate of 6% rights. This must be executed within a period, for the goods to be is applicable. excluded from the bankruptcy. In the enforcement of the mortgage right on real estate, the property must therefore have been sold. 9.2 When is the transfer tax paid? If the secured creditor does not make use of this opportunity, the curator can claim it and sell it himself. The proceeds will then be accumulated Usually, the notary collects the transfer tax. Before the Purchaser upon the estate, the creditor will only be entitled to the proceeds once visits the notary to sign the deed of delivery of the house, the the general bankruptcy costs over the proceeds are covered. Purchaser deposits the purchase price and the amount of transfer tax due in the account of the notary. The notary pays the transfer tax to 8.7 What actions, if any, can a borrower take to frustrate the tax authorities on your behalf. enforcement action by a lender?

9.3 Are transfers of real estate by individuals subject to Enforcement of a right of lien or mortgage by a creditor can be income tax? frustrated through court. This may arise when there is no right to enforce the right of lien/mortgage because it has not yet fallen into Labelling plays a significant role in the sale of immovable property. default or that requirements that are applicable to the drafting of The rules regarding labelling are formed by jurisprudence. In the a notarial deed have not yet been met. Usually, a right of lien or labelling of immovable property such as private assets or corporate mortgage upon a good are very strong. In case of unlawful execution assets, a distinction must be made between corporation tax, income of the enforcement action the court can halt the enforcement. tax and sales tax. By law, legal entities operate their businesses with their entire capital. Therefore, the entire capital is regarded as 8.8 What is the impact of an insolvency process or a a business asset. For income tax, immovable property may belong corporate rehabilitation process on the position of a to private assets. In certain cases, this is mandatory. The choice that real estate lender? is made regarding income tax does not have to correspond with the labelling choice of the turnover tax. In most cases, the creditor has a mortgage right on the real estate of the debtor. A mortgage right has a right of priority in the event of a bankruptcy. As a result, the creditor has priority over other 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? creditors in the event of bankruptcy and greater certainty to recover his or her investment. Exercising these rights occurs as if there was no bankruptcy. Consequently, they can immediately proceed The main rule is that the sale of immovable property is exempt from to the enforcement of their rights after the bankruptcy has been VAT. Exceptions to this are new immovable properties up to two pronounced by the judge. years after first use and the delivery of so-called construction sites. This category of immovable property is legally taxed with VAT. If immovable property is not automatically charged with VAT, the parties 8.9 What is the process for enforcing security over can still opt for a VAT-taxed delivery provided the buyer uses the shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, property for purposes for which he has a full or almost complete right can shares be appropriated when a borrower is in of deduction. The latter can be particularly advantageous if a VAT- administration or has entered another insolvency or exempt sale leads to a revision of the deducted VAT from the seller. reorganisation procedure?

9.5 What other tax or taxes (if any) are payable by the For security over shares, a right of lien must be acquired as it can be seller on the disposal of a property? placed upon non-registered goods, the same as movable goods such as shares. The transfer in case of enforcement of the right of lien also This is not applicable. occurs in the presence of a notary, as defined in the law, and delivery thereof takes place by means of a notarial deed. Furthermore, the right of lien has priority in a bankruptcy. As a result, a creditor, based on 9.6 Is taxation different if ownership of a company (or his right of lien, will claim his debts in a manner as if no bankruptcy other entity) owning real estate is transferred? had taken place before other creditors. In the event of bankruptcy, the creditor, based on his right of lien, is entitled to the shares encumbered This is not applicable. with the right of lien, which includes the right to dividends and voting.

190 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

e) Although contract takeovers are in fact a three-party 9.7 Are there any tax issues that a buyer of real estate arrangement, it is merely necessary for two parties to reach should always take into consideration/conduct due a written agreement: the party which wants to transfer his diligence on? or her legal relationship and the acquiring third party. The debtor/counterparty of the party who transfers the contract is See the previous answers in this chapter. required to given consent to the transferal of the contract. In the case, the tenant has to agree to the takeover if the landlord wishes to transfer the lease. The landlord should give consent 10 Leases of Business Premises in case the tenant wishes to transfer the contract to party that takes over his business. Such consent is form free and, as in this case, can be deduced from the fact that the other party 10.1 Please briefly describe the main laws that regulate concludes further agreements with the relevant third party or leases of business premises. makes rental payments to the third party and no longer to the Netherlands original counterparty. (Rental) regulations distinguish between two different types of f) In general, maintenance is on the account of the landlord. business premises: the 290-business premises (middenstands- For instance, exterior painting or the maintenance of the roof. bedrijfsruimte, article 7:290 DCC); and the 230a-business premises For small repairs the tenant is responsible. (overige bedrijfsruimte, article 7:230a DCC). 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 10.2 What types of business lease exist?

As a landlord you can determine, in consultation, with the tenant A business premise within the scope of article 7:290 DCC arises in whether VAT is calculated along with the rent. As a landlord, you the case of a company (for instance, a retail business or a restaurant/ can for instance, determine the amount of VAT to be paid regarding café business). This rented space must be accessible to the public maintenance costs through calculating VAT yourself. However, if for the direct delivery of moveable goods or services. The hotel and the tenant does not have the opportunity to determine VAT in view of camping business are also qualified as 290-business premises. All tax already paid, it may be detrimental to the tenant. Tax authorities other cases will qualify as 230a-business premises like office space therefore provide that VAT on rent can only be paid if the tenant can and other commercial property. deduct 90% (some branches 70%) as tax. If you choose, together with the landlord, to tax the rent with VAT, then you must ensure 10.3 What are the typical provisions for leases of business that the following components are included in the rental agreement: premises in your jurisdiction regarding: (a) length of ■ that rent is taxed with VAT; term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of ■ from which date the taxed rent commences; the tenant; and (ii) transfer of lease as a result of a ■ a statement that you can deduct the VAT on the rent of the corporate restructuring (e.g. merger); and (f) repairs? building by at least 90% as tax; ■ a description of the building with the data from the land a) If a business premise is rented within the scope of article register; and 7:290 DCC, the contract is for a period of five years. If it has ■ the date on which your financial year starts. not been cancelled after 10 years, it will transfer to a contract for an indefinite period. A lease agreement for two years for an ex-290-business premise can also be agreed, which 10.5 In what circumstances are business leases usually ends automatically on the end date (if no other arrangement terminated (e.g. at expiry, on default, by either party has been agreed to). If the landlord and tenant agree to a etc.)? Are there any special provisions allowing a rental period of five years, formal permission from a judge is tenant to extend or renew the lease or for either party needed. Regarding 230a-business premises, the rental period to be compensated by the other for any reason on is not regulated. termination? b) After five years, both the tenant and landlord can request a Rental period change in the rent. If the parties cannot come to an agreement, then a judge can determine the rent. The judge will adjust the A 290-business premise is normally rented for a period of 10 years. rent to a few comparable business premises near the rented In the lease it is divided into two terms of five years; the second property. term is optional for the tenant. If one of the parties does not cancel c) If the tenant wants to terminate his rental contract prematurely, the agreement after five years, then the agreement is automatically because he wishes to sell his business and the landlord does extended for another five years. If the agreement not terminated not agree with the new tenant, the tenant can sue in court to be by one of the parties after 10 years, then it passes into a contract empowered to place the buyer in his place as the tenant. The for an indefinite period. Unless otherwise stipulated in the rental court can only award this claim if the tenant has a substantial agreement. This system of five + five years is standard. A term of interest in the transfer of the company and the new tenant two years or less can also be agreed to, just like a contract for a fixed offers sufficient guarantees for proper business operations period of five years or longer. and proper fulfilment of the tenancy agreement. d) If you rent a business premise, some insurance policies may Cancellation during the first period of five years be part of the rental price or service costs. This can, for After five years, the contract must automatically be extended by example, be the case with a building insurance policy, a glass five years. Both the tenant and the landlord cannot cancel after the insurance policy or an environmental insurance policy. The first five years. This must be done 12 months before the end of the rental contract and specifications of the rental price should period by registered letter or bailiffs writ. If the tenant makes use be consulted to ascertain which damage claims the tenant is of this, the lease agreement always ends. Termination of the rental insured against. agreement before the end of the first five years is not possible unless the tenant and the landlord agree upon this with each other.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 191 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

Cancellation by the landlord 10.7 Green leases seek to impose obligations on If the landlord is planning to cancel the letting after five years, then he landlords and tenants designed to promote greater is obliged to send a registered cancellation letter with the reason for sustainable use of buildings and in the reduction of cancellation. The reason for cancellation must be clearly defined. If the “environmental footprint” of a building. Please this not the case, then the cancellation is not valid. If the tenant agrees briefly describe any “green obligations” commonly with the cancellation, then the rent ends after the end of the current found in leases stating whether these are clearly period. If the tenant does not agree, then the landlord must go to the defined, enforceable legal obligations or something subdistrict court with the request to terminate the rental agreement. not amounting to enforceable legal obligations (for example aspirational objectives). The rental agreement will continue until the court has decided. Termination by the subdistrict court Since 1 January 2015, at the time of purchase, lease and delivery of

Netherlands If the tenant does not agree with the termination by the landlord, the residences, a valid energy label is obligatory. Through this label, the landlord must request the subdistrict court to terminate the rental new owner receives information as to the energy efficiency of the agreement by the end of the first five years. The subdistrict court building. This obligation is known to homeowners; this obligation can only grant this request in two situations, but does not have to for business premises is much less prominent, as noticed in practice. do this, when: Of course, there are relevant exceptions applicable. Buildings ■ the tenant did not act as a good tenant; or which are intended for the production or storage of materials and ■ the landlord can prove plausibility that he, his spouse, or goods often do not have to be labelled. For buildings with multiple children need the rented property urgently and in a lasting functions, there is only an obligation to label when a section of the nature. building used for a purpose exceeds 50 m2. If an industrial hall Termination after five + five years accommodates an office of 40m2 for instance, an energy label is not After the end of the second period – after 10 years – the protection compulsory. Buildings which are used for agricultural purposes, period has expired. The landlord then has more options to cancel. protected monuments and temporary buildings that are used for a Both the tenant and the landlord can cancel the rent. The same maximum of two years are also exempted. requirements apply as for cancellation at the end of the first five The obligation therefore applies to most buildings. That means that years. If the tenant disagrees with the rental notice, then he can there is progress to be made about sustainability. Real estate agents again go to the subdistrict court. In several cases the subdistrict can direct their services with this obligation in mind – especially in court must rule in the landlord’s favour: the benefit of sustainability. ■ the tenant did not act as a good tenant; ■ the landlord can prove plausibility that he, his spouse or 10.8 Are there any trends in your market towards more children need the rented premises urgently and in a lasting flexible space for occupiers, such as shared nature; short-term working spaces (co-working) or shared ■ the landlord (for instance the municipality) wants to realise residential spaces with greater levels of facilities/ compliance with a valid zoning plan on the business premise; activities for residents (co-living)? If so please provide and examples/details. ■ the tenant does not accept a reasonable offer for a new contract (if this does not alter the rent). This is not applicable. Urgent personal use Lacking other options Landlords tend to cancel the rent by 11 Leases of Residential Premises submitting that they urgently need the building for their own use. However, they must always be able to demonstrate this. A landlord 11.1 Please briefly describe the main laws that regulate cannot simply terminate rental agreements according to lease law leases of residential premises. without a legal ground for cancellation.

The strict rules for cancellation apply if one of the parties unilaterally Title 7.4 DCC arranges lease agreements. A ‘residential space’ is wants to terminate the agreement. But of course, one can also agree understood as a constructed immovable thing as far as it has been with the landlord in mutual consultation to terminate the rental leased out as a separate or dependent dwelling. (Article 7:233 DCC.) agreement through mutual consent. It remains possible, if the landlord commits serious breach of 11.2 Do the laws differ if the premises are intended for contract (for example, systematically not performing serious multiple different residential occupiers? overdue maintenance), or if the tenant commits serious breach of contract (for example, not paying or systematically paying rent late) A lease of a room is a form of rental of a residential accommodation. to ask the court to terminate the tenancy agreement. In such a case, This means that many of the legal rules that apply to the lease of there is no need to wait for the five-year period to end. residential accommodation are fully applicable to the rental of rooms. However, the legal rules make a distinction between self- 10.6 Does the landlord and/or the tenant of a business contained and non-self-contained property. Rental of a room often lease cease to be liable for their respective concerns a non-self-contained property. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance?

After the sale they can be held liable as well.

192 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

Common legal reasons for termination are: 11.3 What would typical provisions for a lease of ■ Breach of contract of the tenant. residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the ■ Termination of a temporary lease contract. tenant’s rights to remain in the premises at the end of ■ Urgent personal use of the living space. the term; and (d) the tenant’s contribution/obligation ■ The tenant does not agree with a reasonable adjustment of the to the property “costs” e.g. insurance and repair? rental contract. ■ Implementation of a valid zoning plan (must be necessary). (A) In the case of a rental agreement for an indefinite period, the parties have agreed an initial date of the rental period (for example, 1 January 2018), but no end date. Agreements 12 Public Law Permits and Obligations relating to accommodation that can be concluded for a

definite period and for which the landlord, after these periods Netherlands has expired, will once again have access to the dwelling, are 12.1 What are the main laws which govern zoning/ distinguished as follows: permitting and related matters concerning the use, ■ Rental agreements for housing based on the Vacancy Act. development and occupation of land? Please briefly ■ Rental agreements for housing based on article 7: 274 (2) describe them and include environmental laws. DCC (diplomatic clause). ■ Rented living space to certain target groups. See article In addition to general administrative law, the following laws apply in 7: 274a DCC (disability), article 7: 274b DCC, article 7: general terms: the environmental management act; the housing law; 274c DCC, article 7: 274d DCC, article 7: 274e DCC, and the law spatial planning; and the general provisions environmental article 7: 274f BW (large families). law (Wabo). ■ Rental agreements for housing accommodation of a short- term nature (article 7: 232 (2) BW). 12.2 Can the state force land owners to sell land to ■ The short-term rental agreement for independent living it? If so please briefly describe including price/ space of a maximum of two years and non-independent compensation mechanism. living space of a maximum of five years (article 7: 271 (1) DCC). If the government needs your land or building for the public interest, (B) The rent of your house could be from 3.9% up to 5.4% in such as for the construction of a road, it tries to buy it from you. It 2018. The increase depended on your income in 2016 and allows the value of your land, with any buildings, to be valued. Based only applies to social housing. In the free sector there is no on this valuation, you will receive an offer for full compensation. If maximum to contractual agreed rent increase. Most landlords increase the rent (once a year) on 1 July using the price index you do not agree and do not agree after negotiation, the government figure. will start an expropriation procedure. (C) The tenant is almost always entitled to rental protection. The Expropriation Act stipulates that you may not be deteriorated by Possible co-tenants and sub-tenants are also protected. This the expropriation, not in capital or in income. You therefore receive means that a tenant cannot simply be removed from his home, full compensation for all damage that is the direct and necessary even if the agreed rental period has expired or the property consequence of the expropriation. The compensation is settled with has been sold. The landlord must cancel the lease and give a any benefits or other allowances such as a planning compensation. valid reason to terminate the lease. If he has no valid reason, In addition, there is the Municipalities Preferential Rights Act. This but you agree in writing to the cancellation, the contract will end. law obliges landowners to sell the land first to the municipality. This only applies to land where a pre-emptive right is established. (D) The term ‘defect’ covers all restrictions on living enjoyment that are not for the account of the tenant himself. The landlord is, in principle, obliged to remedy all defects if the 12.3 Which bodies control land/building use and/or tenant is not responsible for this himself. The tenant is liable occupation and environmental regulation? How do if the damage to the rented property arose because he did not buyers obtain reliable information on these matters? comply with the obligations from the rental agreement. It is assumed that all damage to the rented property has been Authorities that monitor the enforcement of environmental caused by the tenant, apart from fire damage. The tenant will legislation operate mainly at local/municipal level. For information then have to prove that the damage was not caused by him. Only when regarding fire damage is the burden of proof with about this, the buyer can best contact the municipality where the the lessor. He will then have to prove that the fire was caused property is situated. by a cause attributable to the tenant. 12.4 What main permits or licences are required for 11.4 Would there be rights for a landlord to terminate a building works and/or the use of real estate? residential lease and what steps would be needed to achieve vacant possession if the circumstances In most cases, an environmental permit will be required. Each existed for the right to be exercised? municipality then also has its own local regulations. Perhaps the best known is the General Local Regulation (APV). For example, The landlord must have a legal reason to be able to cancel the rent, the APV often regulates whether and how advertising bars may be for example a rent arrear or serious nuisance from the tenant. The placed. Whether you need, a local permit depends on your plans. contract must be canceled in writing at least three months in advance. You can contact the municipality with the question of which local For every year that the tenant has rented the living space, one month permits you need. will be added, up to a maximum of six months in total. If the tenant does not agree with the cancellation, the rental contract continues. The landlord can then go to court to try to terminate the lease.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 193 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

12.5 Are building/use permits and licences commonly 12.9 In what circumstances (if any) is environmental clean- obtained in your jurisdiction? Can implied permission up ever mandatory? be obtained in any way (e.g. by long use)? The soil may be contaminated with hazardous substances. Yes. An environmental permit is valid until the work is carried out Contaminated soil locations with health risks must be dealt with as or until the permit is withdrawn. This is, for example, if you are not quickly as possible. In addition, a similar arrangement applies to yet building after a longer period (three years) or if the construction asbestos-containing materials. is stationary for a longer period. The permit is never withdrawn immediately, you will first receive a resolution to withdraw, giving 12.10 Please briefly outline any regulatory requirements you the opportunity to respond. Implied permission may occur if for the assessment and management of the energy Netherlands the authority fail to decide within the legal time timeframe. performance of buildings in your jurisdiction. It is sometimes possible to obtain a temporary exemption permit (explicitly tolerated). In addition, there may also be a tolerance The Energy Performance of Buildings Directive (EPBD) is situation (or non-enforcement action) than we speak of an implied the European Union’s main legislative instrument aiming to promote permission. the improvement of the energy performance of buildings within the Community. The Netherlands has implemented this directive. 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? 13 Climate Change The costs vary from approximately 2.5% to 5% of the construction costs, depending on the level of the construction costs. In the regular 13.1 Please briefly explain the nature and extent of any procedure the application period is eight weeks and in the extended regulatory measures for reducing carbon dioxide procedure 26 weeks but the delay of the decision period must be taken emissions (including any mandatory emissions in to account. The regular procedure applies to most applications. trading scheme).

The Government is taking measures to reduce greenhouse gases. 12.7 Are there any regulations on the protection of historic For example, large companies must have rights to emit CO2, the monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real most imperative greenhouse gas. Companies must check their estate or development/change of use? installations for leaks. The Government wants additional measures to reduce CO2 emissions by 95% by 2050. This is the goal of the In general, you will need an environmental permit for every change Dutch climate agreement that must be adopted by the end of 2018. to your protected monument. The protected status of a monument Large companies must pay for CO2 emissions. This is in accordance goes beyond the exterior of the building. For example, the interior is with the European system of CO2 emission rights. Large companies also covered by the protection. It is not that you cannot do anything from the industrial sector who emit a lot of CO2 must have rights to with a monumental building, but it does require timely coordination do so. This also applies to large companies in the energy and aviation with your municipality. sector. One can purchase or sell these right within the European You are bound by laws and regulations when you want to modify, Union. This is according to the European Emission Trading System renovate or restore your premises; you almost always must deal with (ETS). Thanks to ETS, large companies can emit 21% less CO2 in your municipality, and you need to apply for an environmental permit. 2020 than in 2005. You must consider that a permit process for a monument takes longer than the route for non-listed buildings. 13.2 Are there any national greenhouse gas emissions reduction targets? Your building requires specialist care; costs for maintenance and restoration are often high because of the use of special materials The Netherlands aims to emit 30% less greenhouse gases in 2020 and techniques. than in 1990. In addition to the current measures, the Government wants more agreements. This is to achieve the goal of the Dutch 12.8 How can e.g. a potential buyer obtain reliable Climate agreement: 49% less greenhouse gas emissions in 2030 information on contamination and pollution of real compared to 1990. By 2050 this must be reduced to 95%. estate? Is there a public register of contaminated land in your jurisdiction? 13.3 Are there any other regulatory measures (not already Via www.bodemloket.nl you gain insight into information about soil mentioned) which aim to improve the sustainability of quality. You will also see where (business) activities have taken both newly constructed and existing buildings? place in the past that deserve extra attention because they may have influenced the quality of the soil. Roughly 15% of greenhouse gas emission in the Netherlands is the result of heating and the lighting of homes and buildings. At least 300,000 homes must be more energy-efficient per year. This is an agreement with organisations in the construction and housing sector.

194 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blenheim Netherlands

Mark van Weeren Tim Pruntel Blenheim Blenheim Westerdoksdijk 40 Westerdoksdijk 40 1013 AE Amsterdam 1013 AE Amsterdam Netherlands Netherlands

Tel: +31 20 52 10 100 Tel: +31 20 52 10 100 Email: [email protected] Email: [email protected] URL: www.blenheim.nl URL: www.blenheim.nl

My role as a business lawyer is to ensure the legality of commercial Tim studied Law at the University of Groningen. He then followed transactions, advising corporations on their legal rights and duties, the master’s degree in Private Law at VU University Amsterdam. Tim Netherlands including the duties and responsibilities of corporate officers. As a worked during his studies as an external registrar at the district court business lawyer I can offer experience and knowledge of construction Midden-Nederland. In addition, he has run several student internships law, corporate law, arbitration, general contract law and zoning law. within the legal profession. He has been working at Blenheim since the beginning of 2017. In my firm, Blenheim, the corporate specialists structure transactions efficiently, manage data, review agreements, negotiate deals, settle In addition to the private law practice in the broad sense, Tim is mainly damages, create company structures, draft documents and contracts. involved in liability and insurance law. When necessary we counsel our clients to confront legal challenges with aggressive, result oriented solutions. I try to avoid conflicts, but as a litigator I’m also geared to go to court if the need arises. I have advised companies of all sizes, from small start-ups to publicly listed companies, and in many industries, both local and international. Regardless of who I am representing, I aim to be an accessible, professional, practical and creative corporate attorney. Engaging a business lawyer is an important decision that should not be based solely upon advertisements. So, before you decide, please call to discuss our experience and qualifications as well as your legal situation and ambitions. Please do feel free to contact me to discuss your Dutch legal issues.

Blenheim is a full-service firm based in Amsterdam consisting of five partners and 21 associates. The core practice areas of Blenheim include corporate law, employment law, administrative law, intellectual property, financial law, real estate and property law. Blenheim is an active member of the professional, international network “Lawyers Associated Worldwide”, in which 130 law firms in 106 countries all over the world participate.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 195 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 20

Northern Ireland David Jones

Tughans Luke Thompson

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

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

Specific rights over land will include rights of way, rights of The main real estate legislation is the Landlord and Tenant Law support, rights to light and/or air, wayleaves and profit-à-prendres. Amendment Act (Ireland) 1860 (or “Deasy’s Act”); the Conveyancing Rights that are expressly included or implied into a contract will be Acts, 1881–1911; and the Settled Lands Act 1882–1890. The purely contractual between the parties unless it is stated that they Prescription Act 1832 deals with prescriptive easements in Northern are given by and for the successors to the parties. These rights can Ireland; 20 years being the length of time required to acquire an also be acquired by necessity or prescription. A grant of a licence or easement through prescription. The most significant modern real tenancy at will also creates contractual rights over land. estate legislation includes the Property (NI) Orders 1978 & 1997 and the Criminal Damage (Northern Ireland) Order 1977, along with the Business Tenancies (Northern Ireland) Order 1996. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed thereon?

1.2 What is the impact (if any) on real estate of local No, there are not. common law in your jurisdiction?

Northern Ireland is a common law jurisdiction and therefore the 3.3 Is there a split between legal title and beneficial title courts do have an impact on real estate law. The Lands Tribunal in your jurisdiction and what are the registration has extensive powers to extinguish historic covenants that would consequences of any split? Are there any proposals to change this? “unreasonably” affect the enjoyment of land. The case law of England will also be persuasive, but not binding, in Northern Ireland; save for where Northern Irish law specifically differs. Yes, there are two ways in which legal title can be held. Firstly, legal title can be held as joint tenants meaning that should one tenant survive the other, the deceased’s share will automatically pass to the survivor 1.3 Are international laws relevant to real estate in your by the right of survivorship. However, if the title is held as tenants in jurisdiction? Please ignore EU legislation enacted common there is a split between the legal and beneficial title and the locally in EU countries. right of survivorship no longer automatically applies. For example, if property is held as tenants in common the beneficial interest may No, save for certain UK-wide legislation in areas such as tax and be held by a beneficiary under a will or a third party under a contract. competition law that can impact on real estate. Trustees can also hold legal title on trust for beneficial owners, who do not appear on the public register. 2 Ownership 4 System of Registration 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)? 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered?

There are no general restrictions on ownership of property, for Not all land in Northern Ireland is registered. From 2003, there has example to overseas entities. However, it is possible to have been a system of compulsory first registration in place – when a

196 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

transaction takes place involving unregistered land, the title must be Good Fee Farm Grant – title will be registered as good fee farm registered at the Land Registry post completion. The exceptions to grant when land is held by way of a fee farm grant that commenced this rule are: transactions with no consideration; mortgages; leases 15 years prior to registration, but the title of the grantor has not been for a term of less than 21 years; exchanges or partitions of land proved. The only difference from absolute fee farm grant title is (involving no consideration); dealings with reversionary interests; that registration will not prejudice any estate arising by virtue of any and the surrender of leases. There are also a number of burdens as superior grant. set out in Schedule 5 of the Land Registration Act (Northern Ireland) Good Leasehold Title – in Northern Ireland, only a lease with a 1970 that will affect registered land without being registered. term of more than 21 years remaining outstanding can be registered at the Land Registry, although shorter term leases can still be 4.2 Is there a state guarantee of title? What does it voluntarily noted against superior titles. A lease will be registered guarantee? with good leasehold title when the leaseholder has not proved the superior title. The only difference from absolute leasehold title is Information contained on the Title Register at the Land Registry is that registration will not affect the enforcement of any rights adverse Northern Ireland considered to be conclusive evidence of title. This is supported by a to the title of the lessor to grant the lease. state guarantee of title, which enables compensation to be claimed for Qualified Title – granted to either freehold or leasehold title if the errors and omissions in the Title Register. However, although the Land title is unable to meet the requirements for an absolute, good fee Registry provides a map-based system to support the Title Register, farm grant or good leasehold title. The Land Registry may also the boundaries shown on the Land Registry maps are not guaranteed. confer a qualified title if they are not satisfied that registration with an absolute, good fee farm grant or good leasehold title is justified. 4.3 What rights in land are compulsory registrable? What Possessory Title – granted for an application to register land that has (if any) is the consequence of non-registration? been acquired by way of adverse possession. Possessory title will not affect the enforcement of any right adverse to the title of the owner. In Northern Ireland, rights in land are registered at the Land Registry as burdens on title. Part 1 of Schedule 6 of the Land Registration 4.6 On a land sale, when is title (or ownership) transferred Act (Northern Ireland) 1970 has a list of the burdens registrable to the buyer? on the Title Register. If two burdens are created at the same time (after first registration), the burden that is registered first at the Land A transfer/conveyance/assignment deed documents a transfer, but Registry will receive priority over the other burden and any burden does not operate to validly transfer the land until the transferee created subsequently. If a registrable burden is not registered, a is registered as the owner at the Land Registry, if such transfer is bona fidepurchaser for value without notice will not be subject to it. registrable. If unregistered land is transferred and the transaction meets the 4.4 What rights in land are not required to be registered? criteria for compulsory first registration, an application to register the title must be made within three months. An application not In Northern Ireland, rights in land are registered at the Land Registry made within this timeframe will become void and title can revert to as burdens on title. Part 1 of Schedule 5 of the Land Registration the seller. Although the seller, having received the purchase money, Act (Northern Ireland) 1970 has a list of the burdens that will affect should then hold the land as a trustee for the buyer; and it is possible registered land without registration on the Title Register. As not that the buyer’s equitable interest in the land can be defeated by all land in Northern Ireland is registered, rights in land that affect prior equitable interests. unregistered land will not be registered. 4.7 Please briefly describe how some rights obtain 4.5 Where there are both unregistered and registered land priority over other rights. Do earlier rights defeat later or rights is there a probationary period following first rights? registration or are there perhaps different classes or qualities of title on first registration? Please give Rights affecting registered land will receive priority in the order details. First registration means the occasion upon in which they are registered. This rule of priority does not apply which unregistered land or rights are first registered to rights over registered land created prior to first registration in the registries. of the title or those included in Part 1 of Schedule 5 of the Land Registration Act (Northern Ireland) 1970. Depending on the nature of the title held, an applicant for first registration may apply to be registered with one of the following five classes of title: 5 The Registry / Registries Absolute Title – generally refers to freehold title and is the best class of registered title. It is usually only granted if an applicant can demonstrate that their title commenced with a disposition made at 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules least 15 years previously. and requirements. A recent practice direction issued by the Registrar of the Land Registry has introduced an exception – where an application is made There is only one Land Registry in Northern Ireland. In order to in relation to freehold land acquired under the Ground Rents Act have title to land registered, a solicitor will need to inspect the title (NI) 2001, the applicant will receive absolute title. and certify it before submitting a registration application to the There is also a class of absolute title for land held by way of a fee Land Registry. Registered titles are considered conclusive and are farm grant or lease. This will only be granted if title commences backed by a state guarantee. However, the mapping system that with a fee farm grant or lease made at least 15 years prior to accompanies the register is not considered conclusive and therefore registration and the grantor’s/lessor’s title has been fully examined. is not backed by a state guarantee.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 197 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

A branch of the Land Registry is known as the Registry of Deeds, running in tandem with the main land register. The Registry of 6 Real Estate Market Deeds is simply a register of deeds. It is not tied to the land; it records details of deeds by noting them against the entities who are 6.1 Which parties (in addition to the buyer and seller parties to the respective documents. This is the only register that and the buyer’s finance provider) would normally can be searched when dealing with unregistered property. be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duties. 5.2 How do the owners of registered real estate prove their title? Real estate transactions will also involve a solicitor acting for the buyer, a solicitor acting for the seller and, at times, a surveyor/estate An application for first registration of a title in Northern Ireland must agent. be made by a solicitor. The application must contain a certification Northern Ireland from the solicitor, to the Land Registry, that the title has been It is a requirement for any conveyance of land to be carried out reviewed and accurately reflects the application for registration. by a solicitor in this jurisdiction. The role of a solicitor will vary depending on which party they are acting for. In very brief terms, On completion of the registration, information about the title to a the solicitor for the seller will provide title to the real estate, draft property may be obtained from the Land Registry, and information the contract, provide search results and negotiate terms on behalf of contained on the title register is backed by a state guarantee. the seller. The solicitor acting for the buyer will review and report on the title and negotiate terms on behalf of the buyer. 5.3 Can any transaction relating to registered real estate Although it is not a requirement, a seller often uses a surveyor/estate be completed electronically? What documents need agent, whose role will typically involve valuing and marketing the to be provided to the land registry for the registration property and liaising with potential interested buyers at the pre- of ownership right? Can information on ownership of registered real estate be accessed electronically? contractual stage.

It is not possible for a transaction relating to land, registered or not, to 6.2 How and on what basis are these persons be completed electronically. The relevant physical documents to any remunerated? transaction must be executed or signed by the parties to the transaction. If the title is registered, a transfer of ownership will be registered Surveyors/estate agents are generally remunerated following when the Land Registry is provided with a correctly completed completion, based on a percentage of the sale price. transfer in the prescribed form. In relation to lawyers, a common basis for remuneration is connected If the title is unregistered, the process of first registration must be to time spent, based on an hourly rate. However, an agreed fee based completed, meaning all relevant title to the land must be provided on a predetermined scope of work is also common. The solicitor and certified by a solicitor. and their respective client should agree a basis for payment prior to a transaction commencing, with payment of all such fees generally The information on ownership of registered land is publicly made upon completion, unless interim billing is necessary. accessible and can be accessed electronically for a fee.

6.3 Is there any change in the sources or the availability 5.4 Can compensation be claimed from the registry/ of capital to finance real estate transactions in registries if it/they make a mistake? your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your The information contained on the Title Register is considered market? conclusive title to land and is backed by a state guarantee. Therefore, compensation for loss arising out of a mistake on a registered title There is a definite increase in the availability of capital to finance is recoverable, but not in relation to the mapping system, as referred real estate transactions in Northern Ireland. The local banks are to previously. starting to appear in the market again, albeit quite tentatively. There is a significant growth in funds, new private investors and mezzanine 5.5 Are there restrictions on public access to the lenders in the local market, across various sectors. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and 6.4 What is the appetite for investors and/or developers other rights affecting real estate and is this achieved to invest in your region compared to last year and by a search of the register? If not, what additional what are the sectors/areas of most interest? Please information/process is required? give examples.

The information contained at the Land Registry relating to registered Both developers and investors are slowly moving back into the land is publicly accessible. Any potential buyer can obtain all the secondary and tertiary real estate markets. Tughans has acted in the information they should reasonably need regarding encumbrances majority of the most significant examples of such transactions in the and other rights to land provided that information is registered. last 12–36 months – e.g. the acquisition of the Flagship Shopping However, there is still a significant amount of unregistered land Centre, Bangor and the acquisition of the Tower Centre, Ballymena. where it can be impossible to access any details. Castlecourt Shopping Centre in Belfast has also changed hands recently.

198 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

6.5 Have you observed any trends in particular market 7.5 Does the seller retain any liabilities in respect of the sub sectors slowing down in your jurisdiction in property post sale? Please give details. terms of their attractiveness to investors/developers? Please give examples. In Northern Ireland the principle of “caveat emptor” or “buyer beware” applies to real estate transactions. Therefore, there are Most sub-sectors are still in recovery/growth mode at present. limited circumstances in which a seller will retain liabilities in Although political and economic uncertainty around Brexit and respect of a property, post completion. However, depending on the other global factors has created a lull in prime investment activity. nature of the property and transaction, post completion liabilities can be negotiated between the buyer and seller. 7 Liabilities of Buyers and Sellers in Real One continuing liability of note would be those concerning Estate Transactions environmental matters. In Northern Ireland, there is a principle of “the polluter pays”. The result if this is that where contamination Northern Ireland is found in land, those in ownership or possession of the land at the 7.1 What (if any) are the minimum formalities for the sale time of the pollution will be deemed responsible. and purchase of real estate? 8 Finance and Banking Any sale or purchase of real estate must be completed by way of a written contract. A Law Society produced standard form of contract, tailored by the inclusion of special conditions, is often used on lower 8.1 Please briefly describe any regulations concerning value, more straight forward transactions. However, it is really the lending of money to finance real estate. Are the designed for residential conveyancing, rather than commercial. rules different as between resident and non-resident persons and/or between individual persons and corporate entities? 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? The same financial regulations that affect England and Wales apply in Northern Ireland, including the same anti-money laundering A seller has a duty to provide a good and marketable title but the regulations. principle of ‘caveat emptor’ also applies to real estate transactions. There is a responsibility on the buyer to carry out its own due diligence. Therefore, as a general rule, the seller has no duty of disclosure; but 8.2 What are the main methods by which a real estate there are exceptions and a degree of disclosure is standard practice. lender seeks to protect itself from default by the borrower? The seller has a duty to disclose latent physical defects or latent defects in its title which it is aware of or should reasonably be aware of. A latent defect is a defect which is not reasonably discoverable Lenders will generally seek security through a fixed charge registered from inspection of the property or the materials supplied to the buyer. against the real estate and in some cases will go further and require debentures, personal guarantees, cross company guarantees, funder warranties from contractors and a professional team, etc. 7.3 Can the seller be liable to the buyer for misrepresentation? 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a For a seller to be liable to the buyer for misrepresentation, three mortgagee to realise a mortgaged property without grounds must be proved: (i) the misrepresentation occurred prior involving court proceedings or the contribution of the to the contract being formed; (ii) the misrepresentation was of fact mortgagor? and not opinion or law; and (iii) the misrepresentation induced the purchaser to enter into the contract. The most common method is the appointment of a fixed charge The seller can be liable for either fraudulent or innocent receiver, who can sell the property without requiring lengthy court misrepresentation. If liable for fraudulent misrepresentation, the proceedings or a mortgagor contribution. Depending on the nature buyer can seek damages or rescission prior to completion of the of the security, an administrator or administrative receiver can also contract; or apply to have the contract set aside or seek damages after be appointed, or the lender can exercise a power of sale itself. completion. If the seller is liable for innocent misrepresentation, the remedies available are more limited. However, the buyer may still 8.4 What minimum formalities are required for real estate seek rescission and the Misrepresentation Act (NI) 1967 provides lending? the courts with discretion to award damages in lieu of rescission. The minimum formalities are an offer letter/facility letter from the 7.4 Do sellers usually give any form of title “guarantee” lender, the lender familiarising itself with the title and a mortgage/ or contractual warranties to the buyer? What would charge deed. be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or 8.5 How is a real estate lender protected from claims warranties act as a substitute for the buyer carrying against the borrower or the real estate asset by other out his own diligence? creditors?

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 199 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

8.6 Under what circumstances can security taken by a 9.2 When is the transfer tax paid? lender be avoided or rendered unenforceable? Within 30 days following the effective date of the transaction Depending on the circumstances, security taken by a lender may (generally the completion date). be avoided or rendered enforceable where documents have not been executed correctly by the necessary parties. In addition, if 9.3 Are transfers of real estate by individuals subject to security documentation is not registered with the appropriate body income tax? (i.e. Land Registry of Northern Ireland and Companies House (if applicable)) it may not have priority over future dealings with the Income tax will only be payable on the sale of real estate by an real estate. Also, where independent legal advice is not provided individual if the individual operates a business for the purpose when circumstances dictate (e.g. spouse using the family home as of buying and selling properties and that individual operates the

Northern Ireland security for capital investment into company). business as a sole trader or partner.

8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions?

A borrower may try to frustrate enforcement action by providing The rules in Northern Ireland are the same as England and Wales, and evidence in court of their ability to make repayments; that they so real estate is exempt from VAT. However, an owner can choose were pressurised into executing the security documents; that the to waive the exemption and charge VAT on commercial property, lender has treated them unfairly; that the lender has not followed the this is called an ‘option to tax’. Once this option is exercised, it correct pre-action protocol; that the security is defective and does cannot be revoked for 20 years, but the option is personal and does entitle the lender to take the proposed action, etc. not transfer with the property. Commercial property that is under three years old will also be subject to VAT. If payable, VAT will 8.8 What is the impact of an insolvency process or a generally be charged at the standard rate, currently 20% and the corporate rehabilitation process on the position of a buyer will pay it on top of the purchase price. The most common real estate lender? exemption from VAT on investment transactions is to treat the deal as a transfer of a going concern. The position of the real estate lender will be subject to the nature of the security held. It is of paramount importance to register any security that is capable of registration. Not only will this ensure 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? that during the insolvency or rehabilitation process, those involved will be on notice of the security, but also there may be a concern the security is not valid if not properly registered. Depending on the seller’s circumstances and the nature of the transaction, capital gains tax or income tax may be payable by the During either process, the lender will become one of any number seller. The tax rules follow England and Wales and specialist tax of creditors to the borrower. The lender’s ability to recover is advice should always be sought. dependent on the security granted by the borrower.

9.6 Is taxation different if ownership of a company (or 8.9 What is the process for enforcing security over other entity) owning real estate is transferred? shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, can shares be appropriated when a borrower is in Yes, if the shares in a company are transferred, rather than the real administration or has entered another insolvency or estate itself, stamp duty will be payable by the buyer on the share reorganisation procedure? price at a rate of 0.5% currently.

The approach to enforcing security over shares will depend on 9.7 Are there any tax issues that a buyer of real estate how the security is drafted, and the constitutional documents of the should always take into consideration/conduct due borrower. There are a number of factors to consider in the security: diligence on? a debenture should contain a share charge, the security should be enforceable and the directors of the borrowing entity should have Yes, a buyer should always consider the value added tax position, the waived any rights to refuse the registration of the transfer of the stamp duty land tax position, the availability of capital allowances shares. The borrower’s constitutional documents should also be and capital gains tax implications. reviewed to ensure that there is nothing that may affect the transfer of shares to a lender, i.e. are the shares subject to a right of pre- emption in favour of another party? 10 Leases of Business Premises

9 Tax 10.1 Please briefly describe the main laws that regulate leases of business premises.

9.1 Are transfers of real estate subject to a transfer tax? ■ Criminal Damage (Northern Ireland) Order 1977 – deals with How much? Who is liable? damage caused to premises as a result of civil unrest; and ■ Business Tenancies (Northern Ireland) Order 1996 – deals Stamp duty land tax is payable in accordance with the same with security of tenure rights for business tenants and legislation as in England and Wales. bringing such leases to an end.

200 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

10.2 What types of business lease exist? 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater The most typical types of business lease are: a lease of a whole sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please building, with the tenant taking full repairing liability; or a lease of briefly describe any “green obligations” commonly part, with the landlord responsible for looking after the structure and found in leases stating whether these are clearly common parts, then recharging a fair and reasonable proportion of defined, enforceable legal obligations or something such costs to the tenant through a service charge. not amounting to enforceable legal obligations (for In both cases, the landlord will generally insure and recharge the example aspirational objectives). premium to the tenant as insurance rent. Tughans has attempted to encourage the use of such leases in Northern Ireland and a couple of landlords have adopted some light- 10.3 What are the typical provisions for leases of business touch aspirational objectives, but nothing too hard-hitting yet. Northern Ireland premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of 10.8 Are there any trends in your market towards more the tenant; and (ii) transfer of lease as a result of a flexible space for occupiers, such as shared corporate restructuring (e.g. merger); and (f) repairs? short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ (a) Typically three to 20 years depending on the deal. activities for residents (co-living)? If so please provide examples/details. (b) Typically open market or index-linked rent reviews every five years. Belfast, Northern Ireland, is staring to follow certain trends in (c) Typically permitted, subject to landlord approval and other restrictions, but subletting is more restricted. flexible space for occupiers as seen in other major UK cities. In the commercial sphere, there is an increase in demand for serviced (d) Landlord generally insures and charges tenant insurance rent. office spaces. This is driven by smaller start-up companies that have (e) Leases are often silent on change of control and restructuring. different demands compared to those of the traditional office letting (f) Repairs can be dealt with in a number of ways and are very market. A client is currently in the process of letting a number of deal/property-specific. floors of a prominent, recently refurbished office building in Belfast to a company to provide serviced office space. This will supplement 10.4 What taxes are payable on rent either by the landlord a number of sites already in the city centre. or tenant of a business lease? In the residential market, a number of ‘build to let’ projects are underway in Belfast city centre. This is a first for this type of VAT can be payable, along with income/corporation tax. accommodation in Belfast, and is seen as a solution to more housing for the increasing numbers of graduate level workers in the city; this level is seen to require low maintenance and a high degree of 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party flexibility in their accommodation. etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party to be compensated by the other for any reason on 11 Leases of Residential Premises termination?

11.1 Please briefly describe the main laws that regulate Leases can terminate at expiry, following default, upon exercise of leases of residential premises. a break option, or following a refusal to agree a renewal under the Business Tenancies Order. The main legislation that regulates residential leases is the Landlord The Business Tenancies Order provides the tenant with security of and Tenant Law Amendment Act (Ireland) 1860 (or “Deasy’s Act”) tenure rights, allowing it to remain in occupation after the expiry of and the Conveyancing Acts, 1881–1911. However, following the the term. The landlord can only refuse to grant a new lease to such Property (NI) Orders 1997, a residential lease for a term greater than a tenant on a number of statutory grounds, some of which require 50 years can no longer be granted. Typically, long-term residential compensation to be paid to the tenant. It is not possible to contract leases are used for apartments given their nature. out of such security of tenure rights.

11.2 Do the laws differ if the premises are intended for 10.6 Does the landlord and/or the tenant of a business multiple different residential occupiers? lease cease to be liable for their respective obligations under the lease once they have sold their No, the laws do not differ. interest? Can they be responsible after the sale in respect of pre-sale non-compliance?

The parties are no longer liable once they have transferred their interest.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 201 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

11.3 What would typical provisions for a lease of 12.5 Are building/use permits and licences commonly residential premises be in your jurisdiction regarding: obtained in your jurisdiction? Can implied permission (a) length of term; (b) rent increases/controls; (c) the be obtained in any way (e.g. by long use)? tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation Generally, planning permission is obtained, but enforcement to the property “costs” e.g. insurance and repair? action cannot be taken once a change of use or development has been in existence for a certain period of time, depending on the (a) Typically short-term lettings would have a term of 12 months. circumstances. (b) No statutory controls, but these can simply be renegotiated at the end of the term. (c) This depends upon the nature of the occupation. 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? (d) The landlord will usually cover buildings insurance, the Northern Ireland tenant will be obliged to keep the property in repair and rates will be the landlord’s responsibility if the rent is below £800 The cost and time involved are dependent upon the nature of the per month, with tenant paying if the rent is above this figure. application and the timing is very dependent on the particular local authority involved.

11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed 12.7 Are there any regulations on the protection of historic to achieve vacant possession if the circumstances monuments in your jurisdiction? If any, when and how existed for the right to be exercised? are they likely to affect the transfer of rights in real estate or development/change of use? A tenant will have peaceful enjoyment of the land subject to payment of rent and breach of covenants. In the event of non-payment of rent Buildings and monuments can be listed to varying degrees, restricting or breach of covenant, the landlord may exercise its power of re- what can be done to them and imposing repairing obligations. Such entry and take possession of the property. restrictions run with the property, so will apply to a buyer when the property is transferred.

12 Public Law Permits and Obligations 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land 12.1 What are the main laws which govern zoning/ in your jurisdiction? permitting and related matters concerning the use, development and occupation of land? Please briefly describe them and include environmental laws. An environmental survey can be requisitioned prior to entering into contract. The main laws are the Planning Act (Northern Ireland) 2011 and the Planning (Use Classes) Order (Northern Ireland) 2015, along with 12.9 In what circumstances (if any) is environmental clean- EU-driven environmental legislation. up ever mandatory?

12.2 Can the state force land owners to sell land to The NI Environment Agency can force pollution to be cleaned up. it? If so please briefly describe including price/ compensation mechanism. 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy Certain public sector bodies have compulsory purchase powers, performance of buildings in your jurisdiction. with compensation based on the rateable value of the property. The energy performance regulations follow those in England and 12.3 Which bodies control land/building use and/or Wales. occupation and environmental regulation? How do buyers obtain reliable information on these matters? 13 Climate Change The local authorities control the planning system and the NI Environment Agency controls environmental regulation. Buyers 13.1 Please briefly explain the nature and extent of any obtain reliable information on such issues through the local regulatory measures for reducing carbon dioxide authority and regional property certificates, along with statutory emissions (including any mandatory emissions charge searches that the seller will order and pay for as part of the trading scheme). title pack provided pre-contract. The position follows that in England and Wales. 12.4 What main permits or licences are required for building works and/or the use of real estate? 13.2 Are there any national greenhouse gas emissions reduction targets? Planning permission and building regulation approval. In some cases, conservation area consent and listed building consent may This follows the UK, with separate regional targets. also be required.

202 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Tughans Northern Ireland

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

Building regulations attempt to incorporate some sustainability measures where buildings are being constructed or renovated and legislative changes are due that will prevent buildings with poor energy performance ratings from being sold or let until the rating is improved. Building regulations attempt to incorporate some sustainability measures where buildings are being constructed or renovated and legislative changes are due that will prevent buildings with poor energy

performance ratings from being sold or let until the rating is improved. Northern Ireland

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

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

David has experience of all aspects of commercial property in England Luke began working in Tughans in August 2013. Luke spent two and Wales and Northern Ireland, including the acquisition and disposal years training in different practice areas before qualifying into the Real of development and investment properties, leasing and property Estate department. management (acting for both landlords and tenants) across all sectors. Luke has experience in a wide range of real estate transactions. This David also works with colleagues in the corporate department on the includes the acquisition and disposal of investment property and the property aspects of business and company sales and acquisitions. leasing of retail, industrial and office space; acting for both Landlord and Tenants. David is dual qualified in England and Wales and Northern Ireland and is on the committee of the Northern Ireland Commercial Property Luke works closely with other departments within Tughans, advising Lawyers’ Association, along with being a member of the Institute of on all property aspects. Recently, Luke provided property advice Directors. for a high value business acquisition which saw a client purchase a number of wind farms from a leading independent national operator of Trained with City of London firm Nabarro Nathanson (now part of renewable energy projects. CMS) and qualified into the commercial property department, working at the firm from January 2002 until September 2007, when he moved back to Belfast to work for Tughans. He now leads the real estate team at Tughans.

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 203 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 21

Poland Agnieszka Stankiewicz

Greenberg Traurig Grzesiak sp.k. Barbara Pancer

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to As a rule, real estate law does not impose restrictions on particular question 12.1. Those relating to tax should be listed in categories of persons. The most notable exception to that rule is response to questions in Section 9. the law regulating the acquisition of real estate by non-residents under which entities from outside the European Economic Area and The main (and general) legal framework for real estate law is set Switzerland may only acquire real estate in Poland after being issued out by the Civil Code dated 23 April 1964. The general rules of real a permit by the Minister of Internal Affairs and Administration. estate law introduced by the Civil Code are modified by provisions There are also certain restrictions in the case of acquisition of regulating publicly owned real estate, i.e. real estate owned by agricultural or forest property by foreigners. the State Treasury or local government. The most important act governing publicly owned properties is the Real Estate Management Act dated 21 August 1997. A specific regime applies to agricultural 3 Real Estate Rights properties and to forest land (the Act on Shaping of the Agricultural System dated 11 April 2003 and the Act on the Protection of Agricultural and Forest Land dated 3 February 1995). Ownership of 3.1 What are the types of rights over land recognised in apartments is governed by the Act on Apartment Ownership dated your jurisdiction? Are any of them purely contractual 24 June 1994. between the parties?

The rights over land that are recognised in Poland may be divided 1.2 What is the impact (if any) on real estate of local into two categories: the first category is rightsin rem, which provide common law in your jurisdiction? stronger protection for their holder, and the second category of purely contractual rights. The main rights in the first category are The legal system in Poland is uniform for the entire country. A key ownership, perpetual usufruct right (similar to temporary ownership), role is played by local master plans, which may affect ownership of usufruct rights, easements and mortgages. Purely contractual rights real estate, in particular the manner of their development. include lease, tenancy, leasing, right to use and timesharing.

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

The most important role is played by EU legislation; however, there In the case of the perpetual usufruct right, a building constructed are several international treaties and numerous bilateral agreements on land owned by the State Treasury or local government is owned to which Poland is a party, including, in particular, bilateral by the holder of the perpetual usufruct right. The ownership of the investment treaties that provide protection for real estate ownership building expires together with the expiry of the perpetual usufruct rights against unlawful actions by governmental agencies such as right to the land, and the owner of the land becomes the owner of unjustified expropriation. the building after reimbursing the perpetual usufruct right holder for the value of the building.

204 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

Some rights require registration in order to be valid (please see 3.3 Is there a split between legal title and beneficial title question 4.3 above) and a lack of registration would result in the in your jurisdiction and what are the registration failure to acquire or transfer such right. consequences of any split? Are there any proposals to change this? 4.6 On a land sale, when is title (or ownership) transferred There is no such split in Poland. There are no proposals to change to the buyer? this. A sale of land may involve the sale of ownership or the sale of the perpetual usufruct right. A sale of ownership of land is effective upon

4 System of Registration the execution of a sale agreement. A sale of the perpetual usufruct right Poland occurs only upon the registration of the buyer in the LMR, but such registration is effective from the moment of filing of the application for 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? the registration of the sale of the perpetual usufruct right in the LMR.

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

5.2 How do the owners of registered real estate prove 4.4 What rights in land are not required to be registered? their title?

Any other rights in land (such as easements, usufruct, certain The title to real estate may be demonstrated by excerpts from contractual rights such as leasehold, tenancy, right of first refusal, LMRs, which are available online and document all entries in the etc.) do not have to be registered in the LMR. LMR, including title to real estate. A printout of an online excerpt is considered a formal document. Additionally, an excerpt from an LMR may be issued by the LMR court as a formal document. 4.5 Where there are both unregistered and registered land In case of any discrepancy between the legal status of real estate or rights is there a probationary period following first registration or are there perhaps different classes revealed in the LMR and the actual legal status of the real property, or qualities of title on first registration? Please give the legal status entered in the LMR, subject to certain exceptions, details. First registration means the occasion upon protects a bona fide purchaser. which unregistered land or rights are first registered in the registries.

Polish law does not recognise different classes or qualities of title on first registration, nor does it recognise any probationary periods.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 205 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

by the seller in the property sale agreement; and (iv) a guarantor 5.3 Can any transaction relating to registered real estate (usually a parent company or other affiliate of the seller) for the be completed electronically? What documents need seller’s obligations to indemnify the buyer under the sale agreement. to be provided to the land registry for the registration of ownership right? Can information on ownership of registered real estate be accessed electronically? 6.2 How and on what basis are these persons remunerated? Transactions relating to real estate may not be completed electronically. The transfer of the title to real estate or the Remuneration for the escrow agent is usually structured as a one- establishment or transfer of a right in rem must be executed in the off payment, payable immediately after signing an escrow account

Poland form of a notarial deed. A notary may file the application to the LMR agreement. Remuneration for title or Warranty & Indemnity insurers electronically. The other interested parties (the owner, holder of the takes the form of a premium and is payable after the execution of the perpetual usufruct right, mortgagee) must file a physical application policy on the basis of its terms. Remuneration for the guarantors of to the LMR court. The documents attached to the application for entry the seller or the buyer is regulated in separate agreements, which are into the LMR have to support the application, e.g. establishment or not usually disclosed to the other party. transfer or a right. Generally, a document with notarised signatures is sufficient to make an entry into the LMR. However, any application 6.3 Is there any change in the sources or the availability for a transfer of the title to real estate or for the establishment or of capital to finance real estate transactions in transfer of a right in rem must be accompanied by an agreement your jurisdiction, whether equity or debt? What are or other document executed in the form of a notarial deed. LMRs the main sources of capital you see active in your available online give information about current and past ownership market? and other registrable rights and are accessible by the general public. The volume of real estate capital targeting the sector in Central and 5.4 Can compensation be claimed from the registry/ Eastern Europe should be perceived as stable when compared to registries if it/they make a mistake? previous years. The main source of investor interest continues to be from the international real estate private equity sector. Other major Yes, compensation can be claimed for damage resulting from a regional real estate investors include British, German and South breach of the law by the authority which maintains the registry. African real estate funds, insurance companies and pension funds. We have not observed noticeable changes in this respect.

5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he 6.4 What is the appetite for investors and/or developers might reasonably need regarding encumbrances and to invest in your region compared to last year and other rights affecting real estate and is this achieved what are the sectors/areas of most interest? Please by a search of the register? If not, what additional give examples. information/process is required? There is a trend throughout Europe for real estate investors and LMRs are available to the general public and the law includes the developers to seek out opportunities in secondary and tertiary assumption that each party to a real estate transaction is aware of the markets. In comparison to last year, there are an increasing number contents of the LMR. Each LMR is accompanied by a file where of transactions in cities other than Warsaw (in particular, Wrocław, all documents based on which entries are made in the LMR are Kraków and Gdańsk) and such transactions include investments in archived. Such files may only be reviewed by persons who prove less popular sectors such as student housing and self-storage. that they have a valid legal interest in doing so and by a notary public. All the information affecting the legal title to real estate can 6.5 Have you observed any trends in particular market be found in the LMR files. sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Please give examples. 6 Real Estate Market We have not observed any such slowdown. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally be involved in a real estate transaction in your 7 Liabilities of Buyers and Sellers in Real jurisdiction? Please briefly describe their roles and/or Estate Transactions duties.

Apart from the abovementioned parties, the following parties are 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? usually involved in a real estate transaction: (i) an escrow agent (usually a bank), which receives the purchase price for the real estate from the buyer prior to the closing of the transaction and The sale and purchase of real estate requires an agreement in the releases such purchase price to the seller after being presented form of a notarial deed or, in the case of the sale of an apartment by with the agreed proof that the transaction was closed; (ii) a title the owner of a building (usually a developer), an agreement on the insurer, which provides a good title policy, as required by default establishment of separate ownership of the apartment and its sale. by some buyers, or a specific indemnity policy to cover the title The registration of the sale is compulsory but only the sale of the risks disclosed during due diligence; (iii) a provider of Warranty perpetual usufruct right and the first sale of an apartment require & Indemnity insurance for the representations and warranties made registration in the LMR in order to be valid.

206 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

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

The seller is obliged to inform the buyer of the facts and legal rights In addition to paying the price, the buyer is obliged to take over relating to the real estate being sold. There is a rule that the seller is the real estate, as well as to proportionally refund part of the fee liable for the physical and legal defects in the real estate (so-called payable for the perpetual usufruct right and, with respect to leased statutory warranty); however, the seller is not liable for the defects real estate, to refrain from terminating the leases. if the buyer knew about such defects at the time of the property sale agreement. The statutory warranty may be excluded by contract; however, such exclusion is not effective if the seller deceitfully 8 Finance and Banking Poland withheld information from the buyer. 8.1 Please briefly describe any regulations concerning 7.3 Can the seller be liable to the buyer for the lending of money to finance real estate. Are the misrepresentation? rules different as between resident and non-resident persons and/or between individual persons and corporate entities? The seller is liable for misrepresentation in the sale and purchase agreement under statutory warranty if such misrepresentation is Lending of money to finance real estate is mainly regulated by the related to the seller’s title to the property or the nature of the real Banking Law dated 29 August 1997. The relevant regulations do not estate being sold. Statutory warranty is, however, increasingly differentiate between resident and non-resident persons or between being excluded by contract and instead the seller is responsible for individuals and corporate entities (except as described below). breach of the given warranties on the basis of freedom of contract, Under such regulations, in loan agreements banks undertake to lend or title insurance and Representations and Warranties insurance is money to a borrower for a limited period of time and for a defined obtained. purpose, and the borrower undertakes to use the money for such purpose and on the other terms set out in the loan agreement, return 7.4 Do sellers usually give any form of title “guarantee” the money together with interest in accordance with the pre-agreed or contractual warranties to the buyer? What would time schedule and to pay other fees due to the bank. Banks are be the scope of these? What is the function of any obliged to assess the creditworthiness of a borrower before lending such guarantee or warranties (e.g. to apportion risk, money. Additional protection is given to individuals under the to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying Consumer Law Act dated 12 May 2011. out his own diligence? 8.2 What are the main methods by which a real estate In practice, sellers always give contractual warranties to the buyer, lender seeks to protect itself from default by the which relate to the title to the real estate (both in terms of its existence borrower? and the absence of encumbrance) with regard to no arrears in the payment of taxes and other public dues related to the real estate, Real estate lenders protect themselves against default by the no contamination (usually limited to actual knowledge), compliance borrower by demanding that various security instruments be with all laws related to real estate, no pending or threatened provided by the borrower or third parties. In real estate financing, proceedings or third party claims, the validity of leases concluded such security instruments are usually a mortgage, a registered pledge for the real estate, the compliance of the buildings developed on the over assets and bank accounts, assignment of receivables from land with the construction laws and laws regulating the maintenance income producing agreements (mainly leases), securities granted by of buildings. Sellers rarely give warranties regarding the physical tenants and insurance policies, registered pledge over the shares of status of the real estate. The main aim of giving warranties is to the borrower and submission to enforcement (an instrument which contractually establish the liability of the parties resulting from facilitates and accelerates enforcement). Sometimes, a guarantee certain agreements. Such warranties almost never substitute due from a parent company or other affiliate is sought (especially for diligence carried out by the buyer. We also note that title insurance development loans). is increasingly being provided in transactions.

8.3 What are the common proceedings for realisation of 7.5 Does the seller retain any liabilities in respect of the mortgaged properties? Are there any options for a property post sale? Please give details. mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the mortgagor? The seller usually retains certain liabilities in respect of the property post sale. This applies mainly to the warranties given to the buyer in the sale, in particular to the title to the real estate. Additionally, Foreclosure requires enforcement proceedings run by an under statutory warranty the seller is liable if the real estate being enforcement authority and supervised by courts pursuant to the sold is not owned (or held in perpetual usufruct) by the seller or Code of Civil Procedure. Enforcement against real estate is carried is encumbered by a third party right unknown to the buyer at the out over several stages, including the actual seizure of real estate, its time of the sale. Additionally, sellers increasingly often provide title valuation and public tender. insurance.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 207 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

8.4 What minimum formalities are required for real estate 8.9 What is the process for enforcing security over lending? shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, A real estate loan is granted pursuant to a loan agreement in a can shares be appropriated when a borrower is in administration or has entered another insolvency or written form. Additionally, the borrower, and sometimes a third reorganisation procedure? party, must establish the security instruments required by the bank which requires the execution of a written agreement (or, in some A typical share pledge agreement would provide for several cases, an agreement in the form of a notarial deed or a form with enforcement methods, out of which, the seizure of title to shares notarised signatures) and, with respect to a mortgage and registered

Poland (made by a written declaration of the creditor – pledgee) or court pledge, also an entry into the relevant register. enforcement proceeding would be the most important. Creditor’s right to appropriate the shares will apply also if the shares are 8.5 How is a real estate lender protected from claims subject to any ongoing bankruptcy proceedings. against the borrower or the real estate asset by other creditors? 9 Tax Real estate lenders protect themselves against claims against the borrower or the real estate assets of other creditors by the ranking 9.1 Are transfers of real estate subject to a transfer tax? of the security instrument. Real estate lenders usually require a first How much? Who is liable? ranking mortgage over the financed real estate, a first ranking pledge over rights related to real estate and insist that a claim made by other If a sale of real estate is not subject to VAT or exempt from VAT, it is creditors through court or enforcement procedures constitute an subject to transfer tax payable by the buyer. The transfer tax is 2% event of default under the loan agreement. In this way, lenders make of the market value of the real estate. sure that if a claim is made by another creditor and such a claim may diminish the value of the assets that secure the loan, the lenders may accelerate the loan and use the proceeds from the execution of the 9.2 When is the transfer tax paid? security instruments before all other creditors. Real estate lenders also make sure that all the income stream is assigned to them and A notary is the remitter of the transfer tax on real estate acquisitions. that any affiliated loans are fully subordinated to their loan. As a result, the notary will collect the transfer tax prior to the execution of the sale and purchase agreement. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 9.3 Are transfers of real estate by individuals subject to income tax? Under the Bankruptcy Law dated 28 February 2003 and the Restructuring Law dated 15 May 2015, some actions of the obligors Generally, transfers of real estate by individuals are subject to income under the finance documentation (borrowers, pledgors, etc.) made tax. Under certain conditions, the capital gains obtained by individuals in certain periods of time prior to filing a bankruptcy motion (or on real estate can be exempt from income tax (in particular if the real declaration of bankruptcy) or application for the opening of remedial estate is sold after being held for a five-year period). proceedings, as the case may be, may be declared ineffective. This applies in particular to: security relating to a not-yet-payable debt; in rem security granted to secure third party debts; assignment of future 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? claims; or security to an extent that exceeds 150% of the secured claim.

Generally, VAT is payable on real estate sold by a taxpayer as part of 8.7 What actions, if any, can a borrower take to frustrate its business activity. If the sale is subject to VAT, the standard VAT enforcement action by a lender? rate amounts to 23%. If specific conditions are fulfilled, the sale of residential buildings or separate ownership of apartments can also Under the Polish Civil Procedure Code dated 17 November 1964, benefit from a reduced 8% VAT rate (subject to certain exceptions). each debtor against which an enforcement proceeding has been Transfer of real estate can also benefit from VAT exemption (under initiated may file a counter enforcement lawsuit (in whole orin certain conditions). VAT is paid to the tax office by the seller. part) where it (among others): (i) questions the existence of the obligation recognised by the enforcement title (in particular if such enforcement title is not a court decision); or (ii) indicates that an 9.5 What other tax or taxes (if any) are payable by the event took place after the enforcement title was issued, as a result of seller on the disposal of a property? which the obligation expired or cannot be enforced. No other tax is payable by the seller on the disposal of real estate.

8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a 9.6 Is taxation different if ownership of a company (or real estate lender? other entity) owning real estate is transferred?

A real estate lender’s claims under a facility loan agreement are Yes. The rules on taxation of a “share deal” are different from taxation usually secured by a mortgage. If the borrower is declared bankrupt of an “asset deal”. In particular, a sale of shares in a Polish company the claims secured by a mortgage have priority over the claims of third is subject to a 1% transfer tax (calculated based on the market value parties, which means a creditor whose claim is secured by a mortgage of the shares) payable by the buyer. Moreover, generally, a share is more likely to be repaid if the debtor is unable to repay the loan. transaction is not subject to Polish VAT (subject to certain exceptions).

208 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

such assignment is performed through corporate restructuring or 9.7 Are there any tax issues that a buyer of real estate otherwise. However, certain types of restructurings (such as merger, should always take into consideration/conduct due demerger, transformation) will result in a transfer of the rights and diligence on? obligations under the lease by operation of law; and (f) the landlord is obliged to ensure that the premises are suitable for the agreed use A buyer of real estate should verify that the purchased real estate and to that extent is obliged to repair the premises and the building does not constitute an enterprise or an organised part thereof as the and maintain the building and common areas. The tenant is obliged tax consequences of such a transfer are different from a transfer to maintain the premises and perform minor non-structural repairs of real estate. The transfer of an enterprise or an organised part in the premises. thereof is outside the scope of VAT and subject to transfer tax to be borne by the buyer. Transfer tax rates vary from 1% (sale of Poland property rights) to 2% (sale of movable and real estate assets). The 10.4 What taxes are payable on rent either by the landlord tax base is the fair market value of the transferred assets without or tenant of a business lease? deduction of liabilities or encumbrances. The buyer of an enterprise or an organised part thereof may be held liable for the outstanding As a rule, business leases are subject to 23% VAT. However, lease tax liabilities of the seller. The buyer (with the seller’s consent) of residential units for housing purposes is VAT-exempt. Generally, or the seller may submit a formal request to the tax authorities for entities conducting rental activity (business lease) are subject to a certificate listing all the tax liabilities which are transferable to income tax. the buyer. The buyer is then liable only up to the value of the tax liabilities presented in the certificate. 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a 10 Leases of Business Premises tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination? 10.1 Please briefly describe the main laws that regulate leases of business premises. Business leases are usually concluded for a defined period of time and as such terminate (automatically) upon expiry but may also Leases of business premises are regulated, as are all other leases, be terminated prior to expiry for the reasons described in the lease by the Civil Code. The Civil Code leaves a lot of flexibility to agreement (which may be related to a default by another party or to the parties to the lease agreement to shape their mutual rights and any other circumstances) or for reasons described in the Civil Code obligations at will. Only a few regulations relating to leases cannot (such reasons generally may not be modified by contract and mainly be modified by contract, in particular the rules for the termination relate to a default by the other party or the inability of the landlord of a lease. (for any reason) to ensure that the premises are suitable for the agreed purpose). Business leases concluded for an undefined period 10.2 What types of business lease exist? of time may be terminated at any time with three months’ notice. There are no special provisions allowing the tenant to extend or The Civil Code recognises the lease of premises (including renew the lease but lease agreements often provide for the unilateral residential premises) and the lease of any other object. right of the tenant to do so. There are no special provisions regarding compensation in case of early termination (general rules shall apply) but parties often provide for contractual penalties in such case. 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or 10.6 Does the landlord and/or the tenant of a business sub-lease; (d) insurance; (e) (i) change of control of lease cease to be liable for their respective the tenant; and (ii) transfer of lease as a result of a obligations under the lease once they have sold their corporate restructuring (e.g. merger); and (f) repairs? interest? Can they be responsible after the sale in respect of pre-sale non-compliance? Provisions typical for leases of business premises are as follows: (a) usually leases are concluded for five years; (b) rent is usually As a general rule, neither the tenant nor the landlord are permitted to increased annually based on the increase in the consumer price sell or transfer the rights and obligations under the lease to a third party index relevant for the currency of the rent; (c) as a general rule, without the consent of the other party, regardless of whether such sale tenants may only sub-let the premises or assign the rights and is a part of the sale of a business or an interest or just a sale of the lease. obligations under a lease with the prior consent of the landlord. As a result, the agreement between the seller and the buyer of the lease, Tenants of larger premises are usually able to negotiate the right as well as the consent of the other party to the lease, will determine to sub-lease the premises and to assign the lease to affiliates; (d) to what extent the obligations under the lease are transferred to the the landlord is usually obliged to acquire and maintain third party buyer; they may be transferred in full (including the liability for pre- liability insurance and property insurance for full restitution value. sale non-compliance) or relate only to the obligations and liabilities The tenant is required to acquire and maintain tenant third party commencing as of the date of sale. The only exception to the rule that liability insurance and property insurance for all the tenant’s requires the consent of the other party for the sale of the lease is a sale assets in the premises; (e) (i) change of control provisions are not of real estate by the landlord whereby all leases related to such real very common in Poland. Sometimes, a change of control over a estate are transferred to the buyer of the real estate by operation of law. tenant may be a prerequisite for termination of the lease, and (ii) In such a case, the seller remains liable for non-compliance and related as mentioned above, usually a tenant is not permitted to assign damage incurred by the tenant prior to the sale. its rights and obligations under the lease to a third party, whether

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 209 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

months (however, market practice is that the rent is increased at the 10.7 Green leases seek to impose obligations on beginning of a calendar year or on the anniversary of the lease); (c) landlords and tenants designed to promote greater the tenant shall leave the premises no later than on the last day of sustainable use of buildings and in the reduction of the termination period; and (d) the tenant shall carry out repairs in the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly the premises/if the tenant incurred some costs with the landlord’s found in leases stating whether these are clearly prior consent, the tenant is entitled to the respective reimbursement. defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for example aspirational objectives). 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed

Poland to achieve vacant possession if the circumstances Green obligations are still not very common in Poland and they existed for the right to be exercised? usually relate to certification of a building at a certain level (either BREEAM or LEED certification) in terms of the energy efficiency The landlord is entitled to terminate a residential lease if the tenant: of the building, and building materials of a certain quality or (i) despite receiving a written notice, uses the premises contrary to provenance. Such obligations relate mainly to the construction the lease agreement or the premises or property are damaged as a stage and they appear in the leases more as aspirational objectives. result of the tenant’s neglect; (ii) is in arrears in payment of rent for at least three months; or (iii) subleased the premises without the 10.8 Are there any trends in your market towards more prior written consent of the landlord. To obtain vacant possession, flexible space for occupiers, such as shared the landlord shall deliver a written notice to the tenant giving a short-term working spaces (co-working) or shared minimum notice of one month. residential spaces with greater levels of facilities/ activities for residents (co-living)? If so please provide examples/details. 12 Public Law Permits and Obligations

A significant inflow of companies operating in the flexible space market is visible, mainly in the area of co-working spaces. In terms 12.1 What are the main laws which govern zoning/ of shared residential spaces, there are some investments aimed at permitting and related matters concerning the use, development and occupation of land? Please briefly leasing residential space to students. describe them and include environmental laws.

11 Leases of Residential Premises The main laws governing zoning and related matters include: (i) the Act on Spatial Planning and Development dated 27 March 2003, based on which municipalities prepare and adopt local 11.1 Please briefly describe the main laws that regulate master plans which define the manner of the use of the land ina leases of residential premises. given municipality; (ii) the Act on Monument Protection dated 23 July 2003 which imposes limitations on developments in areas Leases of residential premises are regulated by the Civil Code classified as protected due to existing monuments; (iii) the Law on and the Act of 21 June 2001 on the Protection of Tenants’ Rights. the Protection of Agricultural and Forest Land dated 3 February The Civil Code leaves a lot of flexibility to the parties to the lease 1995 which imposes limitations on developments on agricultural or agreement to shape their mutual rights and obligations at will. Only forest land; (iv) the Environmental Protection Law dated 21 April a few regulations relating to leases cannot be modified by contract; 2001 which is the main environmental law in Poland and provides, in particular the length of the termination period (one month for the among others, a procedure for land remediation in case of existing lease of premises). The Act on the Protection of Tenants’ Rights contamination; (v) the Waste Management Act dated 14 December provides for additional regulations increasing the protection of the 2012 which imposes certain obligations related to waste generated tenant and limiting the flexibility of the parties. Such regulations on real estate; (vi) the Act on the Prevention and Remediation of include: the frequency of rent increases; restrictions concerning Damage to the Environment dated 13 April 2007; and (vii) the Act on termination of the lease by the landlord; and specific obligations of Access to Information Relating to the Environment and its Protection, the landlord regarding repairs to the premises. on Public Participation in the Protection of the Environment and on Environmental Impact Assessments dated 3 October 2008. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price/ No, the laws do not differ if the premises are intended for multiple compensation mechanism. different residential occupiers. Land owners may be deprived of the ownership of land through expropriation. Expropriation is permitted if the land is required for 11.3 What would typical provisions for a lease of public purposes (mainly roads) and is carried out on the basis of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the an administrative decision. Regulations governing expropriation tenant’s rights to remain in the premises at the end of provide that the owner of the expropriated land has to receive the term; and (d) the tenant’s contribution/obligation appropriate compensation reflecting the market value of such land. to the property “costs” e.g. insurance and repair? Therefore, before expropriation-related proceedings are instituted, mediation is organised between the State Treasury or municipality Provisions typical for leases of residential premises are as follows: and the owner, during which those parties negotiate the compensation (a) leases are usually concluded for an indefinite period or for for the land. However, in practice, the compensation for expropriated one- to three-year periods; (b) rent may be increased every six land is determined based on a valuation ordered by the expropriating

210 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

authority and is rarely agreed upon by the parties, which have divergent interests. As a result, the compensation received by the expropriated 12.7 Are there any regulations on the protection of historic owner rarely reflects the market value of the land expected by such monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real owner. As the appraiser may adopt various methods of assessing the estate or development/change of use? value of land, challenging a valuation in Poland is difficult.

The protection of historic monuments is governed by the Act on 12.3 Which bodies control land/building use and/or Monument Protection dated 23 July 2003. In general, the above occupation and environmental regulation? How do regulations do not limit the transferability of real estate rights; buyers obtain reliable information on these matters? however, a municipality has the right of first refusal regarding real

estate entered on the register of protected historic monuments if such Poland Control of the technical condition of buildings rests with right of first refusal is disclosed in the LMR. The regulations mainly governmental authorities; mainly construction supervision deal with limitations and obligations regarding the development of authorities. Control of real estate from the perspective of real estate, maintenance and repairs. As a general rule, any actions environmental protection rests with local governments and Regional taken with respect to any change or development of protected real Directors of Environmental Protection. Based on the Act on estate require the consent of the authorities responsible for the Access to Public Information, all information about governmental protection of historic monuments. authorities, including local governments, their powers and duties, decisions issued, etc. may be accessed by anyone and, upon an application, the authorities should provide such information to 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real the enquiring party. Therefore, a buyer may always apply to the estate? Is there a public register of contaminated land competent authorities to obtain information about the land or the in your jurisdiction? buildings that they contemplate acquiring. Based on the Act on Access to Information Relating to the 12.4 What main permits or licences are required for Environment and its Protection, on Public Participation in the building works and/or the use of real estate? Protection of the Environment and on Environmental Impact Assessments dated 3 October 2008, anybody can obtain information The following are the main permits in the construction process: (i) about the condition of the environment, including contamination zoning permit (which is not required if there is a binding master plan of land. Additionally, based on the Act on the Prevention and for the real estate); (ii) decision on environmental assessment; (iii) Remediation of Damage to the Environment, the General Director building permit; and (iv) occupancy permit. of Environmental Protection maintains a register of direct threats to the environment that have occurred in Poland. The General Director of Environmental Protection also maintains a register of historic 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission contaminations (which occurred prior to 30 April 2007). Access to be obtained in any way (e.g. by long use)? both of the above registers is limited to the governmental authorities charged with protection of environment, however, indirectly, through Building permits and occupancy permits are commonly obtained Act on Access to Information Relating to the Environment and its in Poland. Minor construction works (or reconstruction works) Protection, the information contained in those registers should also do not require such permits (but need to be notified to the be disclosed to any person applying for disclosure of information competent authorities). If a building has been developed without a about the condition of the environment in a given location. building permit, the owner of the building may be required by the construction supervision authorities to execute certain works or to 12.9 In what circumstances (if any) is environmental clean- prepare documentation with the aim of confirming that the building up ever mandatory? was built in accordance with the law (the so-called legalisation procedure). If the owner does not or cannot comply with the Remediation of land is mandatory if any entity contaminates land in obligations imposed by the construction supervision authorities, breach of the environmental laws. In such case, an administrative the authorities may require that the building be demolished. If decision may be issued by the competent authorities imposing the the building is occupied without the necessary occupancy permit, obligation to remedy such breach on the entity that contaminated a penalty may be imposed on the occupier. There is no implied the land. Additionally, remediation of land is mandatory if the building permission or occupancy permission in Poland. contamination represents a threat to the health of people and the environment. In such case, the obligation to carry out land 12.6 What is the typical cost of building/use permits and remediation rests with the owner of the land, regardless of whether the time involved in obtaining them? such owner is responsible for the contamination, and it is limited to removal or decrease of the contaminating substances in the soil, The administrative procedure to obtain a building permit or an ground and water, controlling or limiting their further spread – all occupancy permit is generally free of charge. However, the to the extent required to ensure that the contaminated land ceases application for a building permit requires the obtainment of a number to constitute a threat to the health of people and the environment. of other minor permits and notifications (such as agreements with utility providers, decisions from the road authority), which may carry significant costs. The building permit should be issued within 65 days of an application. The occupancy permit should be issued within 30 days of an application.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 211 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

12.10 Please briefly outline any regulatory requirements 13.2 Are there any national greenhouse gas emissions for the assessment and management of the energy reduction targets? performance of buildings in your jurisdiction. The national greenhouse gas emission reduction targets result from According to the act of 29 August 2014 on the energy performance the EU gas emissions policy. The Emissions Trading System (ETS) of buildings, save for certain exceptions, each building which is covers 45% of the EU’s greenhouse gas emissions. The EU ETS to be sold or leased should have an energy performance certificate sets a fixed cap on emissions for each year in the period 2013– confirming its rating relating to energy efficiency. Additionally, 2020. The 2013 cap on emissions from fixed installations was set owners or managers of buildings are obliged to periodically inspect at 2,084,301,856 allowances. This cap decreases each year. The Poland the technical condition of all electrical, gas, heat-producing and air- remaining 55% of the EU’s greenhouse gas emissions are covered conditioning equipment to ensure their compliance with the law. by national emission reduction targets (sectors not covered by ETS). EU countries have taken on binding annual targets until 2020 to cut emissions in these sectors. 13 Climate Change

13.3 Are there any other regulatory measures (not already 13.1 Please briefly explain the nature and extent of any mentioned) which aim to improve the sustainability of regulatory measures for reducing carbon dioxide both newly constructed and existing buildings? emissions (including any mandatory emissions trading scheme). The main regulations regarding the above issue are: the Ordinance of the Minister of Infrastructure dated 12 April 2002 regarding the The mandatory emissions trading scheme is regulated in the Act of technical conditions buildings and their location should fulfil, and 12 June 2015 on the Greenhouse Gas Emissions Allowance Trading the Ordinance of the Minister of Internal Affairs and Administration Scheme. A permit for emissions is issued following an application regarding the technical conditions for the occupancy of residential from the operator of an installation. The limit on permits to be buildings dated 16 August 1999. Additionally, there are numerous issued results from EU regulations. regulations provided in the broadly understood construction law and environmental law.

212 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig Grzesiak sp.k. Poland

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

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

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 213 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 22

Puerto Rico Eduardo Tamargo-Motroni

Ferraiuoli LLC María del Rosario Fernández-Ginorio

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to The three basic rights of (i) ownership, (ii) possession, and (iii) question 12.1. Those relating to tax should be listed in use – and variations thereof – are recognised in Puerto Rico. response to questions in Section 9. Ownership can be acquired through sale, donation, inheritance and the court resolution of disputes, including mortgages and other Statutory law and the case law interpreting the pertinent statutes – or foreclosures. The government can also exercise eminent domain holdings in equity in the few cases where there is no statute or case rights. Possession may be acquired through, among others, leasing, law precedent – are the main source of laws that govern real estate. use and occupancy, usufructs, surface rights or surface estate rights, Most of the applicable statutory law is found in the Puerto Rico and easements. Use of land may be acquired by, among others, Civil Code and the Puerto Rico Registry and Mortgage Law. Puerto rights of use, usufructs, easements, restrictive covenants, donations Rico, as part of the United States, is subject to applicable federal and inheritance. Purely contractual rights include sales, donations, statutory and case law which will supersede state law in cases where mortgages, leasing, surface rights and certain easements. is it expressly established by statute or the court.

3.2 Are there any scenarios where the right to land 1.2 What is the impact (if any) on real estate of local diverges from the right to a building constructed common law in your jurisdiction? thereon?

Local common law is developed through the Puerto Rico Supreme The owner of realty may grant another person a right to a surface Court holdings and decisions; such holdings are binding. estate upon the land and confer to the grantee the right to erect a building and retain title to the building constructed thereon. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration consequences of any split? Are there any proposals The Puerto Rico Civil Code establishes that real estate located in to change this? Puerto Rico will be governed by local law. In the event of real estate owned by heirs of an estate, the widow of 2 Ownership the decedent may have a beneficial title over the real estate while the heirs shall retain the legal title. The percentage of the beneficial title that the widow may have will vary from case to case based, mainly, 2.1 Are there legal restrictions on ownership of real estate on the other property that encompasses the estate. The Puerto Rico by particular classes of persons (e.g. non-resident Property Registry may make reference to the beneficial title of the persons)? widow when the ownership title is filed; however, in instances heirs elect to liquidate the beneficial title rights of the widow with a lump Minors and individuals of legal age declared by a court resolution sum and avoid granting a specific right over a particular property. incapable of making decisions, including decisions relating to their possessions, may own real estate as long as a court of law has approved such ownership. Moreover, the aforesaid persons may become owners of real estate by the operation of law in cases of inheritance.

214 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

4 System of Registration 5 The Registry / Registries

4.1 Is all land in your jurisdiction required to be 5.1 How many land registries operate in your jurisdiction? registered? What land (or rights) are unregistered? If more than one please specify their differing rules and requirements. Even though there is no requirement to register the land, most of the real estate in Puerto Rico is registered in the Puerto Rico Property Only one Land Registry operates in Puerto Rico. The Registry is Registry. The registration of a right over realty creates a legally divided into 32 sections. rebuttable presumption of the validity of such right. Therefore, anyone with a right over real estate will have access to the Registry

5.2 How do the owners of registered real estate prove Puerto Rico for the registration of such right. their title?

4.2 Is there a state guarantee of title? What does it The Land Registry will not issue a physical title document to guarantee? evidence ownership over a property; however, a review of the books and records of the Puerto Rico Property Registry and a Please see the answer to question 4.1. corresponding title report or title abstract by a title company will evidence title.

4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need The following rights are compulsory registrable: mortgages; to be provided to the land registry for the registration of ownership right? Can information on ownership of constitution of horizontal property regimes; and time-sharing registered real estate be accessed electronically? agreements. An unrecorded mortgage will not be valid against any third person and the courts will not order foreclosure of an Documents granting rights may be filed by fax, but such “fax filing” unrecorded mortgage. Time sharing agreements and horizontal must be completed or supplemented within 10 calendar days by property regimes are not officially recognised unless they are filing the original documents. The documents required for filing are registered. deeds, court orders or resolutions, and, in certain cases authorised by law, a petition to the Registrar requesting a cancellation of a 4.4 What rights in land are not required to be registered? recorded right based on the lapse of the statutory tolling period. Certain basic information may be accessed electronically for all Apart from the rights set forth in the answer to question 4.3, no other documents filed since 2003. The pertinent document will not be rights are compulsory registrable. available electronically.

4.5 Where there are both unregistered and registered land 5.4 Can compensation be claimed from the registry/ or rights is there a probationary period following first registries if it/they make a mistake? registration or are there perhaps different classes or qualities of title on first registration? Please give No, compensation cannot be claimed. details. First registration means the occasion upon which unregistered land or rights are first registered in the registries. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he Rights which have been registered are afforded a rebuttable might reasonably need regarding encumbrances and presumption of the validity and such validity may only be questioned other rights affecting real estate and is this achieved by a search of the register? If not, what additional in a court of law by a person claiming a preeminent right. The initial information/process is required? registration of land may only be achieved by a court order. There are no restrictions on access. All documents filed in the 4.6 On a land sale, when is title (or ownership) transferred Registry are public and may be accessed by any person. This can to the buyer? be achieved by a review of the books and records of the Puerto Rico Property Registry and a corresponding title report or title Title is transferred to the buyer upon signing the deed of sale. abstract by a title company. To ascertain the status of a specific real property in the Puerto Rico Property Registry and complete a title report or title abstract a party will need the following information: 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later property number; section (geographical) of the Puerto Rico Registry rights? Property; book/volume; and page number of the property. An online search may be performed through the Karibe web-based Generally, earlier rights will defeat later rights. A contractual online search engine. Access to Registry data through the web- covenant between parties may allow for the creation of a later right based search engine is being continuously upgraded. which might have priority over the rights granted in a particular contract. Priority of rights recorded in the Registry, however, operate on the basis of “first in time, first in priority”.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 215 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

6 Real Estate Market 7 Liabilities of Buyers and Sellers in Real Estate Transactions 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally 7.1 What (if any) are the minimum formalities for the sale be involved in a real estate transaction in your and purchase of real estate? jurisdiction? Please briefly describe their roles and/or duties. Conveyancing must be executed by means of a public deed and should be filed before the corresponding division of the Property When applicable, real estate brokers and title insurance company Registry. representatives would be involved in a real estate transaction. If

Puerto Rico any of the parties used the services of a real estate broker, the latter usually participates in conversations and negotiations leading up to 7.2 Is the seller under a duty of disclosure? What matters the closing. In commercial real estate closings of certain complexity, must be disclosed? you will find the title insurance representative participating in the review of title documents, surveys and property tax documents A seller has no duty to disclose. However, it is customary that leading up to the closing. the buyer requests from the seller information regarding real and personal property (e.g. title reports, surveys, appraisals, rent records, easements and liens encumbering the property), structural 6.2 How and on what basis are these persons remunerated? sufficiency matters, environmental matters and concerns, pending litigations affecting the property, insurance, zoning, subdivision and land use matters and any issues connected to compliance with the Fees are based on the amount of the transaction. law.

6.3 Is there any change in the sources or the availability of capital to finance real estate transactions in 7.3 Can the seller be liable to the buyer for your jurisdiction, whether equity or debt? What are misrepresentation? the main sources of capital you see active in your market? Yes, the seller can be liable to the buyer for misrepresentations in the conveyancing documents. Puerto Rico’s distressed financial situation, among other factors, drove down the value of real estate on the island. There is a continued interest 7.4 Do sellers usually give any form of title “guarantee” in real estate investment as long as investors can benefit from the or contractual warranties to the buyer? What would reduced market values. Banks continue to provide financing adhering be the scope of these? What is the function of any to conservative credit analysis mechanisms. During the past five such guarantee or warranties (e.g. to apportion risk, years, the market has benefited from institutional investors purchasing to give information)? Would any such guarantee or significant real estate loans portfolios at a discount. This enables such warranties act as a substitute for the buyer carrying investor to dispose of the realty earning a solid rate of return on its out his own diligence? investment. Banking institutions continue to be the primary source of funding for individuals or private companies acquiring real estate from In Puerto Rico real estate transactions, there are three basic warranties: the aforesaid institutional investors or individuals. (i) warranties of title; (ii) warranties against observable defects; and (iii) warranties against hidden defects. With regards to the warranty of title, the seller would be liable to the buyer in the event a court of 6.4 What is the appetite for investors and/or developers law determines the seller was not the owner of the property at the to invest in your region compared to last year and time of the sale and thus unable to transfer title. If the sale is “as-is, what are the sectors/areas of most interest? Please give examples. where is”, the buyer waives the warranty against observable defects, otherwise the seller would be responsible for those observable defects at the point of conveyancing. Finally, a seller is bound to New developments are limited in scope and size. Institutional give a warranty against hidden defects if the property sold is unfit for investors in real estate loan portfolios have shown interest in the use to which it was destined, or if the defects diminish said use in primary markets, in both commercial and residential markets, in such a manner that if the purchaser had known thereof he would not the purchase of the loan portfolios. The appetite for secondary have acquired it or would have offered a lower price for it. and tertiary markets is not significant. After the natural disaster that affected Puerto Rico last year, Hurricane Maria, additional properties have been foreclosed causing banks and institutional 7.5 Does the seller retain any liabilities in respect of the investors to increase their portfolio. property post sale? Please give details.

See question 7.4. 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? 7.6 What (if any) are the liabilities of the buyer (in addition Please give examples. to paying the sale price)?

All the real estate sectors and subsectors experienced a slow down None, unless otherwise agreed to by the parties in the deed of sale. as a result of the island’s difficult economic situation. The market, however, has benefited from institutional investors purchasing significant real estate loans portfolios at a discount.

216 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

Only recorded liens in favour of the Puerto Rico government (such 8 Finance and Banking as lien on account of property tax debt) and the United States federal government (such as lien on account social security debts) have 8.1 Please briefly describe any regulations concerning priority, by operation of statutory law, over the aforesaid mortgage. the lending of money to finance real estate. Are the rules different as between resident and non-resident 8.6 Under what circumstances can security taken by a persons and/or between individual persons and lender be avoided or rendered unenforceable? corporate entities?

United States federal banking laws are applicable in Puerto Rico A security may be avoided and rendered unenforceable in a and banks are authorised by statute to engage in real estate lending. bankruptcy proceeding if it is deemed preferential or fraudulent

The authority for national banks is found in 12 United States Code under Sections 547 and 548 of the United States Bankruptcy Code. Puerto Rico (“USC”) 371. Furthermore, national banks are subject to a uniform code on real estate lending, the “Real Estate Lending Standards” 8.7 What actions, if any, can a borrower take to frustrate found in subpart D of 12 Code of Federal Regulations (“CFR”) enforcement action by a lender? 34, including the “Interagency Guidelines for Real Estate Lending Policies” contained in appendix A to subpart D of part 34. Banks The filing of a bankruptcy proceeding in the United States Bankruptcy and other financial institutions in Puerto Rico follow basic statutory Court, automatically stays the commencement or continuation of a regulations found in Title 7 of the Laws of Puerto Rico Annotated. state or federal judicial action against the debtor to recover a claim Chapter 143 (Part 7) of Title 7 contains an Act to Regulate the against the debtor that arose before the commencement of the Business of Mortgage Lending and Chapter 144 (Part 7) contains bankruptcy case. The filing of a bankruptcy proceeding also stays an Act to Protect Consumers of Reverse Mortgages. The statutes any act to create, perfect, or enforce any lien against property of the do not differentiate between residents and non-residents; certain debtor. regulations, e.g. reverse mortgages, apply to individual persons.

8.8 What is the impact of an insolvency process or a 8.2 What are the main methods by which a real estate corporate rehabilitation process on the position of a lender seeks to protect itself from default by the real estate lender? borrower? In the event that a debtor files, or is forced into, an insolvency or The lender will require the debtor to provide a security interest or bankruptcy proceeding, a stay will be issued causing that any and lien, typically a mortgage, upon the real estate. all obligations of the debtor and collections efforts by debtors are stayed until a payment plan is approved by the court or the debtor is liquidated. If a foreclosure process has already been initialised it 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a will also be halted as a result of bankruptcy proceedings pursuant to mortgagee to realise a mortgaged property without the United States Bankruptcy Code. involving court proceedings or the contribution of the mortgagor? 8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate Mortgage foreclosures can only be accomplished by means of court shares in a borrower given as collateral? If so, action. The debtor, however, may, with the lender’s consent, sign a can shares be appropriated when a borrower is in deed transferring the property to the lender as partial or full payment administration or has entered another insolvency or of the debt. The lender and any creditors have a preference for reorganisation procedure? judicial foreclosures since as a result of the process the court orders the cancellation of any liens primed by the foreclosed mortgage and Any enforcement of security granted as collateral to a lender shall there are no cancellation costs. require a judgment by the adequate court (forum is generally agreed in the loan, or ancillary, documents) granting lender the right to appropriate collateral granted by the debtor. If an insolvency 8.4 What minimum formalities are required for real estate proceeding has been initiated the collateral enforcement or lending? foreclosure process will be stayed (see question 8.8 above). In certain cases, banks or investors will request as part of a forbearance For residential lending, typically the minimum formalities required negotiation that debtor executes a consent judgment which will are a promissory mortgage note and the mortgage. In the case facilitate the enforcement proceeding. of commercial lending, the lender requires a loan agreement, disbursement note, and a pledge agreement in addition to the aforesaid. Common to both types of lending are title reports of 9 Tax the property to ascertain lien status, title insurance and a certificate stating that there is no tax debt associated with the property. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? Transfer taxes, paid as deed stamps and recording vouchers, on the sale of real estate amount to approximately 0.55% of the property value established in the deed of transfer. The seller is liable for the A recorded mortgage, secured by a title insurance policy, in favour of stamps on the original deed and the purchaser is liable for stamps in the lender and superseding all other liens is the best protection a real the certified copy of the deed and recording vouchers. estate lender will have against claims by borrower or other creditors.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 217 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

9.2 When is the transfer tax paid? 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of The transfer tax is paid at closing, i.e., the date when the transfer term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of deeds are signed. the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? 9.3 Are transfers of real estate by individuals subject to income tax? The typical provisions for leases of businesses in Puerto Rico are as follows: The transfer may trigger a capital gains tax payable by the (a) The length of a lease is 5–10 years, including renewals.

Puerto Rico seller. Generally, any applicable capital gains tax will be withheld (b) Rent increases of 3% every two or three years (more common at the source by the purchaser. recently due to deceleration of the real estate market in Puerto Rico). 9.4 Are transfers of real estate subject to VAT? How (c) The tenant is never permitted to sell or sub-lease, unless with much? Who is liable? Are there any exemptions? the landlord’s consent. (d) Most leases deem a change of control of the tenant an This is not applicable in Puerto Rico. unconsented assignment and grounds for termination. (e) Transfer of the lease may be allowed in the lease agreement without releasing the original tenant from liabilities 9.5 What other tax or taxes (if any) are payable by the thereunder. seller on the disposal of a property? (f) The costs of ordinary wear and tear are borne by the tenant; the costs of extraordinary repairs are borne by the landlord. Property taxes due when the real estate is sold and not paid as of the closing date are paid by the seller in order to accomplish a transfer free from any lien on the account. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease?

9.6 Is taxation different if ownership of a company (or Generally, the landlord will be taxed on net income from rental other entity) owning real estate is transferred? income (payable upon filing an income tax return). From the perspective of the tenant, payments of rent are not subject to taxation The tax withholding at source of capital gains will be different unless the landlord is a non-resident corporation, in which case the depending on if the owner is a non-resident or has residency in tenant will be required to withhold at source. Puerto Rico.

10.5 In what circumstances are business leases usually 9.7 Are there any tax issues that a buyer of real estate terminated (e.g. at expiry, on default, by either party should always take into consideration/conduct due etc.)? Are there any special provisions allowing a diligence on? tenant to extend or renew the lease or for either party to be compensated by the other for any reason on As part of the due diligence process a buyer of real estate should termination? review a recent debt certification issued by the local real property tax agency (Municipal Revenue Collection Center known by its Until the Puerto Rico real estate market experienced a marked Spanish acronym CRIM) and a debt certification issued by the deceleration, most leases terminated on the expiry date; the Puerto Rico Treasure Department related to special contributions to economic downturn has brought about a spike in terminations by ascertain what taxes are owed and ensure they are paid out prior to default of both tenants and landlords. Renewal or extension terms conveyance. are typical in lease agreements, both commercial and residential, and landlord compensation clauses for a tenant’s termination are typical. Such clauses are seldom in favour of the tenant. 10 Leases of Business Premises

10.6 Does the landlord and/or the tenant of a business 10.1 Please briefly describe the main laws that regulate lease cease to be liable for their respective leases of business premises. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance? The Puerto Rico Civil Code is the statute that regulates leases in Puerto Rico. Unless otherwise agreed in the lease, the selling party would cease to be liable from the date of sale of its interest. Parties will be liable 10.2 What types of business lease exist? for pre-sale non-compliance, unless otherwise agreed to in the pertinent agreement. Business leases fall into two categories: commercial; and residential.

218 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

(a) Term – anywhere between one year to three years, with 10.7 Green leases seek to impose obligations on possible extensions of similar terms. Tenants shall issue landlords and tenants designed to promote greater adequate notice to inform his election to extend the lease. sustainable use of buildings and in the reduction of (b) Rent – rent will generally exclude utilities. Rent will the “environmental footprint” of a building. Please generally increase on the first anniversary of the lease briefly describe any “green obligations” commonly anywhere between 2% to 10%, depending on the property. found in leases stating whether these are clearly defined, enforceable legal obligations or something (c) Holdover rent – holdover rent will be stipulated at times. not amounting to enforceable legal obligations (for However, under the Puerto Rico Civil Code, a lease will example aspirational objectives). be considered extended if, after the expiration of the lease, a tenant remains at the premises with the acquiesce of the In Puerto Rico, “green obligation” clauses have yet to be included landlord. in lease agreements. However, we do not rule out the inclusion of (d) Insurance – tenants will be required to carry insurances to Puerto Rico these clauses in future leases due to landlords’ growing interest in cover general liability and content. the application of sustainable use practices to reduce the operational (e) Repairs – it is common that landlord will assume repairs that costs of their buildings. exceed a specific amount or if they are required during the first month. (f) Maintenance – a tenant will be required to carry out regular 10.8 Are there any trends in your market towards more maintenance work on the property (e.g. a/c unit maintenance, flexible space for occupiers, such as shared generator maintenance, pool cleaning, landscaping and short-term working spaces (co-working) or shared gardening work). Non-regular maintenance, such as painting, residential spaces with greater levels of facilities/ will be performed by the landlord. activities for residents (co-living)? If so please provide examples/details. (g) Tax – the landlord and tenants will negotiate who pays for the real property tax. If the landlord pays for the real property tax but there is an increase as result of a new law or amendment, Following the trend in other jurisdictions, various flexible tenant will assume the increase. coworking spaces have been established in Puerto Rico, mostly in the urban areas, which vary in costs, footprint and ancillary services. This began as a more flexible option for small companies, start-ups 11.4 Would there be rights for a landlord to terminate a and technology companies. More recently, local tax incentives residential lease and what steps would be needed have attracted many out of state individuals that have moved their to achieve vacant possession if the circumstances existed for the right to be exercised? business operations to Puerto Rico, as a result they have opted to use coworking spaces over long-term leases during the initial stages of their move. As a result, coworking spaces have proliferated. Generally, residential leases, as well as commercial leases, will include specific instances that will grant landlords the right to In the residential realm, short-term leases have flourished as terminate a lease. The most common are: (a) failure of payment vacation rentals and options for the individuals that have moved to beyond the applicable grace period; (b) a material default on the Puerto Rico interested in the tax incentives mentioned above. All lease; and (c) non-compliance with an applicable law or regulation of this in part is facilitated by sites like Airbnb and HomeAway. (including any particular regulation issued by the condo board). However, many condos developments have regulations that prohibit The eviction process will be initiated with a formal letter notifying these type of rentals. the specific defaults and granting a specific term to abandon the premises. In many events this will not be effective to obtain the 11 Leases of Residential Premises possession but will set the bases for the eventual judicial process. The landlord should file a complaint in the adequate court asking for eviction and it may request collection of the moneys owed in the 11.1 Please briefly describe the main laws that regulate same filing, and request that tenants vacate the premises. Eviction leases of residential premises. process may be filed under a summary process which will accelerate a hearing, judgment and order to vacate (3–6 months). Once a Leases for residential properties are regulated by the Puerto Rico judgment is issued by the court, the landlord may proceed to throw Civil Code. the tenants with the assistance of a bailiff.

11.2 Do the laws differ if the premises are intended for 12 Public Law Permits and Obligations multiple different residential occupiers?

Laws do not differentiate if the premises are intended for different 12.1 What are the main laws which govern zoning/ residential occupiers. In practice, the lease should establish how permitting and related matters concerning the use, many occupiers will be allowed in the property at any given time. development and occupation of land? Please briefly describe them and include environmental laws.

11.3 What would typical provisions for a lease of Act No. 75 of 1975, as amended, created the Puerto Rico Planning residential premises be in your jurisdiction regarding: Board (the “Board”) to guide the integrated development of Puerto (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of Rico. As part of its duties, the Board has to develop Land Use the term; and (d) the tenant’s contribution/obligation Plans (“PUT” by its Spanish acronym), and regulation pertaining to the property “costs” e.g. insurance and repair? to zoning and land use matters. In general terms, the PUTs designate the distribution, location, extension and intensity of Typical provisions for residential leases in Puerto Rico are as the land use in Puerto Rico (i.e. rural, urban, mining, agriculture, follows: forests, conservation, recreation, transportation, communications,

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 219 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

generation of energy, protection of natural resources, residential, Buyers obtain reliable information on these matters through the commercial, industrial, educational, public, and institutional). The online dockets, files and/or records of the above-referenced agencies Board also promulgates regulations on natural reserves established and others, and the Public Property Registry. by law that restrict the use of certain land in Puerto Rico. Additionally, Act 81 of 1991, as amended, allows municipalities 12.4 What main permits or licences are required for in Puerto Rico to develop a Zoning and Land Use Plan (“POT” building works and/or the use of real estate? by its Spanish acronym) to guide the development within their jurisdiction. Municipalities have the option to create partnerships If required by law or when a project is not within the allowed uses with other municipalities for the preparation of POTs. The main for the proposed location, the proponent must obtain a location purpose of the POT is to designate the distribution, location, approval (consulta de ubicación) from the Board. Once the extension and intensity of the land use on a local scale. The Board Board issues the location approval, the proponent may need to Puerto Rico shall evaluate and approve the POT before it can be implemented by file an Anteproyecto application before OGPe or the Autonomous the Municipality. Municipality, as applicable, for variances of building requirements. Furthermore, pursuant to Act 161 of 2010, as amended, the Permits Upon the approval of the Anteproyecto or if no variance is required, Management Office (“OGPe” by its Spanish acronym), is the central depending on the construction project, the proponent may need to government agency in charge of evaluating permits related to land file an application for a preliminary development (similar to a master use and/or construction work when issuance by a municipality is plan) and/or urbanisation permit (infrastructure related). After not applicable. the approval of the preliminary development and/or urbanisation permit, the proponent must file an application for a construction Finally, regulation adopted by the Puerto Rico Environmental permit before OGPe or the Autonomous Municipality, as applicable. Quality Board (“EQB”) may affect the use of a property based on After the building works are completed, the proponent shall request its environmental conditions. Also, given Puerto Rico’s territorial a use permit before using and/or operating the building. status, a dual jurisdiction system permeates our legal framework. As a result, the US Environmental Protection Agency (“EPA”) can also establish liens and restrictive conditions on the property based 12.5 Are building/use permits and licences commonly on its environmental conditions. obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? Other laws which may restrict zoning and land use in Puerto Rico include: (i) the Puerto Rico Wetlands Act of 1998; and (ii) the Yes. In Puerto Rico, a construction and use permit must be obtained Conservation Easement Act of 2001. before the commencement of any building works and/or use of the building. As a result, implied permission for building and/or use is 12.2 Can the state force land owners to sell land to not contemplated by Puerto Rico’s legal framework. it? If so please briefly describe including price/ compensation mechanism. 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? Yes, the Constitution of Puerto Rico and the Eminent Domain Act of 1903 (“Act 1903”), as amended, allows the government of The cost of construction and use permits can vary depending on Puerto Rico to force a landowner to sell its land to the government the proposed project (e.g. acreage of the property, footprint area, provided that there is a public interest and the owner receives fair number of units). There are regulations that establish these costs compensation. As per the Act 1903, public interest includes the and other fees/costs (e.g. impact fees) that may be applicable. development of roads, schools, urban trains, cemeteries, economic reconstruction plans, and/or any purpose that advances public interest. The Supreme Court of Puerto Rico (“TSPR” by its Spanish 12.7 Are there any regulations on the protection of historic acronym) has held that the government does not have to establish a monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real particular use for the land during the eminent domain proceedings. estate or development/change of use? The TSPR’s rationale is based on the premise that the “well-being” of society supersedes individual property interest. Notwithstanding Yes, the Regulation for the Designation, Registration and Conservation the foregoing, the government must ensure the owner’s rights to due of Historic Buildings and Historic Areas of 2002 protects not only process during the proceedings by filing a declaration of acquisition monuments but buildings and areas. Also, any proposed project that and simultaneously depositing fair compensation with the competent requires a federal permit needs to evaluate whether it may impact a court. With regards to fair compensation, the TSPR has adopted the property of historic significance under the jurisdiction of the State undivided fee rule which allows the owner to receive the reasonable Historic Preservation Office before the commencement of any market value of the property without taking into account the liens building works. These regulations and/or requirements are unlikely and encumbrances affecting the property. The TSPR has determined to affect the transfer of rights in real estate. They would rather require only one exception to this rule, when a property is affected by a the owner to comply with applicable parameters provided the property long-term lease with high rental fees. or building has been declared historic or is within a historic area.

12.3 Which bodies control land/building use and/or 12.8 How can e.g. a potential buyer obtain reliable occupation and environmental regulation? How do information on contamination and pollution of real buyers obtain reliable information on these matters? estate? Is there a public register of contaminated land in your jurisdiction? The Board, Autonomous Municipalities, and OGPe control land and building use regulation. Typically, the EQB, EPA, and the A potential buyer must review EQB’s and EPA’s records on the Department of Natural and Environmental Resources (“DNER”) environmental conditions of the real property to be purchased, as control environmental regulation. well as adjacent properties.

220 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

In Puerto Rico, there is no public register of contaminated land/ In February 2013, Executive Order 2013-018 instructed the Puerto properties. Rico Energy Affairs Administration (now known as SEPPO), DNER and EQB to develop a scientific study quantifying the amount of greenhouse gases generated in Puerto Rico within one 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? year of the enactment of the Executive Order. Based on this study, local government agencies will have to develop an integrated and sustainable strategy aimed at reducing and removing a significant The EQB has not adopted any regulations and/or guidelines to amount of these pollutants. The report was due in February 2014 but use risk-based assessment analysis when determining clean-up was later extended to September 2014 by Executive Order 2014-09. standards.

13.2 Are there any national greenhouse gas emissions Puerto Rico 12.10 Please briefly outline any regulatory requirements reduction targets? for the assessment and management of the energy performance of buildings in your jurisdiction. The US Clean Energy and Security Act of 2009 established a The State Energy Public Policy Office (“SEPPO”, formerly known reduction target of 17% below 2005 levels by 2020, and 83% below as the Puerto Rico Energy Affairs Administration) adopted the 2005 levels by 2050. These targets are applicable to Puerto Rico. Energy Savings Performance Contract Regulation. The purpose of Locally, the EQB has not yet developed any additional greenhouse this Regulation is to provide government entities with a standardised gas emission reduction targets outside of the federal reduction process with clear direction and accountability for all participants targets. However, we anticipate that the results of the study prepared in the development, implementation, measurement and verification by SEPPO, DNER and EQB on the amount of greenhouse gases of Energy Savings Performance Contracting projects, by defining generated in Puerto Rico will encourage the government to establish roles and responsibilities; formalising process steps; and providing reduction targets. standard contract documents. In the private sector, the PR Electric Power Authority issues an 11% 13.3 Are there any other regulatory measures (not already reduction in the monthly electric bill of hotels, condo-hotels, small mentioned) which aim to improve the sustainability of hotels, and guest houses in Puerto Rico. The hotel must: have a both newly constructed and existing buildings? long-term Energy Conservation Plan; submit an annual report on the progress of implementing the referenced Plan; and receive a The Board adopted the Land Use and Construction Joint Regulation Certification from SEPPO indicating that conservation methods which establishes the requirements and procedures to obtain a green were implemented by the hotel. permit. This permit is issued to any development which incorporates into its design sustainable construction and land use practice (e.g. reduction in energy and water consumption, reduction in emission 13 Climate Change of greenhouse gases). Finally, in Puerto Rico there are tax incentives for any person or 13.1 Please briefly explain the nature and extent of any entity that purchases and installs renewable energy equipment (e.g. regulatory measures for reducing carbon dioxide solar and wind) in their residence or business to ensure energy emissions (including any mandatory emissions efficiency by reducing energy consumption. trading scheme).

The Renewable Energy Policy Act (“Act 82-2010”) was enacted in 2010 and introduced the use of Renewable Energy Certificates (“RECs”) as a mechanism for stimulating the production of renewable energy and reducing the effects of greenhouse gas emissions. This Act was also adopted in anticipation of the EPA’s revisions of its Greenhouse Gas Reporting Program, National

Renewable Portfolio Standards and other carbon dioxide (“CO2”) and greenhouse gases reduction and control systems. However, Puerto Rico has yet to develop an operational emission trading scheme to engage in the emissions trading market.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 221 © Published and reproduced with kind permission by Global Legal Group Ltd, London Ferraiuoli LLC Puerto Rico

Eduardo Tamargo-Motroni María del Rosario Fernández- Ferraiuoli LLC Ginorio th 221 Ponce de León Avenue, 5 Floor Ferraiuoli LLC San Juan, 00917 221 Ponce de León Avenue, 5th Floor Puerto Rico San Juan, 00917 Puerto Rico Tel: +1 787 766 7000 Email: [email protected] Tel: +1 787 766 7000 URL: www.ferraiuoli.com Email: [email protected] URL: www.ferraiuoli.com

Mr. Tamargo-Motroni is a Senior Member of Ferraiuoli and a member Mrs. Fernández-Ginorio is a Senior Member at Ferraiuoli. She Puerto Rico of the firm’s Corporate Department. He joined Ferraiuoli in 2011 concentrates her practice in general corporate, real estate matters and having worked in corporate law, banking law, the petroleum industry mergers and acquisitions. Additionally, she has extensive experience and the real estate sector. Mr. Tamargo-Motroni worked for Malley, in the leasing, acquisition, disposition, development and operation of Tamargo & Melendez-Sauri, LLC from 2010 to 2011, was a named real properties, including, among others, storage facilities, tourism and partner of Coto, Malley & Tamargo, LLP from 1999 to 2010, a partner hospitality developments, shopping centres, renewable energy, and in the Corporate Department of McConnell Valdés from 1993 to 1999, telecommunications tower sites. and an associate in Sweeting, Gonzalez, Cestero & Bruno from 1987 She has participated in multiple real estate transactions involving to 1992. Mr. Tamargo-Motroni obtained his juris doctor from Cornell both public and private interests. Particularly, she assisted the Local Law School, in Ithaca, New York and his bachelor’s in business Redevelopment Authority in the conveyance of land from the US Navy administration, specialising in accounting, from Franklin and Marshall to the Commonwealth of Puerto Rico and the development efforts College, in Lancaster, Pennsylvania. engaged therein. Mrs. Fernández also handles a myriad of corporate His knowledge of real estate law has benefitted from his experience matters for clients in multiple industries. throughout the years in the aforesaid areas of practice and provides She graduated from the Inter-American University of Puerto Rico School depth of experience to the collective knowledge of the real estate of Law in 2004 and holds a Bachelor of Arts in Public Communication department at Ferraiuoli. from American University in Washington, D.C., graduating class of 2001.

Ferraiuoli LLC is one of the leading law firms in Puerto Rico. The firm provides value added comprehensive legal advice to industry-leading private and publicly owned companies on corporate law, mergers and acquisitions, intellectual property, labour and employment, energy and land use, litigation, tax and other regulatory matters. Ferraiuoli has received international recognition in the legal field byChambers & Partners, a London-based legal directory firm that publishes, on an annual basis, the leading directories of the legal profession identifying the world’s top lawyers and law firms. In its 2010–2015 Latin America and Global editions, Chambers ranked Ferraiuoli as a leader in various practice areas and several firm attorneys were named “Leaders in their fields” by the publication. Ferraiuoli has further been honoured as one of Puerto Rico’s outstanding firms by Chambers & Partners and it was shortlisted as one of the candidates for Puerto Rico’s Law Firm of the Year for the years 2011–2014.

222 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 23

Russia Alexey Konevsky

Pepeliaev Group Vladislav Ivanov

1 Real Estate Law 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in According to the provision set in the Constitution of the Russian response to question 10.1. Those relating to zoning Federation, generally recognised principles and rules of international and environmental should be listed in response to law as well as international treaties are included into the legal question 12.1. Those relating to tax should be listed in system of Russia. response to questions in Section 9.

In Russia, real estate is governed primarily by the following laws: 2 Ownership The Civil Code of the Russian Federation of 1994 N 51-FZ constitutes itself a major legal act regulating real estate relations, in 2.1 Are there legal restrictions on ownership of real estate particular, the procedure for acquisition of rights to real estate and by particular classes of persons (e.g. non-resident various kinds of transactions with objects of real estate. persons)? The Land Code of the Russian Federation of 2001 N 136-FZ has a specific subject of legal regulation – land, which constitutes itself Pursuant to the provisions of Civil law, foreign physical and legal a separate kind of real estate. Therefore, the Land Code stipulates persons are entitled to the same rights and obligations as Russian provisions on acquisition and cessation of rights to land plots and citizens, i.e. they enjoy the national regime. Still, certain restrictions reveals the legal ties between land and various types of constructions exist with respect to the non-resident’s right of ownership. Thus, non- upon it. residents are not entitled to own land located near state borders and agricultural land. The latter restriction also applies to legal entities, in The Town-Planning Code of the Russian Federation of 2004 N 190- which the share of foreigners in the share capital exceeds 50%. FZ establishes the legal regulation of relations on construction and reconstruction of capital facilities (another kind of real estate), sets certain restrictions and requirements to the contents of documents 3 Real Estate Rights on construction. The Residential Code of the Russian Federation of 2004 N 188- FZ has narrower subject of regulation – residential premises and, 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual consequently, usage, maintenance, remodeling and reconfiguration between the parties? of such premises. The Federal Law “On the State Registration of Real Estate” of 2015 ■ Ownership. In Russia, several types of ownership are N 218-FZ provides legal regulation of state registration of rights recognised: public (which can be federal or municipal); to real estate and several kinds of transactions with it (e.g. sale- private (by physical and legal persons); and common purchase, leasing agreements). ownership (by two or more persons). The Federal Law “On the Joint Funding of Construction” of 2004 N ■ Lifetime inheritable possession. Such right is no longer 214-FZ defines relations on the participation of physical persons in granted. However, the Russian Civil Code contains such the process of real estate construction and acquisition of rights to it. provision that used to be granted to physical persons in respect of public land. Nowadays, it is still applicable only to Prescriptions by competent authorities and regional laws also form land plots that were originally granted on this title. an integral part of legal regulation of real estate relations in Russia. ■ Permanent (termless) use applies to publicly-owned land and is no longer granted (while historical rights are recognised). 1.2 What is the impact (if any) on real estate of local ■ Free of charge use (can be only contractual). common law in your jurisdiction? ■ Easement (can be public or private, contractual or prescribed by law). It constitutes itself a right to limited use of land that There is no concept of common law in Russia. is owned by another person.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 223 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

■ Land lease (can be only contractual). ■ Mortgage (can be contractual or prescribed by law) is 4.5 Where there are both unregistered and registered land regulated by a specific federal law N 102-FZ dated 16.07.1998 or rights is there a probationary period following first registration or are there perhaps different classes on real estate mortgage. Only land plots that are included in or qualities of title on first registration? Please give civil circulation can be pledged. A mortgage can be solely set details. First registration means the occasion upon for the term of a lease agreement. which unregistered land or rights are first registered in the registries. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed thereon? The notions of first registration and probationary period are

Russia unknown to the Russian real estate law. A building owner has to have a right to the underlying land. However, this right can be different to ownership: for example, it is a common 4.6 On a land sale, when is title (or ownership) transferred situation when the building owner leases the underlying land. to the buyer?

3.3 Is there a split between legal title and beneficial title In sale-purchase transactions a title to land is considered transferred in your jurisdiction and what are the registration after the state registration was carried out. consequences of any split? Are there any proposals to change this? 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later No, there is no split between legal title and beneficial title under rights? Russian laws, because Russian law does not have a concept of a beneficial title. The concept of priority of rights is not known to the Russian law.

4 System of Registration 5 The Registry / Registries

4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules and requirements. Rights to all kinds of real estate (including land) generally require state registration in the Unified State Register of Real Estate. However, as Unified State Register of Real Estate (“EGRN”) is the main registry the procedure of state registration was introduced only in 1998 (by a which contains legal and technical information on real estate objects, specific law), titles acquired before are also recognised by the Russian including land plots. It is operated by the Federal Service of State law. In order to enter into transactions with such real estate the title- Registration, Cadastre and Cartography (“Rosreestr”). holder should register its title (subject to minor exceptions). While most of the data on real estate objects can be acquired from EGRN, there are specialised registries, like forest registry, water 4.2 Is there a state guarantee of title? What does it bodies registry, and the registry of objects of cultural heritage. guarantee? A good source of information is the Information System of Town- planning Activity (“ISOGD”). This database stores town-planning Under the Russian Constitution, private ownership is recognised documentation, resolutions and decisions of authorities and other and it can solely be taken away by a court decision and with prior documentation related to the specific real estate and its territory. fair compensation to the owner. Another state guarantee of title is state registration which is declared as the primary evidence of existence of a right. Registered title may 5.2 How do the owners of registered real estate prove only be challenged in court. their title?

An up-to-date extract from the Unified State Register of Real Estate 4.3 What rights in land are compulsory registrable? What is a sufficient document to prove the ownership title for any object (if any) is the consequence of non-registration? of real estate. The extract is provided by Rosreestr within seven working days The general rule is that all rights to land require state registration. upon the applicant’s request. However, titles to land acquired before the procedure of state registration was enacted by law (i.e. before 1998) are also recognised by the state, with a limitation that such titles cannot be the subject of 5.3 Can any transaction relating to registered real estate transaction until they are registered. Absence of registration means be completed electronically? What documents need that title has not arisen (subject to some exceptions, for example, an to be provided to the land registry for the registration unregistered lease is effective between the parties, but not against of ownership right? Can information on ownership of registered real estate be accessed electronically? third parties).

Electronic transactions with real estate are possible to perform via 4.4 What rights in land are not required to be registered? website of Rosreestr (purchase, lease, mortgage, gift, easement, other titles and encumbrances). In order to register such transaction, The rights to land require state registration under Russian civil laws contractual parties are required to sign and submit copies of with the exception of short-term lease of land (less than one year). documents with an electronic digital signature.

224 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

Documents to be submitted to Rosreestr to register ownership title to real estate: 6 Real Estate Market ■ application(s) for registration; ■ identity documents and (or) corporate documents; 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally ■ title deeds: transaction / court decision / succession / be involved in a real estate transaction in your commissioning certificate of newly constructed building / jurisdiction? Please briefly describe their roles and/or decision on reorganisation of a legal entity; duties. ■ state duty payment receipt; ■ power of attorney (if parties are represented); and Normally lawyers and real estate brokers would be involved. Russia ■ approvals and consents: mortgage holder consent for Notaries are involved if the agreement requires notarisation or if the transaction (if real estate is mortgaged), spouse consent parties voluntarily agree to notarise it. or marriage agreement (if the seller is a married citizen), corporate approvals for major transaction, interested party transaction (for legal entities). 6.2 How and on what basis are these persons remunerated? Information on ownership can be accessed by requesting extracts from EGRN both electronically and by visiting the registration body Remuneration of lawyers and real estate brokers is freely determined office. by these parties in contracts with the party asking for their services. Notaries get their fees, which are subject to some state restrictions. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? 6.3 Is there any change in the sources or the availability of capital to finance real estate transactions in Being a public registering body, Rosreestr bears civil liability for your jurisdiction, whether equity or debt? What are improper fulfilment of its obligations under Federal Law “On state the main sources of capital you see active in your registration of real estate”. market? Damages suffered by individuals or companies resulting from illegal actions (omissions) of Rosreestr shall be reimbursed by the Federal The main sources of capital in Russia have not changed and include Treasury in the amount not exceeding a certain limit. owner’s equity and bank loans. Such improper fulfilment implies: ■ loss or distortion of information; 6.4 What is the appetite for investors and/or developers ■ provision of incomprehensive or incomplete information; to invest in your region compared to last year and and what are the sectors/areas of most interest? Please give examples. ■ unreasonable refusal to register rights. Because of economic sanctions imposed on Russia, since 2014 5.5 Are there restrictions on public access to the our country has significantly lost its investment attractiveness for register? Can a buyer obtain all the information he foreign investors. might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved by a search of the register? If not, what additional 6.5 Have you observed any trends in particular market information/process is required? sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Please give examples. According to the law, Unified State Register of Real Estate is open to the public. A general trend for the slowing down of investments appears Extracts from the Unified State Register with description of title, applicable to all sub sectors of the real estate market. titleholder, encumbrances and limitations are available on a fee basis (from $4 to $33 for different types of extracts approximately). Some information is available only to the current owner, tax 7 Liabilities of Buyers and Sellers in Real authorities, courts and law enforcement. Estate Transactions Any individual can request information from the Register in relation to a particular property by presenting ID and filling in an application form. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? Information from the Register is not sufficient for a detailed due diligence, since it would not contain information on some limitations Real estate purchase agreements shall be executed in writing and encumbrances and does not show sufficient information on the in the form of one document. The law stipulates specific cases history of title. when purchase agreement shall be notarised. After the agreement is signed, transfer of title shall be registered in the Unified State Register of Real Estate.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 225 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

7.2 Is the seller under a duty of disclosure? What matters 8.3 What are the common proceedings for realisation of must be disclosed? mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without There is no particular duty of disclosure. However, if the seller involving court proceedings or the contribution of the mortgagor? does not disclose some negative facts (such as encumbrances on real estate), the seller would be liable to the buyer. There are two types foreclosure on mortgaged property: judicial; and extra-judicial. 7.3 Can the seller be liable to the buyer for It is a general rule that a mortgage is subject to judicial foreclosure

Russia misrepresentation? by means of a court order. The mortgaged assets are then sold at a public auction held by the court authorities. The seller is liable for misrepresentation provided that the relevant provisions are stipulated by a purchase agreement. The parties may enforce a mortgage without recourse to the courts. Extra-judicial procedure is possible, in particular, through a public auction under the agreement or through a closed auction where 7.4 Do sellers usually give any form of title “guarantee” provided for by law. or contractual warranties to the buyer? What would be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, 8.4 What minimum formalities are required for real estate to give information)? Would any such guarantee or lending? warranties act as a substitute for the buyer carrying out his own diligence? The loan agreement for any material amount should be in writing.

The seller usually gives warranties to a buyer that: ■ the real estate is free from any rights of third parties, is 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other not seized or pledged, is free from any encumbrances and creditors? limitations; and ■ there are no disputes, demands or court claims related to the A real estate lender may protect itself by a third-party security real estate. (independent guarantee, surety, mortgage, etc.). Assuming some provisions are included in the contract, breach of warranty gives the buyer a right to claim damages and, in some cases, to terminate the contract. The warranties are not a sufficient 8.6 Under what circumstances can security taken by a substitute for due diligence. lender be avoided or rendered unenforceable?

Being an accessory to the agreement, security may be avoided or 7.5 Does the seller retain any liabilities in respect of the rendered unenforceable when the main agreement is null and void. property post sale? Please give details.

After the sale, the seller is liable for breach of contract, including for 8.7 What actions, if any, can a borrower take to frustrate breach of requirements regarding the quality of real estate. enforcement action by a lender?

Enforcement through out-of-court procedure in some situations 7.6 What (if any) are the liabilities of the buyer (in addition (and arguably in all cases) requires endorsement of a public notary. to paying the sale price)? Public notaries are supposed to give such endorsement only if the claim is “undisputed”. Therefore, the borrower may declare that the In addition to paying the sale price, the buyer shall also accept the claim is disputed and therefore, arguably frustrate the enforcement real estate by the signing of a respective transfer and acceptance act. through out-of-court procedure.

8 Finance and Banking 8.8 What is the impact of an insolvency process or a corporate rehabilitation process on the position of a real estate lender? 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the In case of insolvency of the borrower, the lender does not have any rules different as between resident and non-resident persons and/or between individual persons and priority over other creditors, unless the lender is also a mortgage- corporate entities? holder. If the lender is a mortgage-holder, it would have some limited priority among the third line of creditors (after, for example, The Russian Civil Code is the main source of regulation. claims for wages).

8.2 What are the main methods by which a real estate 8.9 What is the process for enforcing security over lender seeks to protect itself from default by the shares? Does a lender have a right to appropriate borrower? shares in a borrower given as collateral? If so, can shares be appropriated when a borrower is in administration or has entered another insolvency or The most common security is a mortgage. Other methods of reorganisation procedure? protection are an independent guarantee, suretyship, pledge of movables or shares. The main stages of enforcing the security over shares through the

226 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

extra-judicial procedure are the following: (i) the pledge-holder files a tax on profit of organisations. The amount of the latter depends a court claim; and (ii) the court orders the public auction, or, if the on the taxation system under which the company is operating. If parties previously so agreed, a sale to a third party or transfer of ownership of a company owning real estate is transferred solely or ownership to the pledgor. The main stages of enforcing the security primarily to transfer ownership of the real estate, there is a risk that over shares through the extra-judicial procedure are the following: a VAT may be applied. (i) evaluation of the market price of the shares; (ii) notification of the pledgor; (iii) arguably an endorsement of the public notary; and 9.7 Are there any tax issues that a buyer of real estate (iv) court bailiffs enforce the pledge (by transferring the property to should always take into consideration/conduct due the lender, selling to a third party or through an auction). diligence on?

The pledgor has a right to appropriate shares in the borrower Russia given as collateral, if the parties so agreed. The insolvency or The buyer should take into account the cadastral value of the real reorganisation is not an obstacle for such appropriation. There is no estate object before buying it. Land tax and corporate property tax separate concept of administration under Russian law other than in (in certain cases) are based on the cadastral value, which may be the context of bankruptcy proceedings. higher than the real market price of real estate. The seller may propose to execute the real estate purchase agreement 9 Tax with an indication of a lowered price in it for the purposes of tax reduction. By entering into such agreement, the buyer bears certain risks, including a risk of not receiving back the actual paid amount 9.1 Are transfers of real estate subject to a transfer tax? in case the transaction is declared invalid. How much? Who is liable?

The buyer shall pay a stamp duty for the state registration of 10 Leases of Business Premises ownership title. It does not depend on deal value and comprises 2,000 rubles for individuals (about $30) and 22,000 rubles (about 10.1 Please briefly describe the main laws that regulate $300) for legal entities. leases of business premises.

9.2 When is the transfer tax paid? Leases of business premises in Russia is primarily governed by the following laws: The stamp duty is paid when the buyer addresses to a registering ■ The Civil Code defines the legal nature of lease agreements, body (Rosreestr) with an application for state registration of sets the main provisions for execution of lease agreements ownership title. for buildings, facilities and premises, as well as contractual rights and obligations of the parties. ■ The Federal law “On state registration of real estate” 9.3 Are transfers of real estate by individuals subject to comprehensively governs all relations on registration of income tax? rights to objects of real estate and transactions with them.

In accordance with the Tax Code, real estate sales transactions are subject to income tax paid by individuals in the amount of 13%. The 10.2 What types of business lease exist? Tax Code sets provisions for income tax deductions and income tax exemptions. Russian legislation does not provide legal classification of business lease. However, it can be conditionally categorised by the object of lease: office premises; retail premises; warehouses; and industrial 9.4 Are transfers of real estate subject to VAT? How premises. much? Who is liable? Are there any exemptions?

Transactions involving sale of commercial real estate are generally 10.3 What are the typical provisions for leases of business subject to VAT in the amount of 18% (20% starting from 01.01.2019). premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or The buyer pays the purchase price to the seller together with the sub-lease; (d) insurance; (e) (i) change of control of VAT amount, and then the seller pays VAT to the state budget. the tenant; and (ii) transfer of lease as a result of a The sale of residential premises, land plots and the purchase of real corporate restructuring (e.g. merger); and (f) repairs? estate through share purchase agreement is VAT exempt. a) The parties are entitled to determine the length of lease term in the agreement. Business premises are typically leased 9.5 What other tax or taxes (if any) are payable by the for a term of 5–10 years. If the term is not specified in the seller on the disposal of a property? agreement, it is deemed to be concluded for an indefinite term and can be terminated with three months’ notice. Russian legislation does not stipulate additional taxes for the seller Long-term lease agreements (for more than one year) are of real estate other than VAT and income tax. subject to state registration. There are no restrictions on the length of lease between 9.6 Is taxation different if ownership of a company (or private parties. As for public property, the law establishes a other entity) owning real estate is transferred? maximum lease term of 49 years. b) According to the law, the rent can be changed by agreement Individuals are obligated to pay a tax on income of physical between the parties within time limits set in the agreement, persons in the amount of 13%. Companies are obligated to pay but no more than once a year. A yearly increase is usually stipulated in business lease.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 227 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

c) The Tenant can assign its lease rights and obligation to a new Tenant (assignment agreement) with the Landlord’s consent. 10.7 Green leases seek to impose obligations on Public leases with a lease term exceeding five years can be landlords and tenants designed to promote greater assigned without prior consent. sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please Upon obtaining the Landlord’s consent, the Tenant is also briefly describe any “green obligations” commonly entitled to sublease the leased property, to pledge lease rights, found in leases stating whether these are clearly to contribute them to the charter capital of legal entities. defined, enforceable legal obligations or something d) There are no mandatory requirements towards insurance of not amounting to enforceable legal obligations (for commercial real estate. As a rule, the Landlord insures its example aspirational objectives). property against damage or destruction. The Tenant usually Russia obtains insurance of property (equipment and furniture) in Such terms are very unusual for Russian law leases. the leased premises. The Landlord may request insurance from the Tenant to insure its third party civil liability that might arise in connection with use of the leased premises. 10.8 Are there any trends in your market towards more e) (i) The lease agreement survives unchanged even in case of a flexible space for occupiers, such as shared change of control of the tenant, unless the parties agreed short-term working spaces (co-working) or shared otherwise. residential spaces with greater levels of facilities/ activities for residents (co-living)? If so please provide e) (ii) Reorganisation of the Landlord as a legal entity does not examples/details. affect the Tenant’s rights in a negative way. All rights and obligations of previous Landlord shall are transferred to a new one. Co-working spaces are an emerging trend, but they are already having an effect on office leasing. While being a popular living trend in other f) In accordance with the law, the Landlord shall carry out countries, so far co-living has received a poor response in Russia. major repairs to the leased premises, while the Tenant is obliged to keep the premises in a good condition and perform minor repairs (maintenance). This order may be changed in the agreement. 11 Leases of Residential Premises

10.4 What taxes are payable on rent either by the landlord 11.1 Please briefly describe the main laws that regulate or tenant of a business lease? leases of residential premises.

The rent under lease agreement is subject to VAT at a rate of 18% Leases of residential premises are mainly regulated by the provisions (20% starting from January 1, 2019). In any case, the Landlord shall of the Civil Code and the Residential Code. pay property tax, land tax (if applicable) and profit tax. 11.2 Do the laws differ if the premises are intended for 10.5 In what circumstances are business leases usually multiple different residential occupiers? terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a No, the legal basis would be the same. tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination? 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the The leases are usually terminated upon expiry. Upon expiry, the tenant’s rights to remain in the premises at the end of tenant has the right of first refusal with respect to further lease. the term; and (d) the tenant’s contribution/obligation The lease is deemed automatically renewed for an indefinite term to the property “costs” e.g. insurance and repair? on the same conditions if upon the expiry of the agreement the tenant continues to use leased property without objections from the a) The maximum term for a lease of residential premises landlord. executed with an individual comprises five years. If the term A lease can be prematurely terminated by court at the request of for lease is less than one year (short-term lease), the contract does not require registration. either party in cases specified by the law. The parties can also agree upon other conditions of early termination in the lease agreement. b) A rent increase is only allowed when prescribed by law or settled in an agreement. When the maximum rent fee is prescribed by law, no increase of that amount can be 10.6 Does the landlord and/or the tenant of a business stipulated by the agreement. lease cease to be liable for their respective c) Under Russian laws, the Tenant is entitled to the preemptive obligations under the lease once they have sold their right to remain in the premises after the end of the term. interest? Can they be responsible after the sale in Under lease of residential premises to an individual the respect of pre-sale non-compliance? landlord should offer the tenant a new lease with the same or different terms no later than three months before the end As a general rule, the landlord and the tenant of a business lease are of the term. The only exception from this rule is that the responsible for pre-sale non-compliance. landlord intends not to let its premises for at least one year. d) Unless a lease provides otherwise, the tenant covers public utility charges. The general rule is that the tenant incurs current repair costs, while the landlord incurs capital repair. However, an agreement may provide otherwise.

228 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

■ Federal Service of State Registration, Cadastre and 11.4 Would there be rights for a landlord to terminate a Cartography (Rosreestr) – land supervision. residential lease and what steps would be needed ■ Federal Service for Supervision of Natural Resources to achieve vacant possession if the circumstances (Rosprirodnadzor) – environmental supervision. existed for the right to be exercised?

A landlord in a lease with an individual can terminate a lease only 12.4 What main permits or licences are required for though judicial proceedings, when: building works and/or the use of real estate? ■ a tenant does not make rent payments for half a year (or in case of a short-term lease at least twice); The main permits/licences are: Russia ■ a tenant damages or destructs the premises leased; and ■ State (or private) expertise of engineering surveys and project documentation. ■ a tenant continues to use premises for purposes other than intended or keeps on violating legally protected rights and ■ Construction/design contractors must be members of interests of third parties. respective self-regulatory organisation (membership in this professional union is similar to licensing). ■ Construction/reconstruction permit. 12 Public Law Permits and Obligations ■ Commissioning permit.

12.1 What are the main laws which govern zoning/ 12.5 Are building/use permits and licences commonly permitting and related matters concerning the use, obtained in your jurisdiction? Can implied permission development and occupation of land? Please briefly be obtained in any way (e.g. by long use)? describe them and include environmental laws. Obtaining construction and commissioning permits is mandatory The main laws are: unless stipulated otherwise by law in certain cases. There is no ■ the Land Code; possibility to obtain an implied permission. ■ the Urban Planning Code; ■ the Water Code; 12.6 What is the typical cost of building/use permits and ■ the Forest Code; the time involved in obtaining them? ■ the Federal Law “On specially protected natural territories”; and The construction and commissioning permits are issued free of ■ the Federal Law “On environmental protection”. charge. The permits are issued within seven working days.

12.2 Can the state force land owners to sell land to 12.7 Are there any regulations on the protection of historic it? If so please briefly describe including price/ monuments in your jurisdiction? If any, when and how compensation mechanism. are they likely to affect the transfer of rights in real estate or development/change of use? Provisions of the Land Code and the Civil Code allow forcing the owners to sell land to it, if it is needed for state or municipal needs. The historic monuments are protected by the law “On objects of The compensation amount is equal to the market price of the land cultural heritage (monuments of history and culture) of peoples of plot. Lands plots are taken together with the real estate objects on Russian Federation” and other regulations. it, which are also subject to compensation. The legislation heavily restricts development and change of use Procedure: of historic monuments. Their demolition or reconstruction are not allowed, only some limited works are allowed that require ■ a decision on taking is made on federal, regional or municipal permission from the authorities. Owners of monuments normally level by a respective authority; have to sign special undertakings on protection of the monument. ■ an owner is notified about upcoming taking and is entitled to Such undertakings continue to apply to the purchasers of monuments. dispute the decision on taking in court; ■ land plot and other real estate on it undergo market price estimation; 12.8 How can e.g. a potential buyer obtain reliable ■ an agreement on withdrawal is signed between the authority information on contamination and pollution of real estate? Is there a public register of contaminated land and the owner; and in your jurisdiction? ■ when the owner does not agree, the authority has a right to take the real estate through a court. There is no public register of contaminated land. The best way to obtain information is to perform respective independent surveys. 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do buyers obtain reliable information on these matters? 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? The bodies which control land/building are: As a general rule, environmental clean-up is mandatory in cases ■ Local administration (municipal control for use of buildings/ when any harm is done. land plots).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 229 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

Russian Government issued a long-term Strategy on sustainable 12.10 Please briefly outline any regulatory requirements development of woods complex until 2030 that is aimed at for the assessment and management of the energy enhancement of efficiency of woods’ protection and reduction performance of buildings in your jurisdiction. of greenhouse gas emissions. Ratification of the Paris Climate Agreement by Russia is planned in the first quarter of 2019. Energy performance in Russia is mainly governed by the Federal Law “On energy conservation and energy performance”. The law stipulates requirements to power efficiency of buildings and facilities 13.2 Are there any national greenhouse gas emissions (restricting usage of power inefficient equipment, requirements to reduction targets? install power metering devices). Russia In accordance with the decree of the President of Russia, the goal for 2020 is to achieve a level of greenhouse gas emissions of no more 13 Climate Change than 75% of the emissions that existed in 1990.

13.1 Please briefly explain the nature and extent of any 13.3 Are there any other regulatory measures (not already regulatory measures for reducing carbon dioxide mentioned) which aim to improve the sustainability of emissions (including any mandatory emissions both newly constructed and existing buildings? trading scheme). The main regulatory basis of buildings sustainability is the Town- An international standard of tasks in respect of control and reporting Planning Code of Russia and a corresponding Federal law N 384-FZ on greenhouse effect emissions was ratified in 2016. Then, the on technical regulation of buildings and constructions safety.

230 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Pepeliaev Group Russia

Alexey Konevsky Vladislav Ivanov Pepeliaev Group Pepeliaev Group Building 1, 39 Building 1, 39 3rd Tverskaya-Yamskaya Street 3rd Tverskaya-Yamskaya Street Moscow, 125047 Moscow, 125047 Russia Russia

Tel: +7 495 767 0007 Tel: +7 495 767 0007 Email: [email protected] Email: [email protected] URL: www.pgplaw.com URL: www.pgplaw.com Russia Alexey is a partner specialising in real estate, construction and land Vladislav is a senior associate specialising in real estate for over 15 law. years. He has extensive experience of advising on M&A transactions, the sale and purchase of real estate, construction, development, He has significant experience in supporting investment projects in financing and leases. various industries and transactions with real estate (including due diligence, structuring deals, and drafting contracts). He advises clients Among Vladislav’s major projects, we would highlight advising: across these specialist areas. ■■ Yandex, one of the biggest Internet providers in Europe and a Alexey also defends clients in courts in civil law and public law disputes leading search engine in Russia; over real estate, construction and investment projects. ■■ Capital Partners: Alexey’s major projects include: ■■ on the construction, financing and subsequent sale of ■■ participated in drafting amendments to the Russian Land Code Metropolis, one of the biggest shopping malls in Moscow, to with a view to improving the investment environment in Russia the Morgan Stanley Real Estate Fund for US$ 1.2 billion; and by offering enhanced access to energy generation facilities by ■■ on the acquisition and subsequent sale for US$ 600 million of simplifying the procedures and, therefore, the time limits for the Ritz Carlton Hotel in Moscow, one of the best 5-star hotels in construction of such facilities; Russia; and ■■ developed and assisted with a transaction of a major Russian ■■ Meridian Capital on the sale of Gallery shopping mall in the centre diamond miner to purchase office premises in Moscow; of St Petersburg to the American real estate fund Morgan Stanley ■■ provided integrated legal support in connection with amendments Real Estate Fund for US$ 1.1 billion. to be introduced into Russian legislation governing the construction of infrastructure (stadiums and other facilities) required to hold the 2018 FIFA World Cup; and ■■ the practice headed by Alexey has won the Records of the Real Estate Market award. According to independent international rating of law firms The Legal 500, Alexey Konevsky is a recommended lawyer in land law, real estate and construction in Russia.

Pepeliaev Group is a leading Russian law firm offering the full range of legal services in all regions of Russia, in most former Soviet countries and abroad. Over 160 lawyers in Moscow, St Petersburg, Krasnoyarsk, Yuzhno-Sakhalinsk, Vladivostok, Beijing and Shanghai provide legal assistance to over 1,500 companies operating in various industries. 50% of these are international corporations implementing long-term investment projects in Russia. Pepeliaev Group is a leader in providing comprehensive legal services in Russia. Every year The Legal 500 and Chambers and Partners name the firm as the best in the category of taxation. International ratings agencies, including IFLR1000, World Tax, Pravo – 300 and others, recommend the firm’s real estate and construction, corporate, M&A, employment and migration law, dispute resolution and mediation, intellectual property and trademarks, antimonopoly regulation and bankruptcy practices for doing business in Russia. Pepeliaev Group is a member of the international association of law firmsTerraLex and the global network Taxand.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 231 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 24

Scotland David Mitchell

Shepherd and Wedderburn LLP Scott Ritchie

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

232 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

unregistered property will induce a first registration into the Land 2 Ownership Register and other transactions such as the grant of a new registrable lease, or the grant of a standard security will trigger the requirement 2.1 Are there legal restrictions on ownership of real estate for the landlord’s or borrower’s title to be registered in the Land by particular classes of persons (e.g. non-resident Register, if it is unregistered at the time. Eventually the Register persons)? of Sasines will be closed to all deed types. Through this process, and voluntary registration in the Land Register of Sasines title, No, there are no such legal restrictions. and a process known as Keeper-induced registration, by which the Registers of Scotland can transfer a Sasine title onto the Land Register without having to contact the owner, it is intended that

3 Real Estate Rights all title in Scotland will eventually be registered. The provisional Scotland deadline for this is 2024. 3.1 What are the types of rights over land recognised in Some ancient land rights are not registered in either Register. Often your jurisdiction? Are any of them purely contractual these relate to land rights granted by Royal Charter, such as Burgh between the parties? lands and some lands held by the older Scottish Universities.

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

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 233 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

who held the unregistered title more than 10 years previously, to 4.5 Where there are both unregistered and registered land the current owner (if that owner has not owned the property for or rights is there a probationary period following first more than 10 years themselves). Section 1 of the Prescription and registration or are there perhaps different classes Limitation (Scotland) Act 1073 provides that where a person has or qualities of title on first registration? Please give details. First registration means the occasion upon possessed land openly, peaceably and without judicial interruption which unregistered land or rights are first registered for 10 years, on the basis of a sufficient recorded title, the title will in the registries. be unchallengeable. Accordingly, no further proof is required.

There is no probationary period following a first registration. For 5.3 Can any transaction relating to registered real estate already registered titles there is a type of probationary period in be completed electronically? What documents need Scotland certain very rare cases: this is a protection for good faith purchasers to be provided to the land registry for the registration who buy from someone who is not in reality the true owner of the of ownership right? Can information on ownership of land. Provided that person is registered as the proprietor, and is in registered real estate be accessed electronically? possession of the land, the buyer will obtain a good unchallengeable title after a period of one year has elapsed. That one-year period Only in limited circumstances at present. For some years the Land can include the period of possession of the seller, so if the seller Register has operated a system of Automated Registration of Title has already been in possession for one year, the title is immediately to Land (ARTL). It was only possible to transact with the whole of protected. titles that were already registered. The Registers of Scotland are currently operating a system for electronic registration of discharges of standard securities, and are developing that system to be able to 4.6 On a land sale, when is title (or ownership) transferred accept transfers of title (dispositions) and standard securities in the to the buyer? near future.

Title and ownership transfer on registration of the transfer at the If the transaction involves a first registration into the Land Register, Land Register. then in addition to the disposition in favour of the applicant, accompanied by a completed application form, all other documents relative to the title have to be submitted. This may include other 4.7 Please briefly describe how some rights obtain deeds containing a full description of the property, deeds containing priority over other rights. Do earlier rights defeat later servitudes and burdens, and a plan. If any Land and Buildings rights? Transaction Tax (LBTT) (see Section 9) is payable, payment of this must be confirmed in the application. The priority of rights is usually determined by the order in which such rights are created, and as a general rule, earlier rights would It is possible to search the Registers through a service provided by defeat later competing rights. This can be overturned if the later the Registers of Scotland, known as ScotLIS. Business users of right was protected by an advance notice, and the earlier right was ScotLIS have to be approved or licensed to use it, and charges are not, provided the later right is registered within the protected period made for accessing documents, but a lesser service is available to of the advance notice (35 days). the general public.

5.4 Can compensation be claimed from the registry/ 5 The Registry / Registries registries if it/they make a mistake?

5.1 How many land registries operate in your jurisdiction? Yes, if the person suffers loss as a result of the mistake, and certain If more than one please specify their differing rules conditions apply. and requirements. 5.5 Are there restrictions on public access to the The Registers of Scotland operate two principal land registers: the register? Can a buyer obtain all the information he older Register of Sasines which is a register of deeds and does not might reasonably need regarding encumbrances and benefit from any state guarantee of title; and the Land Register of other rights affecting real estate and is this achieved Scotland which is a register of rights in land and provides a state by a search of the register? If not, what additional guarantee of title. The Land Register is map-based, and property information/process is required? being transferred or secured or over which other rights are being created must be capable of being mapped onto the cadastral map The Registers are open to public inspection and copies of documents which forms part of the Land Register. There is no mapping registered can be obtained for a fee. A buyer’s solicitor will normally requirement in the Register of Sasines. conduct all the necessary searches, inspections and other due diligence required to establish all registered rights and encumbrances, although some rights and encumbrances can exist without registration; for 5.2 How do the owners of registered real estate prove example unregistered leases (with a duration of 20 years or less), or their title? prescriptive servitudes (see question 4.3). While registered encumbrances such as real burdens ought to be An owner’s title is demonstrated by the title sheet for the property in ascertainable from the Title Sheet for a property, some encumbrances the Land Register. Appearance in the Land Register carries a state occur off-register, such as rights of way or core paths plans. Separate warranty of good title (see question 4.2). investigations of other sources, such as Local Authority records, For titles to real estate that are still on the Sasine Register (i.e. are are required to establish the nature and extent of such off-register “unregistered”) (see question 4.1) good title is proved by examining encumbrances. all title deeds going back for a period of 10 years to ensure that there are no breaks in any chain of ownership from the person

234 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

There is little interest in the retail sector, other than prime retail 6 Real Estate Market properties or sites.

6.1 Which parties (in addition to the buyer and seller 6.5 Have you observed any trends in particular market and the buyer’s finance provider) would normally sub sectors slowing down in your jurisdiction in be involved in a real estate transaction in your terms of their attractiveness to investors/developers? jurisdiction? Please briefly describe their roles and/or Please give examples. duties. There has been a marked acceleration in the slow-down in traditional/ Solicitors: usually both the buyer and the seller will instruct their high street retail sector, with all but the very best multi-channel own solicitors to act for them in the negotiation and preparation retailers under pressure, and only the prime locations prospering. Scotland of the contract. The buyer’s solicitor will conduct all necessary due diligence in relation to the title, any occupational leases, and other ancillary matters, including examining legal reports and other 7 Liabilities of Buyers and Sellers in Real searches. The buyer’s solicitor will attend to submission of an Estate Transactions LBTT return and payment of any LBTT due, and submission of the application for registration and other post completion matters. Agents: selling or letting agents are usually involved in marketing 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? property, and are often responsible for negotiating the principal heads of terms for the sale with the buyer’s agents. A contract for the sale and purchase of the land must be in writing. Surveyors: a preliminary step in the purchasing process is to In Scotland, the contract is usually adjusted between the solicitors establish the physical condition of the property, and a buyer will acting for the seller and the buyer, who negotiate and then exchange instruct a surveyor to carry out an inspection of the property, either contract letters (missives) on behalf of their respective clients. prior to bidding, or will make its offer conditional on receiving a While it is possible to buy or sell property without entering into a satisfactory survey report. prior contract to do so, in practice a contract is invariably arranged. Accountants/financial advisers: particularly if there are complex Title to the property is transferred by way of a disposition signed tax or capital allowances issues, the parties may engage specialist by or on behalf of the seller. The purchaser then registers the advisers. Specialist tax lawyers may be employed for this purpose. disposition in the Land Register to complete its title. Other specialists (e.g. environmental consultants) may be required according to circumstances. 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? 6.2 How and on what basis are these persons remunerated? The seller does not have a duty of disclosure, in general terms, and the principle of caveat emptor (let the buyer beware) applies, so that They will usually render an invoice for their services direct to the the buyer must usually conduct its own due diligence and satisfy client. Agents often operate on a commission basis, agreeing to itself as to title and other relevant matters in relation to the property. be paid a certain percentage of the price obtained. Lawyers will usually agree the basis of their fee at the stage of being instructed, 7.3 Can the seller be liable to the buyer for and will invariably have been asked to provide a quote for the work. misrepresentation? Surveyors are usually paid a fixed fee, often on a scale of fees depending on the value of the property, but not always. Yes, if the seller makes a false statement, on the strength of which the buyer is induced to purchase the property, and the buyer suffers 6.3 Is there any change in the sources or the availability loss as a result. of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your 7.4 Do sellers usually give any form of title “guarantee” market? or contractual warranties to the buyer? What would be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, There has been a greater appetite in the past year from UK institutions to give information)? Would any such guarantee or willing to invest in Scotland compared to the previous year. warranties act as a substitute for the buyer carrying There has also been more evidence of lending by alternative lenders out his own diligence? who appear prepared to invest in higher risk real estate such as secondary properties. Limited warranties are given in the contract. Some contracts, particularly of residential properties, will contain a warranty from the seller that the title is valid and marketable. However this does 6.4 What is the appetite for investors and/or developers to invest in your region compared to last year and not replace the buyers’ own due diligence requirements. Some what are the sectors/areas of most interest? Please warranties or confirmations are given by a seller in respect of matters give examples. which are only within the knowledge of the seller, and are not otherwise ascertainable from the titles or other searches and reports. The build to rent sector in Scotland continues to grow in popularity, The seller will usually include a guarantee of good title in the and development in Central Scotland is growing at the expense of disposition transferring title of the property to the buyer. This is more traditional office or retail development. called warrandice.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 235 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

There are three types of warrandice: ■ In relation to interest payable on an advance from a bank, if, ■ Absolute warrandice: A grant of absolute warrandice at the time when the interest is paid, the person beneficially protects the purchaser from the past and future acts and entitled to the interest is liable to pay UK corporation tax on deeds of the disponer, and from the acts of third parties, and the interest or would be so liable but for the fact that it is a is a guarantee from the granter that the title is good, and not bank acting through a foreign branch in respect of which the subject to unusual conditions of title that are unknown to foreign branch exemption applies. the disponee. It is expressed by the words: “And I/we grant ■ If the company paying the interest reasonably believes that warrandice.” It is the most common form. the beneficial owner of the interest is a UK-resident company ■ Fact and deed warrandice: This is a guarantee against which carries on a trade in the UK through a permanent both the future acts or deeds and the past acts or deeds of establishment and is liable to UK corporation tax on the interest or a partnership of which all the partners are such

Scotland the granter. In effect it is an undertaking by the disponer that he has not done anything in the past, and will do nothing UK-resident or non-UK-resident companies. in the future to prejudice the title granted in the disposition. ■ If the lender has the benefit of a double taxation treaty with This type of warrandice is usually given by granters acting in the UK reducing withholding tax on interest to zero. some representative capacity, such as executors or trustees, in which case generally they will also bind the trust or the executry estate in absolute warrandice. It is expressed by the 8.2 What are the main methods by which a real estate words: “And I/we grant warrandice from my/our own facts lender seeks to protect itself from default by the and deeds only.” borrower? ■ Simple warrandice: This is usual where the property is being transferred for no consideration, e.g. such as a gift, (a) Security package – the security package for a facility secured and is implied in such deeds unless other provision is made. on real estate will usually comprise: It offers protection from the future voluntary acts or deeds ■ a standard security (perfected by registration at the Land of the granter but not past ones, or third party acts. It is Register of Scotland) over the asset; expressed by the words: “And I/we grant simple warrandice.” ■ an assignation of rental income (perfected by intimation It is common for no warrandice to be given in sales by insolvency (i.e. formal notification) to the underlying tenant(s)) by practitioners. way of security in relation to rental income receivable from the asset; ■ an assignation in security (perfected by intimation to 7.5 Does the seller retain any liabilities in respect of the the relevant counterparty) of the borrower’s rights in property post sale? Please give details. any relevant contracts governed by Scots law such as insurance documents, collateral warranties and other Usually any liabilities in respect of the property will pass to the construction documentation relative to the asset; buyer, unless specific provision has been made in the contract to ■ a floating charge over all assets of the borrower; the contrary. ■ (occasionally) a share pledge (perfected by execution and delivery of a stock transfer form in the name of the lender 7.6 What (if any) are the liabilities of the buyer (in addition (or its nominee)) of the share capital in the borrower, to the to paying the sale price)? extent the borrower is a Scottish-incorporated company; and Usually, a buyer does not have any other liabilities to the seller. ■ (occasionally) an assignation in security (perfected by intimation to the account bank) of the borrower’s rights However, it is the buyer’s responsibility to pay any LBTT due in in relation to any Scots law-governed transaction bank respect of the transaction, and the registration dues of the disposition accounts. in its favour. If the sale price is liable to VAT, the buyer must pay (b) Guarantee – guarantees are sometimes given by the that too. borrower’s parent company or by other companies in the same group. 8 Finance and Banking (c) Control accounts – the lender will ensure that any income from the asset is paid into control accounts. Funds from these accounts will only be released to the borrower after interest 8.1 Please briefly describe any regulations concerning and amortisation on the loan has been paid. the lending of money to finance real estate. Are the (d) Valuations and LTV covenants – by regularly requiring rules different as between resident and non-resident valuations of the asset and testing the loan to value (LTV) persons and/or between individual persons and covenant set out in the loan agreement, the lender will ensure corporate entities? that the value of the asset over which it has security remains sufficient to repay the loan. This section does not address private lending where various (e) Insurance – the lender will require the borrower to take out consumer protection provisions may apply. appropriate buildings insurance. The Financial Services and Markets Act 2000 (FSMA) (as amended) (f) Covenants – the loan agreement will contain both financial provides the framework for the UK regulatory regime. It provides covenants (financial targets which the borrower undertakes to for the establishment, objectives and ongoing functions of the meet (for example, an interest cover covenant (and, if the loan Financial Conduct Authority, an independent, non-governmental is being repaid in instalments, debt service cover covenant)) body regulating the provision of financial services. which aims to ensure that the net rental income from the asset will cover all interest and fees (and any repayments of The Income Tax Act 2007 requires tax to be withheld on payments principal) due under the loan agreement in a given period) and of annual interest broadly where that interest is paid by a company non-financial covenants (such as covenants to maintain the or is paid by any person to a non-resident person. Exemptions are asset in good repair or covenants restricting disposal) by the available: borrower to ensure that the value of the asset is maintained.

236 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

(g) Tenants and leases – the lender will require detailed City of London Law Society or Property Standardisation undertakings from the borrower in relation to the tenants, Group forms being generally accepted); the leases and the rental income from the asset (for example, ■ a valuation of the asset; to collect the rent and otherwise enforce the tenants’ lease ■ a first ranking standard security over the asset; and obligations, not to grant new leases nor to accept surrenders of leases, and to provide regular information to the lender ■ a floating charge over all assets of the borrower (where the about the tenants, the leases and the rental income). borrower is a special purpose vehicle).

8.3 What are the common proceedings for realisation of 8.5 How is a real estate lender protected from claims mortgaged properties? Are there any options for a against the borrower or the real estate asset by other creditors?

mortgagee to realise a mortgaged property without Scotland involving court proceedings or the contribution of the mortgagor? ■ Registration of security package – The security package referred to in the response to question 8.2 above will be ■ Power of Sale – Pursuant to the standard security granted perfected by the standard security being registered at the over the asset, the heritable creditor/lender has statutory Land Register of Scotland. Prior to the standard security powers of sale and foreclosure in relation to the asset under being submitted for registration, the borrower should submit the Conveyancing and Feudal Reform (Scotland) Act 1970. an “advance notice” against the property title in respect of the These powers are closely regulated and can only be exercised standard security, which gives the heritable creditor/lender a following the service of a “calling up” notice by the heritable priority period of 35 days. The heritable creditor/lender will creditor/lender on the borrower. Service of the “calling up” then have priority as against other creditors in respect of the notice gives the borrower a two-month period in which to asset for that period. In addition, if the security is granted repay or satisfy the outstanding debt. If, following expiry of by a UK company, such security must be registered against the two-month “calling up” notice period, the borrower has the company at Companies House within 21 days of creation, not repaid or satisfied the outstanding debt then the heritable failing which the security will be void against any liquidator creditor/lender can enforce its rights under the standard or administrator of the company and any third party creditor. security, unless the asset is used for residential purposes ■ Assignation of rental income – Where the heritable creditor/ (which can include hotels and student accommodation) in lender takes an assignation in security of the rental income which case the heritable creditor/lender must also apply to derived from the asset, this must be perfected by intimation court for a decree to sell or foreclose on the asset. Due to to the underlying tenant(s). Until intimation is given to the the time periods and procedure involved in using the powers tenant(s), there is no perfected assignation and therefore no of sale and foreclosure, it is less common now for heritable fixed security over the rental income. The heritable creditor/ creditors/lenders to enforce their rights in this way. Heritable lender must also demonstrate a sufficient degree of control in creditors/lenders will often (where the borrower vehicle respect of the rental income which will ordinarily be achieved makes it appropriate) seek to realise their security through by either (a) having the rental income paid by the underlying appointment or an administrator or liquidator. tenant(s) into a blocked bank account, or (b) where the ■ Appointment of a receiver – Other than in very limited rental income is collected by a managing agent, having that circumstances, a heritable creditor/lender cannot appoint managing agent enter into a duty of care agreement with the a receiver under Scots law in relation to the asset. Where heritable creditor/lender. the borrower holds multiple assets and has granted a limited ■ Other assignations in security – Where the heritable creditor/ assets floating charge over a Scottish asset, it may be possible lender also takes an assignation in security of the borrower’s for the heritable creditor/lender to appoint a “Scottish” rights in relation to other contracts or assets governed by receiver (under the Insolvency Act 1986) to the Scottish Scots law (such as insurance contracts, bank accounts or asset. The location and jurisdiction of the borrower will also construction documentation), such assignation in security have an impact on this ability to appoint a Scottish receiver. must be perfected by intimation to the relevant counterparty. Where such an appointment is possible, the receiver will Until intimation is given to the relevant counterparty there have the powers to sell and manage and realise the property is no perfected assignation and therefore no fixed security in accordance with Schedule 2 to the Insolvency Act, plus over the relevant rights/contracts. Similar requirements in any additional powers outlined in the floating charge security. relation to control as outlined in relation to assignations of ■ Appointment of an administrator – If the borrower is an rental income will also apply. appropriate corporate entity then the heritable creditor/lender ■ Scottish share pledge – In the limited circumstances where could apply for the appointment of an administrator, either the heritable creditor/lender takes a pledge of the share capital through the courts or, if the heritable creditor/lender has a in the borrower, this must be perfected by execution and qualifying floating charge over the borrower, through an delivery of a stock transfer form in the name of the heritable out-of-court procedure. One of the effects of administration creditor/lender (or its nominee) and registration of the stock is that there is a moratorium on proceedings against the transfer form in the borrower’s register of members. An borrower (or its property) or security enforcement without updated register of members and share certificate (showing the permission of the court or the consent of the administrator. the heritable creditor/lender (or its nominee) as the registered An administrator is an officer of the court and has wide shareholder) should also be obtained. Until the stock transfer powers including powers to dispose of assets. forms are executed and delivered, and registered in the register of members of the borrower, the share pledge has not been perfected and there is no fixed security over the share capital. 8.4 What minimum formalities are required for real estate lending? ■ Negative pledge – The loan agreement will contain a negative pledge whereby the borrower agrees not to create any other security interest over the relevant asset (breach of which will The lender will require: be an “event of default”). ■ a report on title (lenders usually require the report to be in a prescribed format called a certificate of title, with both the

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 237 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

appropriation or sale of the shares, as well as receipt and retention 8.6 Under what circumstances can security taken by a of any dividends. lender be avoided or rendered unenforceable? It is thought competent for a lender to exercise a right to appropriate shares in a borrower given as collateral, without obtaining a Provided the security has been validly created and properly court declarator. Any appropriation should be on the basis of a perfected, a lender is entitled to take enforcement action in the commercially reasonable valuation and the lender must account to appropriate circumstances. the security-provider for any surplus in value. Shares in a borrower provided as collateral may be appropriated 8.7 What actions, if any, can a borrower take to frustrate when the borrower is in administration or liquidation, but generally enforcement action by a lender? any transfer of the shares by the lender (or its nominee) when the Scotland borrower is in liquidation, pursuant to a power of sale or otherwise, In the event of a default under the security, a borrower can take steps is void. to remedy the default before the expiry of the period in any default

notice issued by the lender. If the default is remedied, the lender no longer has a right of enforcement in respect of that instance of default. 9 Tax

8.8 What is the impact of an insolvency process or a 9.1 Are transfers of real estate subject to a transfer tax? corporate rehabilitation process on the position of a How much? Who is liable? real estate lender? Land and Buildings Transaction Tax (LBTT) is payable by the buyer Provided the lender has obtained validly created and properly of land, and by a tenant of leased property. The tax is charged on a perfected fixed and/or floating security, the lender will rank (subject progressive basis; that is to say, it is charged only on the proportion to the terms of any ranking agreements or arrangements with third of the price within and at the different rates set for, the relevant party security-holders) accordingly as a secured creditor in any band or bands of tax. For leases, the net present value (NPV) of insolvency process of a borrower. the rent must be ascertained, and the tax is then calculated at 1% In certain circumstances, the granting of security by a borrower prior of NPVs over £150,000. LBTT may also be payable on chargeable to an insolvency process may be reviewable and/or challengeable consideration other than rent, such as a premium. by an insolvency official (such as an administrator or liquidator) The current rates of LBTT for non-residential properties (w.e.f. 1 appointed in respect of the borrower. In addition to statutory time April 2015) are: periods for challenge under the Insolvency Act 1986, the common law of Scotland also provides for an unlimited period of challenge Purchase price LBTT rate in certain circumstances. Up to £150,000 0% Provided the borrower was able to meet the relevant tests for Above £150,000 to £350,000 3% solvency when the security was granted, or the lender is able to Above £350,000 4.5% show that the granting of security constituted reciprocal obligations The current rates for residential properties (w.e.f. 1 April 2015) are: between the borrower and the lender, at full and fair equivalence of consideration, and without collusion with the purpose of prejudicing Purchase price LBTT rate the general body of creditors of the borrower, the likelihood of a Up to £145,000 0% successful challenge by an insolvency official to the granting of the Above £145,000 to £250,000 2% security is limited. Above £250,000 to £325,000 5% A moratorium on the creditors taking action against a borrower Above £325,000 to £750,000 10% or its property arises in the context of administration, voluntary Over £750,000 12% arrangements proposed by “small companies” (being, broadly, An additional dwelling supplement (ADS) of 3% applies to companies satisfying two of the following criteria: (i) turnover of purchases of second or additional residential properties. not more than £10.2 million; (ii) balance sheet total of not more than £5.1 million; and/or (iii) no more than 50 employees) and liquidation. The liquidation moratorium does not restrict the lender 9.2 When is the transfer tax paid? from enforcing security where no court action or proceeding is required. LBTT is payable to Revenue Scotland within 30 days of the effective date of a transaction. For purchases of property, the effective date 8.9 What is the process for enforcing security over usually means the date of completion: when the price is paid. shares? Does a lender have a right to appropriate However, it is not possible to register the disposition of the property shares in a borrower given as collateral? If so, at the Land Register of Scotland, unless the LBTT has been paid, or can shares be appropriated when a borrower is in there are in place “arrangements satisfactory” to Revenue Scotland administration or has entered another insolvency or for payment of the tax. Arrangements satisfactory mean that reorganisation procedure? payment must be received by Revenue Scotland (by BACS, CHAPs or direct debit) no later than the fifth working day after the date of For a lender to take fixed security over the shares in a Scottish submission of the LBTT return. For leases, the effective date is the borrower company the lender (or its nominee) must take title to the last date of execution of the lease, or if earlier, when “substantial shares (see question 8.5(d) above). Any enforcement will therefore performance” takes place. This will occur if the tenant takes entry comprise the exercise of the rights of the lender (or its nominee) as to the property or makes payment of all or a substantial proportion shareholder of the borrower, subject to the terms of any agreement of any non-rental consideration, or makes the first payment of rent. set out in the share pledge security document. This could include

238 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

Particular care is required when works are carried out by the seller. 9.3 Are transfers of real estate by individuals subject to If the works are carried out under a contract which is closely linked income tax? with the land contract, LBTT may be payable on the value of the works as well as the price paid for the land. No income tax is payable on transfers of real estate, although, The annual tax on enveloped dwellings (ATED) is not a property depending on the nature of the seller’s business, they may be liable transaction tax as such; it is an annual charge on UK residential to pay tax on any profit from the sale. property owned by non-natural persons (mainly companies) that own UK residential property valued at more than £500,000. The 9.4 Are transfers of real estate subject to VAT? How annual charge ranges on bands from £3,600 (for values of more than much? Who is liable? Are there any exemptions? £500,000 but less than £1 million) to £226,950 (for values of more than £20 million) depending on the value of the property. Scotland As a matter of law, real estate is exempt from VAT. However, the owner of commercial property can opt to tax it, so that it can treat 10 Leases of Business Premises any supplies it makes in relation to the property as subject to VAT at the standard rate (currently 20%). If the seller has opted to tax the property, then the price on sale will attract VAT. It is quite common 10.1 Please briefly describe the main laws that regulate for owners of commercial property to have opted to tax. In addition, leases of business premises. sales of newly constructed commercial buildings or civil engineering works which are less than three years old will be standard rated. There is very little by way of legislation regulating commercial leases Sale contracts will invariably provide for the price to be exclusive of in Scotland. The Law Reform (Miscellaneous Provisions) (Scotland) any VAT, so that if VAT is payable, this must be met by the buyer. It Act 1985 makes provision for steps that a landlord must take before it is the liability of the seller to account to HM Revenue and Customs can irritate a lease, requiring the tenant to remove due to some breach. for the amount of the VAT paid on the price. In very limited circumstances, a statutory right of renewal is Even when a property has been opted, there are circumstances in available under the Tenancy of Shops (Scotland) Act 1949. This which no tax is payable. This is where the building concerned is was designed to protect tenants of shop premises, by allowing the held by the seller as a going concern (i.e. it is being operated as a tenant to apply to the sheriff court for renewal of the tenancy where business such as the letting of property). Provided the buyer intends a notice to quit has been served on a tenant, and the tenant wants to continue to operate the building in the same way, and also opts to continue the tenancy, but has been unable to get a renewal of to tax, the transaction can qualify as a transfer of a going concern the tenancy from the landlord on satisfactory terms. This is rarely (TOGC), so that VAT is not payable. invoked, and it is likely that it will be repealed. For the most part, leases are governed by the terms of the contract 9.5 What other tax or taxes (if any) are payable by the between the landlord and the tenant, that constitutes the lease, and seller on the disposal of a property? by common law.

UK resident companies pay corporation tax at the rate of 19% 10.2 What types of business lease exist? (expected to be reduced to 17% in April 2020) on any capital gain which arises from the transfer of property held as an investment. The terms of business leases are usually negotiated between the Profits realised from the transfer of property held as trading stock parties and so the detail of the provisions can vary. However, most will be subject to corporation tax on income at the same rate. business leases tend to conform to a standard full repairing and Individuals may be liable to capital gains tax on disposal of property insuring (FRI) format. at the rate of 20%, or 28% for gains on chargeable residential property. Some sectors of the real estate industry, representing both landlords and tenants are attempting to standardise the terms of leases by 9.6 Is taxation different if ownership of a company (or adopting the format of the Model Commercial Lease (MCL). The other entity) owning real estate is transferred? MCL leases were launched in 2014 and consist of suites of leases for office, retail, logistics/industrial and food/drink premises. These Yes. LBTT does not apply to the purchase of shares in a company leases have been generally well received in England and Wales, (or other entity) owning a property asset, unlike the purchase of the and since 2016, the Property Standardisation Group (PSG) (www. asset itself. Stamp duty is payable on the transfer of shares in a UK psglegal.co.uk) has been involved in producing Scottish law- company at the rate of 0.5%. compliant versions of the MCL leases. The leases are intended as a starting point for the drafting of a commercial lease, and adopt a balanced approach for both parties. 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due diligence on? 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of A buyer of real estate should always consider the LBTT implications, term; (b) rent increases; (c) tenant’s right to sell or and for commercial property, VAT considerations. Certain purchases, sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a such as the acquisition of multiple dwellings, and certain buyers such corporate restructuring (e.g. merger); and (f) repairs? as charities, registered social landlords, or group company transfers, may qualify for relief. (a) Length of term: The term of the lease will vary according to Special LBTT rules apply when works are carried out as part of the what is negotiated between the parties. However, lease terms consideration for a land transaction. An exemption may apply when have been getting shorter over the past decade or so, and the works are carried out by the buyer, if certain conditions are met. average term is now likely to be less than 10 years.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 239 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

(b) Rent increases: Leases will usually provide for a regular days prior to the expiry date. If neither party serves notice, the lease review of the rent – typically an upwards only review every may continue on the same terms and conditions for a further year. five years, based on open market rents prevailing at the time This is known as “tacit relocation” and leases can continue this way of review. Some leases will link the increases to a fixed year by year until one of the parties serves appropriate notice to quit. formula or to the Retail Price Index or Consumer Price Index. Most leases will contain an irritancy clause, providing that the (c) Tenant’s right to sell or sub-lease: The lease will usually landlord will be entitled to terminate the lease in the event of a set out in some detail what rights the tenant has to assign the lease to a new tenant or to sub-let all or part of the premises. breach by the tenant, on giving notice. A breach may be a monetary Where permitted, assignation or subletting will be subject one, such as non-payment of rent, or non-monetary such as a default to obtaining landlords consent. There is usually a provision by the tenant in respect of one or more of its other obligations that consent is not to be unreasonably withheld, but that will under the lease, or on the tenant becoming insolvent. The Law Scotland usually be subject to the landlord being satisfied as to the Reform (Miscellaneous Provisions) (Scotland) Act 1985 requires suitability of the proposed assignee or sub-tenant. that appropriate notice must be given by the landlord to the tenant, (d) Insurance: Usually, the landlord will insure the whole of and if the breach is a remediable one, the tenant must be given the the premises, or the building or estate in which the premises opportunity to remedy the breach. are located (where the landlord owns the whole building or There is no statutory provision allowing a tenant to extend or renew estate), for full reinstatement value, and for loss of rent for the lease – it will be a matter of agreement between the parties three years. The landlord will then recover the premium and any additional costs from the tenants. whether the lease is extended or renewed, and some leases contain an option to extend or renew. (e) Change of control/corporate restructuring: It is not usual to see any specific provisions in a lease regarding change of There are no rules relating to either party being entitled to control of the tenant or corporate re-structuring involving the compensation from the other on termination. At common law, tenant. a tenant is not entitled to compensation from the landlord for (f) Repairs: Most business leases will proceed on an FRI basis. improvements. Unless there is specific provision in the lease, any How this applies will depend on the way in which the lease is improvements carried out by the tenant and which attach to the structured. The lease will invariably impose liability for repairs premises will fall to be retained by the landlord without compensation. to the premises on the tenant. If the premises comprise the whole of the building then the tenant will be expected to attend to repairs to both the interior and exterior of the premises. 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective For leases of part of a larger building, it is usual for the premises obligations under the lease once they have sold their to consist of the internal parts of the area let, and the other parts of interest? Can they be responsible after the sale in the building – the common parts and the exterior – will be repaired respect of pre-sale non-compliance? by the landlord, with a proportion of the cost of those repairs being recovered from the tenants through service charge. Once the landlord of a business lease has sold its interest in the property, it will cease to be liable for any obligations under the lease, 10.4 What taxes are payable on rent either by the landlord unless these have been specifically identified in the terms of the sale. or tenant of a business lease? Identifying whether there are outstanding liabilities to tenants will form a part of the due diligence of the buyer, who will generally ■ Corporation tax: A UK-resident company landlord will be seek contractual confirmations from the seller about any outstanding liable to pay corporation tax on rental profits calculated on an matters. accounts basis, but with certain modifications. Usually an outgoing tenant will cease to be liable for any obligations ■ Income tax: all other taxpayers will be liable to pay income under the lease, and the terms of the assignation to a new tenant will tax on rental profits as they arise, also on an accounts basis cover the rights and responsibilities of the outgoing and incoming but with certain modifications. tenants between themselves. In some cases the contractual ■ VAT: if a landlord has opted to tax a commercial property, arrangement between the parties may reserve liability for any it must account to the UK tax authority for VAT on any rent antecedent breach that is not known at the date of transfer, but which and other amounts due to it under a lease of the property. The subsequently comes to light. landlord will normally seek recovery of the VAT from the tenant. ■ LBTT: Leases may be subject to LBTT. The net present 10.7 Green leases seek to impose obligations on value (NPV) of the rent must be ascertained, and the tax is landlords and tenants designed to promote greater then calculated at 1% of NPVs over £150,000. LBTT may sustainable use of buildings and in the reduction of also be payable on chargeable consideration other than rent, the “environmental footprint” of a building. Please such as a premium. The standard non-residential rates and briefly describe any “green obligations” commonly found in leases stating whether these are clearly bands apply to such payments; however the nil rate band defined, enforceable legal obligations or something does not apply to lease premiums if the average annual rent not amounting to enforceable legal obligations (for exceeds £1,000. example aspirational objectives).

10.5 In what circumstances are business leases usually “Green obligations” are still not commonly encountered in business terminated (e.g. at expiry, on default, by either party leases, although provisions relating generally to energy efficiency or etc.)? Are there any special provisions allowing a sustainability are starting to appear more often. It would not be unusual tenant to extend or renew the lease or for either party to see provisions in a lease or in a licence for works that prohibit the to be compensated by the other for any reason on termination? tenant from carrying out any alterations to the premises that might have an adverse effect on the energy efficiency rating of the premises. For a lease to be terminated on the expiry date, either the tenant or the Green issues are becoming more relevant to landlords of certain landlord has to give the other a notice to quit, usually at least 40 clear larger buildings due to the introduction in September 2016 of the

240 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

Assessment of Energy Performance of Non-domestic Buildings are regulated by the provisions of the Civic Government (Scotland) (Scotland) Regulations 2016. The Regulations affect buildings Act 1982, and licensing of HMOs became mandatory in 2000 under or building units of more than 1,000 square metres, which do not the Civic Government (Scotland) Act 1982 (Licensing of Houses in meet the building standards regulations which had effect on or Multiple Occupation) Order 2000. The regulation of HMOs was after 4 March 2002. On the sale or letting of such buildings the consolidated in the Housing (Scotland) Act 2006, with amendments owner must obtain an Action Plan, containing recommendations for in the Housing (Scotland) Act 2010 and the Private Rented Housing improvement measures, which must be carried out. Alternatively, (Scotland) Act 2011. operational ratings can be measured and must be reported annually. Either alternative requires the cooperation of the tenant, and the 11.3 What would typical provisions for a lease of object of the exercise is to improve the energy efficiency of the residential premises be in your jurisdiction regarding: Scotland building and reduce CO2 emissions, based on reduction targets set (a) length of term; (b) rent increases/controls; (c) the by the Action Plan. Accordingly landlords are now more inclined tenant’s rights to remain in the premises at the end of to seek to include “green” obligations in new leases. The MCL and the term; and (d) the tenant’s contribution/obligation PSG leases contain provisions relating to sustainability issues. to the property “costs” e.g. insurance and repair?

(a) Length of term: Under the Housing (Scotland) Act 1988, 10.8 Are there any trends in your market towards more the most popular form of tenancy was the short assured flexible space for occupiers, such as shared tenancy. The tenancy is required to be for a minimum of short-term working spaces (co-working) or shared six months, and usually the tenancy agreement will provide residential spaces with greater levels of facilities/ for the tenancy to continue on a month-by-month basis until activities for residents (co-living)? If so please provide terminated by either party on giving (usually two months’) examples/details. notice. The attraction of the short assured tenancy for the landlord is that it has the right to terminate the tenancy for Providers of flexible working spaces are known to be seeking a large no reason other than that the period of the tenancy has come amount of space for development in this sector in Edinburgh. There to an end. This type of tenancy is not available under the is also a growing trend for spin-off technology teams linked to the Private Housing (Tenancies) (Scotland) Act 2016. University to occupy incubator space on a flexible basis. Lease The other form of tenancy under the 1988 Act was the assured lengths continue to shorten. tenancy. These types of tenancy tended to be for longer Residential developments with shared facilities, such as concierge periods, as landlords would use the short assured version for services, are mainly limited to the small high-end luxury market shorter term lets. at present, with nothing like the penetration of such developments There is no provision under the Private Housing (Tenancies) as are seen in London. This is, however, a growing appeal for (Scotland) Act 2016 for a lease term to be stated. In practice, managed residential facilities among high end professionals, and we landlords and tenants may negotiate a fixed term, but if the tenant refuses to leave at the end of the term the landlord will can expect to see growth in this sector. have to establish one of the statutory grounds for eviction before the tenant can be removed (see (c) below). 11 Leases of Residential Premises (b) Rent increases/controls: A landlord can intimate a rent increase to the tenant during the course of a private residential tenancy under the 2016 Act, but not more than once in a 11.1 Please briefly describe the main laws that regulate 12-month period. Notice of the increase must be served on leases of residential premises. the tenant and will apply from the date specified in the notice unless the tenant refers the matter to a rent officer, who will then determine the level of rent. There is a right of appeal Residential leases and residential landlords are highly regulated in by either the landlord or the tenant to the First Tier Tribunal Scotland. The latest legislation which introduced a new form of (Housing and Property Chamber). tenancy – the “private residential tenancy” – is the Private Housing The 2016 Act introduces the potential for rent controls by (Tenancies) (Scotland) Act 2016, and came into force on 1 December local authorities. A local authority may make an application 2017. From that date, all new private residential tenancies must to the Scottish Ministers, asking for all or any part of the conform to the requirements of the 2016 Act. areas for which the authority is responsible to be designated Most private residential leases entered into before December 2017 as a Rent Pressure Zone. If an area is so designated, then were assured tenancies or short assured tenancies under the Housing rent increases may not be applied except in accordance with (Scotland) Act 1988. a capping formula set out in the 2016 Act. Other key legislation in this area includes: (c) Tenant’s rights to remain in the premises at the end of the term: Under a private residential tenancy, the tenant can ■ Housing (Scotland) Act 2006 (tolerable standard and continue to occupy the premises, even after any contractual repairing standard for rented accommodation; tenancy expiry date. To remove a tenant who remains in the premises, deposits; licensing of HMOs). the landlord will have to establish that one of the grounds for ■ Housing (Scotland) Act 2010 (registered social landlords). repossession applies. Some of the grounds are mandatory ■ Private Rented Housing (Scotland) Act 2011 (registration of (M) – if established the First Tier Tribunal (Housing and private landlords). Property Chamber) must grant repossession. Others are discretionary (D). The grounds are: ■ Tenancy Deposit Schemes (Scotland) Regulations 2011 (regulating the treatment of deposits paid by tenants). ■ The landlord intends to sell the property (M). ■ The property has been repossessed by the landlord’s lender, who intends to sell (M). 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? ■ The landlord intends to carry out significantly disruptive refurbishment work (M). Residential tenancies for houses in multiple occupation (HMOs) ■ The landlord intends to live in the property (M).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 241 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

■ A family member of the landlord intends to live in the (b) Environmental property (D). ■ Environmental Protection Act 1990 – provides for the ■ The landlord intends to use the property for a non- identification and remediation of contaminated land. residential purpose (M). ■ Control of Asbestos Regulations 2012 – imposes a duty ■ The property is required for occupation by a person on persons responsible for maintenance of properties to working for a religious organisation (M). manage any asbestos in those properties. ■ The tenant was given the accommodation as an employee and is no longer an employee (M or D). 12.2 Can the state force land owners to sell land to ■ The tenant no longer has a need for supported it? If so please briefly describe including price/ accommodation (D). compensation mechanism. Scotland ■ The tenant is not occupying the property (M). ■ The tenant has failed to comply with a condition of the The Scottish Government and local authorities have powers tenancy agreement (D). of compulsory purchase. Generally, the Acquisition of Land ■ The tenant has been in arrears of rent for three or more (Authorisation Procedure) (Scotland) Act 1947 regulates most consecutive months (M). uses of compulsory purchase, although there are several forms of ■ The tenant has a conviction for an offence committed by compulsory purchase procedures, which may come from private using the property for an immoral or illegal purpose (a legislation or by an order under the Transport and Works (Scotland) “relevant conviction”) (M). Act 2007. The process is laid down in Scottish Planning Circular ■ The tenant has engaged in anti-social behaviour (D). 6/2011. ■ The tenant associates in the property with a person who Compensation is payable, and is based on valuation. Assessing has a relevant conviction or has engaged in anti-social compensation is governed by continually evolving legislation and behaviour (D). case law, and is a very complex area. Whether a person is entitled ■ The landlord is not registered (D). to compensation, and how much compensation they are entitled ■ The landlord’s HMO licence has been revoked (D). to, will depend on the circumstances. However, in calculating the amount of compensation, the following may be taken into account: ■ An overcrowding statutory notice has been served on the landlord (D). ■ The open market value of the interest. (d) Tenant’s contribution/obligation to the property “costs”: ■ Compensation for severance and/or injurious affection. Usually, the tenant does not have to contribute towards the ■ Compensation for disturbance and other losses not directly cost of maintenance and repair of the property or the insurance based on the value of the interest. This includes certain of the building and any landlord’s contents. The tenant will reasonable professional fees. usually have to meet the cost of utilities: gas, electricity and Planning Circular 6/2011 provides basic principles for acquiring telephone; and council tax. authorities to follow when assessing and negotiating the level of compensation due, although specialist valuers are often instructed 11.4 Would there be rights for a landlord to terminate a to progress this aspect. residential lease and what steps would be needed to achieve vacant possession if the circumstances existed for the right to be exercised? 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do buyers obtain reliable information on these matters? See question 11.3(c). Unless the tenant agrees to leave voluntarily, the landlord would have to apply to the First Tier Tribunal (Housing Overall executive control and responsibility for planning in and Property Chamber) for repossession of the property, citing one Scotland rests with the Scottish Ministers. Their role includes: of the grounds. A hearing would then be held, at which relevant introducing new planning legislation; publication of the National evidence to support the ground relied on would have to be produced. Planning Framework (NPF); producing Scottish planning polices and guidance (including the Scottish Planning Policy (SPP)); 12 Public Law Permits and Obligations Planning Advice Notes (PANs); and planning circulars. Through the Directorate for Planning and Environmental Appeals (DPEA), Scottish Ministers also determine a variety of planning appeals 12.1 What are the main laws which govern zoning/ and they may also choose to call in planning applications. Scottish permitting and related matters concerning the use, Ministers also have a role in dealing with listing buildings through development and occupation of land? Please briefly Historic Environment Scotland. describe them and include environmental laws. At a local level, implementation of Scottish planning policy is the (a) Planning and Building Control responsibility of local authorities. They deal with the development ■ Town and Country Planning (Scotland) Act 1997 – sets of local planning policies (local development plans) for their out the main framework for planning control in Scotland. area, and are responsible for determining planning applications and enforcing planning and building control. While the Scottish ■ Planning (Scotland) Act 2006 – sets out additional provisions to those contained in the 1997 Act. Ministers have the overall responsibility for planning in Scotland, the majority of the planning process will be conducted through local ■ Acquisition of Land (Authorisation Procedure) (Scotland) authorities, at least in the initial stages. The Scottish Ministers can Act 1947 applies to most of the compulsory purchase schemes. choose to oversee the development of proposed local development plans and the approval of strategic development plans. ■ Building (Scotland) Act 2003 – regulates the building standards system for construction, demolition and All current Scottish planning policies, guidance and local authority alteration works requiring a building warrant. development plans are available online through the Scottish Government website or the relevant local authority.

242 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

A buyer will obtain initial information about the planning position Certificates of lawfulness of existing (or proposed) use or for a particular property from the seller. The seller will be expected development can be applied for to establish the planning status of to provide a property enquiry certificate (PEC) as part of the due land that may be in breach of planning control (i.e. whether or not diligence package. A PEC provides details from local authority an existing or proposed use or development is considered lawful records about planning applications, whether the property is a listed for planning purposes because the enforcement period has expired). building or lies in a conservation area or is otherwise designated, for example as a Site of Special Scientific Interest, affected by a 12.6 What is the typical cost of building/use permits and tree preservation order, or an Article 4 direction restricting permitted the time involved in obtaining them? development. The PEC will also provide details of any planning enforcement notices or other orders and whether the property is If planning permission is required for a development, an application affected by any planning policies, etc. within the development plan. Scotland has to be submitted to the relevant local authority. This process A PEC should also detail any recent building control decisions on is governed by the Town and Country Planning (Development applications for the property. Management Procedure) (Scotland) Regulations 2013, which also set out the time limits for determining planning applications. The 12.4 What main permits or licences are required for time limit for determination of national or major developments is building works and/or the use of real estate? four months, with a two-month time limit for all other applications. Various types of planning application can be made: full planning Planning permission is required where there is “development”, permission; planning permission in principle; approval of matters which is defined as “the carrying out of building, engineering, specified in conditions; variation; retrospective; and planning mining or other operations in, on, over or under land, or the making permission renewal. of any material change in the use of any buildings or other land”. The fees for a planning application vary depending on the type There are limited permitted development rights for works that do of application under the Town and Country Planning (Fees for not fall within this definition, such as certain development within Applications and Deemed Applications) (Scotland) Regulations the curtilage of a dwelling house, the installation of domestic micro 2004. Building warrant fees are regulated by the Building (Fees) generation equipment, and agricultural buildings. There are a number (Scotland) Regulations 2004. of specific classes of permitted development rights detailed in the Town and Country Planning (General Permitted Development) (Scotland) 12.7 Are there any regulations on the protection of historic Order 1992. If planning permission is required for a development, an monuments in your jurisdiction? If any, when and how application has to be submitted to the relevant local authority. are they likely to affect the transfer of rights in real The majority of all construction, demolition and other works estate or development/change of use? will also require a building warrant from the Building Control Department of the relevant local authority. This may include works Historic Environment Scotland (HES) carries out statutory functions that fall within a class of permitted development. Applying for a to protect historic buildings and monuments. Under the Ancient building warrant is a separate process from applying for planning Monuments and Archaeological Areas Act 1979, HES can schedule permission. The Building (Scotland) Act 2003 and the Building sites of national importance and take them into state care. (Procedure) (Scotland) Regulations 2004 are the primary statutory In general, properties that are scheduled as historic buildings and instruments under which the building standards system operates. monuments under the 1979 Act are not the subject of transfers. HES is also authorised under the Planning (Listed Buildings and 12.5 Are building/use permits and licences commonly Conservation Areas) (Scotland) Act 1997 to list structures for their obtained in your jurisdiction? Can implied permission architectural or historic significance. The fact that a property is a listed be obtained in any way (e.g. by long use)? building does not affect the owner’s ability to transfer ownership of it. Listing does, however, affect what an owner may do with that Yes – see question 12.4 above. building and whether they are able to carry out any alterations to it. Local authorities have enforcement powers to deal with breaches of Any alterations to a listed building, including demolition or extension, planning control. However, if they fail to take enforcement action, which would affect the character of the listed building will require within specified time limits, the development becomes a lawful listed building consent from the local authority under the 1997 Act, development under the Town and Country Planning legislation which is a similar process to that of a planning application. through essentially having implied planning permission. However, these time limits for enforcement action do not apply to breaches of 12.8 How can e.g. a potential buyer obtain reliable the particular statutory controls of listed buildings, tree preservation information on contamination and pollution of real orders or advertisement control systems. estate? Is there a public register of contaminated land A four-year time limit applies in situations where there has been in your jurisdiction? a breach of planning control consisting of carrying out without planning permission building, engineering, mining or other A potential buyer can obtain information about the contamination or operations. The four years starts with the date on which the pollution of land or buildings from a variety of sources. A PEC can, operations were substantially completed. The four-year time limit although usually only to a limited extent, provide useful information is also applicable where the breach consists of a change of use of on any statutory notices served under environmental protection any building to use as a single dwelling house. legislation. This includes information on whether a particular site is registered in the relevant local authority’s contaminated land For any other breach of planning control, no enforcement action may register. Not all land that is contaminated is registered in a public be taken after the end of the period of 10 years, beginning with the register, however – such registers will only contain details of land date of the breach. This includes breaches of planning conditions that has been identified as contaminated. A PEC will, however, only and circumstances where there has been a material change of use to provide information available within public registers. a property.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 243 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

Where there is a possibility of contamination at a site, the prudent course of action is to engage a reputable environmental consultant 13 Climate Change to prepare an in-depth environmental report or a desktop survey, depending on the buyer’s needs. It is essential to be clear what level 13.1 Please briefly explain the nature and extent of any of reporting is required for each particular transaction so that a site- regulatory measures for reducing carbon dioxide specific, valuable report is provided. emissions (including any mandatory emissions trading scheme).

12.9 In what circumstances (if any) is environmental clean- The Carbon Reduction Commitment Energy Efficiency Scheme up ever mandatory? (CRC) is a mandatory scheme for the purchase of allowances that

Scotland reflect the amount of emissions that a participant estimates it will The environmental regimes relating to water, contaminated land and make from buildings owned by it. The scheme started in 2010 and waste are each governed by separate statutory regimes. All have one applies to large commercial organisations and public sector bodies. element in common, however: they all follow the “polluter pays” The initial qualification criteria – i.e. whether or not the regime principle. This principle seeks to ensure that those who pollute will applies to an organisation – is based on electricity consumption. pay the full costs of any requirement to clean-up. Those organisations that use at least 6,000 MWh (megawatt hours) Liability for contaminated land and its remediation under the of electricity from half-hourly meters (which affect commercial statutory contaminated land regime is contained in Part IIA sites with a large consumption of electricity where a meter reading of the Environmental Protection Act 1990. Under this, local is taken every half hour – allowing for accurate billing). authorities have the duty to inspect land and properties within However, the CRC has not been the success that was hoped for in their council boundaries to identify contaminated land. Following reducing emissions and changing behaviour. It is to be discontinued. such identification, the local authority will notify the Scottish After the current Phase finishes on 31 March 2019, the scheme will Environment Protection Agency (SEPA), the owner, any occupier end. and any “appropriate person”. Liability is on the basis of the “appropriate person” who “caused or knowingly permitted” the contamination. Under Part IIA, the appropriate person is held liable 13.2 Are there any national greenhouse gas emissions to carry out remediation works. If, after reasonable inquiry, that reduction targets? person cannot be found, liability then falls on the present owner or occupier. The Climate Change Act 2008 sets a UK-wide carbon emissions reduction target for at least an 80% reduction in emissions from 1990 levels by 2050. It also sets an interim target of a 26% reduction by 12.10 Please briefly outline any regulatory requirements 2020. The Climate Change (Scotland) Act 2009 sets the same 2050 for the assessment and management of the energy performance of buildings in your jurisdiction. target for Scotland, but also sets a more ambitious interim target of 42% reduction in emissions by 2020. An Energy Performance Certificate (EPC) must be obtained for a The Scottish Government introduced a Climate Change Bill in building or part of a building when it is sold or let. This applies to May 2018. It is expected to be passed into law during the 2018/19 both commercial and residential properties. parliamentary session. The Bill will increase the ambition of the 2050 EPCs were introduced by the Energy Performance of Buildings target to 90% greenhouse gas emission reduction from the baseline. (Scotland) Regulations 2008. An EPC is a document that states the The Scottish Government also proposes, in line with advice from the energy efficiency rating and environmental impact of a building by independent Committee on Climate Change, to update the interim measuring the amount of carbon dioxide estimated to be emitted target for 2020 to at least 56%, and to set new interim targets for at from the building. The energy efficiency ratings are shown on a least 66% in 2030 and at least 78% in 2040. scale of A (excellent efficiency) to G (very poor efficiency). The EPC must also indicate current carbon dioxide emissions, potential 13.3 Are there any other regulatory measures (not already emissions, the current energy consumption of the building and mentioned) which aim to improve the sustainability of suggested cost-effective improvements. both newly constructed and existing buildings? A recommendation report will also accompany an EPC. This includes a list of cost-effective measures to improve the building’s Building standards require newly constructed buildings to meet energy efficiency. It is not mandatory to implement these measures. certain energy efficiency standards. The situation has changed for certain non-domestic buildings, due Scottish Ministers announced in June 2015 that they would take to the introduction in September 2016 of the Assessment of Energy long-term action to reduce the energy demand of, and decarbonise Performance of Non-domestic Buildings (Scotland) Regulations the heat supply to, Scotland’s residential, services and industrial 2016. The Regulations affect buildings or building units of more sectors, and designated energy efficiency as a national infrastructure than 1,000 square metres, which do not meet the building standards priority. The strategy for this is enshrined in Scotland’s Energy regulations which had effect on or after 4 March 2002. On the Efficiency Programme (SEEP). SEEP will be a coordinated sale or letting of such buildings, the owner must obtain an Action programme to improve the energy efficiency of homes and buildings Plan, containing recommendations for improvement measures, in the commercial, public and industrial sectors and to decarbonise which must be carried out. Alternatively operational ratings can their heat supply, with an initial estimated overall investment in be measured and must be reported annually. The Action Plan also excess of £10 billion. sets energy efficiency and emissions reduction targets, and the recommended improvement measures must be designed to have the effect over time of meeting those targets.

244 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Shepherd and Wedderburn LLP Scotland

Acknowledgment The authors would like to thank Ann Stewart, a Property and Professional Development Adviser and senior professional support lawyer at Shepherd and Wedderburn LLP, for her invaluable assistance in the preparation of this chapter.

David Mitchell Scott Ritchie

Shepherd and Wedderburn LLP Shepherd and Wedderburn LLP Scotland 1 Exchange Crescent 1 Exchange Crescent Conference Square Conference Square Edinburgh EH3 8UL Edinburgh EH3 8UL Scotland Scotland

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

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

Shepherd and Wedderburn is a Scottish-headquartered UK law firm. From offices in Edinburgh, Glasgow, Aberdeen and the City of London, the firm delivers comprehensive multi-jurisdictional legal advice across every business sector as well as offering the full range of private client and wealth management services. Regarded by many as the go-to firm for specialist advice in: real estate; energy and natural resources; and the financial and banking sectors, Shepherd and Wedderburn also has an impressive track record in advising clients from across other industries and sectors. FTSE and AIM companies, large SMEs, and public service organisations are counted among its clients. With 81 partners and more than 400 staff, Shepherd and Wedderburn has the expertise, experience and depth of resource to deliver what our clients need. As a founding member of the World Services Group, Shepherd and Wedderburn is able to respond to clients’ needs swiftly and effectively anywhere in the world. Currently the firm serves clients in 92 jurisdictions.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 245 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 25

Slovenia Damijan Brulc

Brulc, Gaberščik and partners, Law Firm, Ltd. Marjetka Kenda

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

Real estate is mainly governed by the Law of Property Code (Stvarnopravni zakonik), the Land Register Act (Zakon o zemljiški 3.1 What are the types of rights over land recognised in knjigi), the Real Estate Recording Act (Zakon o evidentiranju your jurisdiction? Are any of them purely contractual nepremičnin), the Agricultural Land Act (Zakon o kmetijskih between the parties? zemljiščih), the Housing Act (Stanovanjski zakon), the Protection of Buyers of Apartments and Single Occupancy Buildings Act (Zakon The rights over land are exhaustively listed in the Law of Property o varstvu kupcev stanovanj in enostanovanjskih stavb) and the Real Code and are the following: ownership (lastninska pravica); Estate Agencies Act (Zakon o nepremičninskem posredovanju). mortgage (hipoteka); servitudes (služnosti); encumbrance (pravica stvarnega bremena); and building rights (stavbna pravica).

1.2 What is the impact (if any) on real estate of local These rights exist only if they are registered in the land registry and common law in your jurisdiction? therefore have erga omnes effect. Apart from the above, parties can freely agree upon contractual rights Slovenia is a civil law country and the impact of local common law over land. Some of those can be registered (e.g. lease, option rights) is therefore relevant only for the interpretation of statutory law. and in this way become effective with regard to third parties as well. Certain facts related to real estate can be annotated in the land 1.3 Are international laws relevant to real estate in your registry (e.g. annotation of a dispute over real estate, annotation of jurisdiction? Please ignore EU legislation enacted priority); the purpose of annotations is to protect the rank of a right locally in EU countries. that might later be entered into the registry.

The Constitution of the Republic of Slovenia (Ustava Republike 3.2 Are there any scenarios where the right to land diverges Slovenije) provides that foreign nationals may acquire ownership from the right to a building constructed thereon? rights to real estate only under conditions provided by law or a treaty ratified by the National Assembly. International agreements that There are two such options: the building right (stavbna pravica) – enable foreign nationals (apart from nationals of EU members) to the right to own a building above or under somebody else’s land acquire real estate in Slovenia are therefore relevant in this aspect. (can be established for 99 years maximum); and condominium (etažna lastnina) – the combination of sole ownership of one part 2 Ownership of the building (apartment) and co-ownership of shared parts of the building (including the land below it).

2.1 Are there legal restrictions on ownership of real estate 3.3 Is there a split between legal title and beneficial title by particular classes of persons (e.g. non-resident in your jurisdiction and what are the registration persons)? consequences of any split? Are there any proposals to change this? Foreign nationals may acquire ownership rights to real estate only under conditions provided by law or a treaty ratified by the National The legal title or legal ownership is separate from the beneficial title Assembly. In general, there are three different categories of foreign or beneficial ownership, and the legal owner will not necessarily

246 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

be the same as the beneficial owner. A person who has a beneficial is registered as the owner in the Land Registry. The title is obtained title enjoys the benefits of ownership, even though legal title is in from the date of submission of the proposal to transfer the ownership. another name.

The legal title belongs to the person, who is registered in the 4.7 Please briefly describe how some rights obtain Land Registry. It provides the right to possess, use and control priority over other rights. Do earlier rights defeat later the property. Owners with legal title can take legal action against rights? parties who breach their ownership rights. Non-registered rights cannot be exercised or enforced against third The prior tempore, potior iure rule applies for rights of the same persons who obtained their right relying on information in the Land kind. This is especially relevant for mortgages – in the case of Registry. execution, the debts secured by mortgages will be repaid in the Slovenia same order the liens were registered in the Land Registry. Once We are not aware of any proposals to change this. a procedure of registration in the land registry is initiated, it is published in the land registry with a special entry. 4 System of Registration 5 The Registry / Registries 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules All land in our jurisdiction is required to be registered. and requirements.

4.2 Is there a state guarantee of title? What does it Only one Land Registry, as a register of rights, exists in Slovenia. guarantee? The factual features of the land (location, dimensions, value, etc.) are registered in the cadaster. The Land Register Act stipulates that a person that acts in good faith and relies on information from the land registry shall not suffer any 5.2 How do the owners of registered real estate prove adverse consequences because of this. The said rule ensures that the their title? transfer of the registered title is efficient. The owners of registered real estate prove their title with an extract of 4.3 What rights in land are compulsory registrable? What the current state or with an historical extract from the Land Register. (if any) is the consequence of non-registration?

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

All land in Slovenia should be registered in the Land Registry. The documents that need to be provided to the Land Registry are: Cases of unregistered land are uncommon and can arise only as a the contract, including the obligation of the seller to transfer their consequence of administrative mistakes. ownership right to the buyer; the grant deed to transfer the title over the land to the buyer with a notarised signature (the deed is usually already part of the contract); a certificate of intended use of the land 4.6 On a land sale, when is title (or ownership) transferred (issued by the municipality); and a tax payment confirmation. to the buyer? Information of ownership of real estate, as well as of all other rights over land, can be accessed at: https://evlozisce.sodisce.si/esodstvo/ The ownership of real estate can only be transferred by registration index.html without charge; registration of an email address is required. in the Land Registry. The buyer therefore obtains the title when he

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 247 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

Tariff (Odvetniška tarifa). By both tariffs, the price of the service is 5.4 Can compensation be claimed from the registry/ determined by the value of the transaction. registries if it/they make a mistake? The remuneration of real estate agencies is limited by the Real Estate Agencies Act (Zakon o nepremičninskem posredovanju) to The Land Registry is administrated by the courts. As the employer 4% (+ VAT) of the purchase price. of court personnel, the state is liable for damages that occur as a consequence of their wrongful actions. There have already been cases in which compensation was awarded to plaintiffs that relied 6.3 Is there any change in the sources or the availability on erroneous information in the Land Registry and suffered adverse of capital to finance real estate transactions in consequences because of it. your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your Slovenia market? 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he There are no changes in the sources or the availability of capital to might reasonably need regarding encumbrances and finance real estate transaction in our jurisdiction. The main sources other rights affecting real estate and is this achieved of capitals for purchasing real estate in the primary real estate by a search of the register? If not, what additional information/process is required? market are still housing loans and savings. The secondary market (used real estate property) in Slovenia is The Land Registry can be accessed without restriction, as explained heavily driven by foreclosures and bankruptcy proceedings. Many in question 5.3. On the electronic portal of the court, it is possible properties are put on the market at auction, as the Bank Assets to get all the essential information about real estate – ownership, Management Company (Družba za upravljanje terjatev bank), encumbrances, other rights in rem, as well as historical data about a government-owned “Bad Bank”, and privately held banks are real estate (previous owners, previously existing encumbrances, actively managing the liquidation of their real estate portfolios. etc.). This is achieved by a search of the register. Other information as documents relating to entries (contracts, 6.4 What is the appetite for investors and/or developers court decisions, etc.) is not publicly available. The court can grant to invest in your region compared to last year and access to those documents to persons with a legitimate interest upon what are the sectors/areas of most interest? Please written request. Intent to buy real estate is considered a legitimate give examples. interest in this regard. There are no significant changes compared to the previous year. Several purchases of non-performing bank loans (NPLs) have been 6 Real Estate Market made by foreign funds, which came with a sizeable portfolio of real estate collateral or real estate property. Active management of those portfolios brought a systematic institutional approach to secondary 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally market transactions. Most of the secondary market is therefore be involved in a real estate transaction in your driven by asset liquidation policies. A notable exception to this jurisdiction? Please briefly describe their roles and/or rule is the hotel industry real estate market, where due to industry duties. standards in acquisitions, asset deals are prevalent.

The only party that is indispensable for a real estate transaction is a 6.5 Have you observed any trends in particular market notary public, since the seller’s signature on the grant deed must be sub sectors slowing down in your jurisdiction in notarised. As explained in question 5.3, the notary public is usually terms of their attractiveness to investors/developers? also authorised to file the request to transfer the ownership to the Please give examples. Land Registry. It might also draft the entire sales contract or give an already drafted contract the form of a notary deed. In these two At the moment, there is no slowdown in any particular sector. cases, the notary public also examines the validity of the contract in relation to mandatory statutory requirements. Real estate agencies are involved in less than half of real estate 7 Liabilities of Buyers and Sellers in Real transactions. Their role is determined in the agency contract and Estate Transactions is typically limited to finding buyers for certain real estate or vice versa, and advising their clients about the terms of transaction, and 7.1 What (if any) are the minimum formalities for the sale the legal and factual state of the real estate. and purchase of real estate? Contracts for real estate transactions are typically drafted by attorneys, especially for institutional and corporate buyers. Their See the answer to question 5.3. mandate often also includes an examination of the legal and administrative status of real estate. 7.2 Is the seller under a duty of disclosure? What matters The role of an escrow agent is usually taken by a notary public, or must be disclosed? less commonly, by attorneys or real estate agents. The seller is obligated to transfer to the buyer the object of the sales 6.2 How and on what basis are these persons contract in the agreed upon state. This indirectly creates a duty remunerated? of disclosure, since it gives the buyer the right to remedies for a breach of contract in case any defects of the sold real estate were not The remuneration of notaries is regulated by the Notary Tariff disclosed to the buyer at the time of the conclusion of the contract. (Notarska tarifa), and the remuneration of attorneys by the Attorney

248 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

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

8.1 Please briefly describe any regulations concerning The Code of Obligations (Obligacijski zakonik) provides that in the lending of money to finance real estate. Are the the case of misrepresentation, the aggrieved party can demand the rules different as between resident and non-resident termination of the contract and claim compensation for damages persons and/or between individual persons and arising out of misrepresentation. corporate entities?

Financing of real estate is not specifically regulated; general 7.4 Do sellers usually give any form of title “guarantee” or contractual warranties to the buyer? What would regulations for lending of money apply. There are no relevant Slovenia be the scope of these? What is the function of any differences between residents and non-residents. such guarantee or warranties (e.g. to apportion risk, Individual persons, however, enjoy a higher level of protection by the to give information)? Would any such guarantee or law in comparison to corporate entities. Loans given to individual warranties act as a substitute for the buyer carrying persons are subject to mandatory provisions of the Consumer Credit out his own diligence? Act (Zakon o potrošniških kreditih). Additional contractual warranties are common only in complex Securitisation with mortgage bonds is only possible for public transactions. In such cases, the buyer can efficiently rely upon the entities. contractual warranties. Any loan-giving may be considered a business model that requires a There is no such guarantee or warranties which act as a substitute for banking or a savings bank licence. the buyer carrying out his own diligence. 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the 7.5 Does the seller retain any liabilities in respect of the borrower? property post sale? Please give details.

The most commonly used collateral is mortgage, as well as, to a The Protection of Buyers of Apartments and Single Occupancy lesser extent, sureties and bank guarantees. Buildings Act contains rules on the sale of dwelling and one- dwelling buildings in order to protect the final customers from the risk of default of the investor or intermediate buyer as a seller 8.3 What are the common proceedings for realisation of according to the sales contract. The act stipulates that the seller mortgaged properties? Are there any options for a shall be liable for property defects which could not be determined mortgagee to realise a mortgaged property without at the time of the acquisition of property (hidden mistakes) if involving court proceedings or the contribution of the mortgagor? hidden mistakes appear within two years of the acquisition of the property. The seller is also liable for hidden mistakes, which have the characteristic of errors in the solidity of building, if they appear The mortgage can be established in an ordinary contract (which has within 10 years of the acquisition of the property. to contain a notarised grant deed allowing the registration of the mortgage in the land registry) or in the form of a directly enforceable For other sorts of buildings, The Code of Obligations is used. The notary deed. seller is liable for material defects that the property had when the risk was transferred to the buyer, irrespective of whether the seller To avoid the litigation phase, the mortgage is usually established knew of them. The seller shall also be liable for those material in an agreement in the form of a directly enforceable notary deed. defects that show themselves after the risk was transferred to the In this case, the mortgagor expressly agrees that after the default buyer if they are the result of a cause that existed prior to this. of the claim, the real estate will be sold, and handed over empty of persons and things within one month from the sale and the date The seller is also liable for legal defects. For example, the seller the mortgagee’s claim is repaid. With this type of mortgage, the shall be liable if any right is held on the sold property by a third mortgagee can initiate the execution procedure directly which person that excludes, reduces or restricts the rights of the buyer, and significantly shortens the duration of the process. the buyer was not informed of such and did not consent to taking the thing encumbered with the right. The seller of any other right Otherwise, the mortgagee has to file a lawsuit demanding that the shall be liable for the existence thereof and for there being no legal real estate is sold and the claim that is collateralised with a mortgage obstacle to the exercise thereof. on that real estate is repaid. Standard litigation procedure needs to be carried out. After the decision of the court is final and binding, the mortgagee has to initiate a procedure in which the real estate is 7.6 What (if any) are the liabilities of the buyer (in addition first evaluated and then sold, usually in a public auction. to paying the sale price)? For the moment, there are no options that would enable the mortgagee to avoid court involvement in the procedure of realisation The buyer may be liable for damages and is usually liable for costs of the mortgaged property. and taxes connected to the property if he does not take possession.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 249 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

8.4 What minimum formalities are required for real estate 8.9 What is the process for enforcing security over lending? shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, The Code of Obligations (Obligacijski zakonik) does not require can shares be appropriated when a borrower is in administration or has entered another insolvency or any formality for credit agreements. Contracts of suretyship and reorganisation procedure? the establishment of mortgages are required to be in written form (in which case the signature of the mortgagor must also be notarised). There are two main enforcement options – private sale and court If there is real estate lending as an ongoing business activity, a proceedings. In the case of private sale, the shares may be sold banking or loan-house licence is required. either by way of public auction or private sale at the best prices Slovenia In practice, corporate lenders always conclude loan agreements in reasonably obtained. writing, usually even in the form of a directly enforceable notary In case of court proceedings, there are two options – if a holder has a deed. directly enforceable notarial deed or not. If the holder has a directly In the case that the loan is given to an individual person, the enforceable notarial deed, they may apply to the court for an order mandatory provisions of the Consumer Credit Act (Zakon o that the share be sold by way of public auction. If a holder does not potrošniških kreditih) apply. The credit agreement must be have such deed, it must first obtain a judgment against the security concluded in writing and must contain numerous clauses and data, provider followed by applying to the court for an order of sale. listed in the said act. If the loan is secured with a mortgage, the A lender does not have a right to appropriate shares in a borrower agreement must have the form of a notary deed. given as collateral. The Law of Property Code stipulates that contractual provisions stipulating that the ownership of pledged 8.5 How is a real estate lender protected from claims property transfers to the lienor if his claim is not paid at maturity against the borrower or the real estate asset by other and on the sale of the pledged property at a predetermined price are creditors? null and void, unless otherwise provided by this Act.

That depends entirely upon the collateral given for the loan. In the case of a mortgage, the prior tempore, potior iure rule applies – 9 Tax the loan, secured with a mortgage that has a priority order, will be repaid from the sale proceeds first. If no collateral is given and 9.1 Are transfers of real estate subject to a transfer tax? an insolvency procedure takes place, the real estate lender has no How much? Who is liable? priority over other creditors. Transfers of ownership of real estate or building rights (for 8.6 Under what circumstances can security taken by a definitions, see the answer to question 3.2) are subject to taxation, lender be avoided or rendered unenforceable? governed by the Real Property Transaction Tax Act (Zakon o davku na promet nepremičnin). The tax rate is 2% of the purchase price of If the loan agreement has all the necessary components and is real estate. The tax must be paid by the seller if the sales contract composed in the form of a notarial record, the borrowers can delay does not provide otherwise. Newly-built objects and uninhabited the payment but ultimately cannot avoid the final payment. building lands are usually subject to VAT, and not to real property transaction tax. 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 9.2 When is the transfer tax paid?

Borrowers may only file an objection against the enforcement order, The seller (or, if so agreed, the buyer) must report the intended but its objections are very limited. The borrowers can only claim transfer of real estate to the tax office within 15 days of the to have repaid the loan in cash or in some other way (e.g. netting). conclusion of the contract and provide the obligation to transfer the ownership or establish or transfer the building right. The tax 8.8 What is the impact of an insolvency process or a must be paid within 30 days after the tax assessment is served to the corporate rehabilitation process on the position of a seller (or, if so agreed, the buyer). In addition, the Land Register real estate lender? Act stipulates that the confirmation of payment of real property transaction tax must be attached to the request for registration of the The impact of an insolvency process or a corporate rehabilitation transfer in the Land Registry. process on the position of a real estate lender depends entirely upon the collateral given for a loan. 9.3 Are transfers of real estate by individuals subject to In case of mortgage, a real estate lender has the right to a separate income tax? settlement in an insolvency process. A right to a separate settlement shall be the right of a creditor to be paid his claims from certain Under the Personal Income Tax Act (Zakon o dohodnini), the assets of the insolvent debtor before the claims of other creditors income of tax residents from the transfer of real estate is considered of such debtor are paid from such assets. In this case, a real estate as capital gain if it was held as a private asset for less than 20 years. lender has a lot of repayment options. The tax base is calculated as the difference between the value of If no such collateral is given and an insolvency procedure takes real estate in the moment of disposal and its value at the moment place, the real estate lender has no priority over other creditors, of acquisition. which means there is a lot of posibilities that the real estate lender will not be repaid.

250 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

The tax rate depends upon the years of ownership of real estate on Business Buildings and Business Premises (Zakon o poslovnih before disposal. If the real estate is disposed of in the first five years stavbah in poslovnih prostorih). The Code of Obligations applies of ownership, the tax rate is 25%; after five years it drops to 15%; subsidiarily for the issues that are not governed by the said Act. after 10 years to 10%; and after 15 years to 5%.

10.2 What types of business lease exist? 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? The Act on Business Buildings and Business Premises does not provide for more types of lease. Apart from standard lease contracts, Transfers of real estate are subject to VAT if the real estate is a new financial leasing contracts that provide a transfer of ownership with building (i.e. the transfer is made before the building is first used or

the payment of the last annuity are in use, although this is declining. Slovenia within the first two years of its use), or land suited for construction without any facilities. 10.3 What are the typical provisions for leases of business The tax rate depends upon the use of the building: premises in your jurisdiction regarding: (a) length of ■ for the sale of residential buildings measuring up to 120m² term; (b) rent increases; (c) tenant’s right to sell or (apartments) or 250m² (houses), the tax rate is 9.5%; and sub-lease; (d) insurance; (e) (i) change of control of ■ for other buildings and land suited for construction, the tax the tenant; and (ii) transfer of lease as a result of a rate is 22%. corporate restructuring (e.g. merger); and (f) repairs? The seller is liable for the payment of VAT. Typical provisions are the following: (a) for length of term: usually definite (2–10 years); 9.5 What other tax or taxes (if any) are payable by the (b) rent increases: if rent increases are provided for in the seller on the disposal of a property? contract, they usually follow the consumer price index, defined by the Statistical Office of the Republic of Slovenia; In 2012, the Fiscal Balance Act (Zakon o uravnoteženju javnih (c) the tenant’s right to sell or sub-lease: the tenant cannot financ) introduced a new tax on profits arising from sales of transfer the lease contract without the landlord’s consent; real estate that was not suited for construction at the time of its sub-lease is only possible if it is expressly allowed for in the acquisition and obtained that purpose before its disposal. contract, which is not common; The tax base is the difference between the value of the land at its (d) insurance: the costs of insurances are subject to negotiation; disposal (diminished for the costs of disposal) and the value of the (e) (i) change of control of the tenant: typically not dealt with in land at its acquisition (increased for the costs of acquisition). the lease contract; The tax rate depends upon the time that has passed between the date (ii) transfer of lease as a result of a corporate restructuring: that the purpose of the land was changed and the date of transfer. It typically not dealt with in the lease contract; and is currently: (f) repairs: there are no provisions that could be characterised ■ 25% if that time period was shorter than one year; as typical in this aspect; the default provision of the law is ■ 15% if that time period was longer than one but shorter than that the owner of the building or premises bears the costs of three years; and investment-type repairs. The tenant usually bears the costs of standard maintenance (cleaning, paint jobs). ■ 5% if that time period was longer than three but shorter than 10 years. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? There are no taxes on rent payable by the tenant of a business lease. Taxation of the transfer of business shares or stock is entirely The income of individual persons who are leasing their real estate independent from the real estate owned by the respective company. are subject to income tax, at a rate of 25%. It is common practice in B2B real estate deals to use special purpose The income of business entities from rent is generally not subject to vehicles, namely holding companies, for larger transactions. VAT, yet this is often agreed upon by the parties of the lease contract, since such agreement enables the landlord to deduct input tax. Such 9.7 Are there any tax issues that a buyer of real estate agreement is allowed under the condition that the tenant uses the leased should always take into consideration/conduct due premises for business activity that is subject to VAT and that the tenant diligence on? has the right to deduct input VAT. The tax rate in this case is 22%.

In transactions with VAT, there is always an open question of how 10.5 In what circumstances are business leases usually to calculate VAT considering the potential further transaction. In terminated (e.g. at expiry, on default, by either party transactions with real estate transfer tax, there are usually no special etc.)? Are there any special provisions allowing a open questions that a buyer of real estate should take into consideration. tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination? 10 Leases of Business Premises If a business lease is concluded for an indefinite term, it can be terminated by either party with a termination period set out in the 10.1 Please briefly describe the main laws that regulate leases of business premises. lease contract that cannot be shorter than one year. If a lease is concluded for a definite term, it expires with the lapse of time. The main law regulating the lease of business premises is the Act However, if the tenant keeps using the premises after the expiry, the

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 251 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

landlord must file a demand for the emptying of the premises to the court within one month. If the landlord fails to do so, the duration 11.3 What would typical provisions for a lease of of the contract is by law converted to an indefinite term. Apart from residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the this, the tenant cannot extend or renew the lease unilaterally. tenant’s rights to remain in the premises at the end of Apart from the possibility of termination of the contract concluded the term; and (d) the tenant’s contribution/obligation for an indefinite term, the lease contract can only be terminated on to the property “costs” e.g. insurance and repair? the grounds that are listed in the Act on Business Buildings and Business Premises. Typical provisions are the following: A lawful termination of the contract itself is not a basis for claims for (a) for length of term: there are no provisions that could be compensation from either party. The liability for damages arising characterised as typical; Slovenia out of breach of contract is governed by the general provisions of (b) rent increases: if rent increases are provided for in the the Code of Obligations. contract, they usually follow the consumer price index, defined by the Statistical Office of the Republic of Slovenia; (c) tenant’s right to remain in the premises at the end of the term: 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective the tenant cannot remain in the premises at the end of the obligations under the lease once they have sold their term without the landlord’s consent; If the tenant keeps using interest? Can they be responsible after the sale in the premises after the expiry, the landlord must file a demand respect of pre-sale non-compliance? for the emptying of the premises. If the landlord fails to do so, the duration of the contract is by law converted to an The sale of the object of a lease contract is subject to provisions indefinite term. Apart from this, the tenant cannot extend or renew the lease unilaterally; of the Code of Obligations. If the tenant has already started using the premises when they are sold, the new owner steps into the legal (d) insurance and repair: the costs of insurances are subject to position of the previous owner and is bound by the lease contract. negotiation; and The previous owner remains liable for obligations of the new owner (e) repairs: there are no provisions that could be characterised (that arose before the transfer) as a guarantee. as typical in this aspect; the default provision of the law is that the owner of the residential premise bears the costs of investment-type repairs. The tenant usually bears the costs 10.7 Green leases seek to impose obligations on of standard maintenance (cleaning, paint jobs). landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 11.4 Would there be rights for a landlord to terminate a briefly describe any “green obligations” commonly residential lease and what steps would be needed found in leases stating whether these are clearly to achieve vacant possession if the circumstances defined, enforceable legal obligations or something existed for the right to be exercised? not amounting to enforceable legal obligations (for example aspirational objectives). If a residential lease is concluded for an indefinite term, it can be terminated by a landlord with a termination period that cannot be Environmental issues are not yet a common element of lease shorter that 90 days. The lease contract can only be terminated for contracts. the guilty grounds that are listed in the Housing Act. Any other reasons must be listed in the lease contract or alternatively, the 10.8 Are there any trends in your market towards more landlord must provide another suitable residential premise. flexible space for occupiers, such as shared short-term working spaces (co-working) or shared To achieve vacant possession, the landlord must file a demand for residential spaces with greater levels of facilities/ the emptying of the premises to the court. activities for residents (co-living)? If so please provide examples/details. 12 Public Law Permits and Obligations We are not aware of any such trends in our markets.

12.1 What are the main laws which govern zoning/ 11 Leases of Residential Premises permitting and related matters concerning the use, development and occupation of land? Please briefly describe them and include environmental laws. 11.1 Please briefly describe the main laws that regulate leases of residential premises. The use and occupation of land is mainly governed by the Spatial Management Act (Zakon o urejanju prostora), Spatial Planning Act The main law regulating the lease of residential premises is the (Zakon o prostorskem načrtovanju), the Construction Act (Zakon o Housing Act (Stanovanjski zakon). The Code of Obligations and the graditvi objektov), the Environment Protection Act (Zakon o varstvu Law of Property Code (Stvarnopravni zakonik) apply subsidiarily narave), the Nature Conservation Act (Zakon o ohranjanju narave) for the issues that are not governed by the said Act. and the Waters Act (Zakon o vodah).

11.2 Do the laws differ if the premises are intended for 12.2 Can the state force land owners to sell land to multiple different residential occupiers? it? If so please briefly describe including price/ compensation mechanism. The laws do not differ if the premises are intended for multiple different residential occupiers. The Housing Act regulates all types The right of the state to compulsory purchase is set out in the of residential buildings. Constitution and is only permissible for the public good; an

252 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

appropriate compensation (monetary or in the form of equivalent land) must be given, which is subject to expert evaluation 12.8 How can e.g. a potential buyer obtain reliable (standardised real estate evaluation methods are applied). information on contamination and pollution of real estate? Is there a public register of contaminated land Compulsory purchase is governed in detail by the Spatial in your jurisdiction? Management Act.

No public register of polluted land exists in Slovenia, nor does any 12.3 Which bodies control land/building use and/or other centralised collection of data relating to pollution. Reports occupation and environmental regulation? How do on pollution of land (especially agricultural) are often issued buyers obtain reliable information on these matters? by municipalities. Monitoring of pollution of land and water is

also regularly done by the Agency of Republic of Slovenia for Slovenia The main bodies of control over those issues are the Construction, Environment, which can represent a source of information on the Surveying and Housing Inspectorate and the Inspectorate for environmental situation of a certain area. Agriculture and the Environment, both under the responsibility of the Ministry of the Environment and Spatial Planning. 12.9 In what circumstances (if any) is environmental clean- Architectural bureaus usually offer specialised reports of spatial up ever mandatory? planning limitations; information can also be obtained from the local authorities, i.e. municipalities and state administrative units. Environmental clean-up can be mandatory in a variety of different circumstances, ranging from agricultural protection, to public health 12.4 What main permits or licences are required for and safety, to protection of drinking water, etc. building works and/or the use of real estate? 12.10 Please briefly outline any regulatory requirements Before the beginning of building works, a building permit must for the assessment and management of the energy be obtained (simple buildings are exempt). After the conclusion performance of buildings in your jurisdiction. of the building works, their compliance with the building permit is confirmed in an operating permit. In 2014, the Energy Act (Energetski zakon) introduced so-called Under specific circumstances (buildings with greater environmental energy certificates. An energy certificate must be obtained ifa impact), an environmental permit must be obtained as well. building is sold or leased. It contains information on the energy performance of the building and recommendations for improvement. Apart from that, the Construction Act and Energy Act contain certain 12.5 Are building/use permits and licences commonly mandatory standards for the energy performance of newly built as obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? well as existing buildings.

A building permit and operating permit must always be obtained; 13 Climate Change the law does not provide for any possibility of an implied permit.

13.1 Please briefly explain the nature and extent of any 12.6 What is the typical cost of building/use permits and regulatory measures for reducing carbon dioxide the time involved in obtaining them? emissions (including any mandatory emissions trading scheme). The administrative fee for the building permit and operating permit is relatively low (maximum EUR 272, depending upon the In 2014, the government of the Republic of Slovenia adopted an value of the project), especially in comparison with the municipal operative programme for the reduction of emissions of greenhouse contribution that can amount to several thousand euros and has to be gases by 2020. The aim of the programme is to ensure that the paid before the building permit can be obtained. emissions of greenhouse gases will not increase by more than 4% in The time necessary to obtain the building permit depends on whether comparison to the emissions in 2005 and shall not exceed 12.117 kt any permits or consents are required for it to be issued. Usually the CO2 ekv³. The programme is focused on the sectors that represent permit should be issued within one or two months (depending on the main sources of pollution outside the European Union Emission certain factual features of the building); however, this is rarely the Trading Scheme. case in practice. 13.2 Are there any national greenhouse gas emissions 12.7 Are there any regulations on the protection of historic reduction targets? monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real See the answer to question 13.1. estate or development/change of use?

13.3 Are there any other regulatory measures (not already Historic monuments are subject to a special regime of protection mentioned) which aim to improve the sustainability of under the Cultural Heritage Protection Act (Zakon o varstvu both newly constructed and existing buildings? kulturne dediščine). Real estate that is classified as a cultural monument or as land in the effective area of the monument is One important incentive on the field of sustainability of buildings is subject to a pre-emptive right of the state or municipality. In the the Eco Fund, a Slovenian Environmental Public Fund that provides case that archaeological remains are found on real estate, the owner subsidies and other financial aids for investments in sustainable must allow archaeological excavations to take place. development such as passive buildings, wastewater treatment plants and heating with renewable energy sources.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 253 © Published and reproduced with kind permission by Global Legal Group Ltd, London Brulc, Gaberščik and partners, Law Firm, Ltd. Slovenia

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

Tel: +386 59 119 900 Tel: +386 59 119 900 Email: [email protected] Email: [email protected] URL: www.bgp.si URL: www.bgp.si Slovenia Damijan Brulc completed his studies at the Faculty of Law in Ljubljana Marjetka Kenda graduated from the Faculty of Law in Ljubljana in in 2004 with honours and founded his own law firm four years later, 2016. In May 2017, she joined Brulc, Gaberščik & Partners, Law Firm which later in 2010 expanded to today’s Brulc, Gaberščik & Partners, as a junior associate, focusing mainly on real estate, corporate law Law Firm. His initial focus was civil, corporate and labour law. The and labour law. core of his practice today lies in real estate, corporate law and overall legal support for business and finance. Real estate is also the centre of his academic engagements – in 2016 he obtained a doctorate degree at the European Faculty of Law in the field of real estate law.

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

254 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 26

South Africa

Norton Rose Fulbright South Africa Inc. Pieter Niehaus

enshrined in terms of the Constitution but in 2018, Parliament has 1 Real Estate Law been tasked to investigate whether section 25 needs to be amended so as to permit land expropriation without compensation. The 1.1 Please briefly describe the main laws that govern parliamentary process following extensive public hearings and real estate in your jurisdiction. Laws relating to submissions will only be finalised late in 2018 / early 2019 and in leases of business premises should be listed in addition thereto, it is expected that the new Expropriation Bill is response to question 10.1. Those relating to zoning also expected to be released for public comment as soon as part of and environmental should be listed in response to a parallel process initiated by Government to fast track land reform question 12.1. Those relating to tax should be listed in is complete. response to questions in Section 9.

The right to property is enshrined under section 25 of the 1.3 Are international laws relevant to real estate in your Constitution of the Republic of South Africa, 1996. The registration jurisdiction? Please ignore EU legislation enacted of rights to and over immovable property is regulated by the Deeds locally in EU countries. Registries Act, 1937 which sets out the registration requirements and processes necessary for the transfer of ownership or creation of As land and the process of acquiring land involves an attorney’s trust real rights in respect of land, including the process whereby security account, it has been noted that certain criminals use the acquisition is registered in favour of creditors. All regions’ and cities’ planning of land as a means to engage in money laundering activities. legislation (called provincial ordinances/laws and bylaws) are now Accordingly the US and UK legislation (i.e. FCPA and Bribery subject to framework legislation that was enacted in terms of the Act) are enforced in terms of the Financial Intelligence Centre Act Spatial Planning Land Use Management Act, 2013 (SPLUMA). (FICA) in South Africa so as to prevent same. Furthermore, FATCA There are many other statutes regulating real estate law but the (US-based tax legislation) and CRS (Common Reporting Standards) aforementioned are the main pieces of legislation to consider. also impact South African property law and especially the finances related thereto.

1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? 2 Ownership

Since 1994, the ownership of land in South Africa has been the 2.1 Are there legal restrictions on ownership of real estate subject of a number of legal and administrative changes. Most by particular classes of persons (e.g. non-resident notably, in 2014 government promulgated the restitution of Land persons)? Rights Amendment Act, which reopened the time period within which to submit land claims until 30 June 2019, as part of the At present, there are no restrictions on foreign ownership or occupation redress following the dispossession of rights, and or land, pursuant but, as stated above, there is currently a Constitutional review process to racially discriminatory legislation in effect since 1913. However, underway which may result in recommendations as to how tenure may in 2016 the Amendment Act was found to be unconstitutional on be enjoyed by foreigners and whether different ownership structures technical grounds and new legislation is still is envisaged to ensure (e.g. leasehold as an alternative to freehold) should be introduced. As new land claims after the initial cut-off date of 31 December 1998 part of the same discussion, government also proposed introducing can be lodged. This process impacts mostly rural and agricultural maximum land areas that can be owned by one individual or entity, land, but land claims have in some instances also affected urban but no draft bills have been tabled for comment. areas, but the Act is clear how an existing owner may deal with land that is subject to a claim. Under the land claims process, successful There are formal requirements for a foreign company to register claimants can either be compensated for the land, or rights in under the Companies Act, 2008 if it wishes to acquire immovable land, that were dispossessed, alternatively the land can be restored property in South Africa. Ownership of shares by a foreign person in ownership, noting that the majority of claimants preferred in a local entity that owns real property is also permitted, subject to compensation instead of restitution of land. In both instances certain tax implications relating to withholding tax, capital gains tax though, it is important to note that the current owner’s rights are and exchange control.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 255 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

have to engage the lessee/servitude holder to seek its permission. In 3 Real Estate Rights another scenario, the owner sells the property, it may do so without the lessee’s/servitude holder’s permission, but the successor in title to 3.1 What are the types of rights over land recognised in the land will still be bound to the terms of the lease or servitude and your jurisdiction? Are any of them purely contractual thereby the right afforded to the lessee or servitude holder. between the parties? There are currently no proposals to change this. However, as a means of addressing the challenge of land restitution the notion of Freehold, Sectional Title, Leasehold and Long Term Lease are the leasehold tenure has been put on the table for discussion, whereby manner in which an owner can enjoy tenure. Freehold means out- the State will retain title of the land and enter into long term lease and-out ownership, subject to the conditions of title and real rights agreements with lessees who will obtain the rights to use, occupy (e.g. a mortgage bond registered in favour of a bank) applicable to the and to develop the land for their purposes, subject to zoning South Africa property. Sectional title ownership is a manner in which one owns restrictions and conditions in the lease agreement. a defined area in a complex or building, together with proportionate rights to the common property and some exclusive rights to defined areas as designated on a sectional plan. Leasehold is a remnant of 4 System of Registration our history in terms whereof government restricted who could own land and is gradually being phased out in urban areas. Long term 4.1 Is all land in your jurisdiction required to be lease is a form in terms whereof two parties agree that a specific registered? What land (or rights) are unregistered? piece of land or entire land area are let to the lessee for a defined period of time against payment of a consideration. This lease must Yes, save for short term leases (less than nine years and 11 months) be notarially executed and is tantamount to “land” in terms of the which need not be registered, unless contractually agreed otherwise provisions of the Deeds Registries Act (i.e. can be mortgaged). The between lessor and lessee. Other real rights in land, e.g. mortgages, long term lease is the only purely contractual tenure model, which servitudes and restrictive conditions of title, must also be registered. could influence the lessee’s continued tenure. For example, if the lessee is in breach, the lessor may terminate the lease if the breach is not remedied. The rest mentioned above convey rights in land 4.2 Is there a state guarantee of title? What does it pursuant to an agreement but once registered in the deeds registry, guarantee? the contract has been implemented and hence, is fulfilled. There is no formal state guarantee of title. The Constitution enshrines the rights to property and states that no one can be deprived 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed of property except in terms of general law and no law can permit thereon? arbitrary deprivation of property. There is, however, an ongoing Constitutional review process to determine whether changes are Based on common law principles, the registered owner of the land is required to section 25 of the Constitution. also the owner of the buildings and other fixed improvements situated on the land. However there may be exceptions in terms of certain 4.3 What rights in land are compulsory registrable? What long term lease structures (whereby certain rights in the domain are (if any) is the consequence of non-registration? retained by one party and another owns the land). The Sectional Titles Act 1986 also provides great application in certain residential Ownership and real rights such as mortgages and servitudes. commercial real estate developments. This can result in multiple Consequently the rights in land, including the risk and benefit of owners owning defined sections and exclusive use areas within a profit and loss, do not effectively transfer. building or in a property, together with an undivided share of the common property and specifically denoted exclusive areas assigned 4.4 What rights in land are not required to be registered? to that particular section. The common property in a sectional title setup is controlled by the body corporate. Ownership of the land, or the sectional title section and exclusive use area is recorded in all Short term leases (less than nine years and 11 months in duration) instances in the 11 deeds registries located throughout South Africa. are not required to be registered.

3.3 Is there a split between legal title and beneficial title 4.5 Where there are both unregistered and registered land in your jurisdiction and what are the registration or rights is there a probationary period following first consequences of any split? Are there any proposals registration or are there perhaps different classes to change this? or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered With reference to long term lease structures, there is usually a notarial in the registries. lease registered in the deeds registry in terms whereof the lessee is entitled to exercise a real right both against the owner of the property No probationary period is applicable. In terms of ownership in and the world at large. The same principal may apply in respect of land, the rights take effect on registration of the deeds in the deeds praedial servitude holders (e.g. right of way). The owner, in dealing registry. In terms of leases though, the rights take effect on the date with the property (e.g. granting further servitude rights to another agreed between lessor and lessee in the lease and is not necessarily third party) may depending on the wording of the lease or servitude dependent on the date of registration.

256 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

to pay compensation, based on a specific inclusion in the Deeds 4.6 On a land sale, when is title (or ownership) transferred Registries Act which exempts it from liability for acts or omissions. to the buyer? The responsibility that the documents are correct lies with the conveyancing attorney signing/executing the deeds. The title is transferred to the Buyer upon registration in the deeds registry. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he 4.7 Please briefly describe how some rights obtain might reasonably need regarding encumbrances and priority over other rights. Do earlier rights defeat later other rights affecting real estate and is this achieved rights? by a search of the register? If not, what additional information/process is required?

In general, South African law recognises a system of first in time South Africa is stronger in law. However, our deeds registry and legal system There are no restrictions on public access to the register. A Buyer may recognises that even the most complete right of all, ownership, can be obtain any and all information s/he might reasonably require regarding limited by the real rights of others, such as mortgagee/bond holders encumbrances and other rights affecting real estate. Members of the and servitude holders and registered lessees, which real rights are public may request all necessary information, in person, from the registered at the same time as the owner acquires ownership, or later. deeds registries. Alternatively, this can be achieved via searches on an electronic data bases; however, these require subscription to the necessary platforms. Conveyancing practices subscribe to these 5 The Registry / Registries platforms resulting in Buyers having access to this information through the conveyancer appointed to act on his/her/their behalf.

5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules 6 Real Estate Market and requirements.

There are 11 deeds registries, including the head office in Pretoria. 6.1 Which parties (in addition to the buyer and seller Each deeds office has a specified area of practice, meaning a piece and the buyer’s finance provider) would normally of land may only be recorded in one deeds office. The main services be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or provided by the Deeds Office Registry are the registration of land and duties. real rights in land and the provision of land registration information. For more information of South Africa’s land registration system Estate agents and specialist attorneys known as conveyancers and visit http://www.ruraldevelopment.gov.za/. notaries public in relation to notarial deeds that have to be registered (e.g. notarial leases and notarial deeds of cession of exclusive use 5.2 How do the owners of registered real estate prove areas in sectional title matters or notarial deeds of servitude). their title?

6.2 How and on what basis are these persons On registration, the relevant owner is issued with a title deed which remunerated? proves ownership. Real right holders’ rights are evidenced either in terms of a notarial deed or a mortgage bond deed. South Africa The estate agent industry is governed by the Estate Agency Affairs has a negative land registration system, thus information contained Board and all estate agents are to be registered members. The in the Deeds Office Registry is considered to be sufficient proof of commission charged by estate agents varies, depending on the ownership, unless proven otherwise. agreement reached with the party paying the commission. If no agreement is reached, the default rate prescribed in terms of the Act 5.3 Can any transaction relating to registered real estate and in terms of the regulations is 7.5 % plus Value Added Tax (VAT) be completed electronically? What documents need thereof on 15%. The parties are however free to negotiate the agent’s to be provided to the land registry for the registration commission (whether a fixed fee or a percentage). Conveyancers of ownership right? Can information on ownership of and notaries public are governed in terms of the Attorneys Act and registered real estate be accessed electronically? the Law Society issues guidelines in respect of conveyancing fees payable which is based on a sliding scale depending on the value of No. We still work on a manual system of submission of deeds but the property or mortgage bond, or deed to be registered. South Africa boasts one of the world’s most efficient and sophisticated systems of land registration. Every piece of land is shown on a diagram and ownership recorded in one of the regional Deeds 6.3 Is there any change in the sources or the availability Registries, where documents are available for public viewing, both of capital to finance real estate transactions in at the deeds registries and online. The system does provide owners your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your with security of title. Electronic deeds registration pilot projects are, market? however, being planned and will hopefully be implemented in 2019.

There has not been any change in the source or availability of capital to 5.4 Can compensation be claimed from the registry/ finance real estate transactions. The introduction of REIT legislation registries if it/they make a mistake? in 2014 has remained a source of funding for the listed property sector. Overall property prices, particular residential properties, have No. If a mistake is made in relation to the registration in a deeds remained flat or even decreased. Property investment, depending on registry, the deeds registry and its officials cannot be held liable the asset class, varies in relation to the equity and debt.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 257 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

6.4 What is the appetite for investors and/or developers 7.2 Is the seller under a duty of disclosure? What matters to invest in your region compared to last year and must be disclosed? what are the sectors/areas of most interest? Please give examples. Yes. The Seller has the “duty to disclose” any defects which are prevalent, especially those which are not obvious. If the Seller hides To the extent relevant, several of South Africa’s biggest REITs have defects in the property on purpose, the Seller will not be protected. already expanded into other markets in Sub-Saharan Africa, Europe Therefore the voetstoots clause will not protect a Seller who knows and Australia. Overall investment across all sectors has declined in of a defect in the property but does not tell the Purchaser about the South Africa, primarily as a result of the current political landscape defect. and global hesitance to invest in developing economies. In February 2018, a significant development took place in that Parliament voted South Africa in favour of reviewing the property clause of the Constitution to 7.3 Can the seller be liable to the buyer for misrepresentation? investigate whether the section required amendment in order to permit land expropriation without compensation. The rationale behind embarking on this parliamentary process is to see how land, Yes. Proper recourse is to institute an action for damages against and access thereto may assist in addressing the inequalities of wealth the Seller. amongst racial groups in South Africa. The ruling party, in driving this process, has been very clear in stressing that the adoption of any 7.4 Do sellers usually give any form of title “guarantee” legislative change to the Constitution or additional legislation which or contractual warranties to the buyer? What would allows expropriation without compensation cannot be at the expense be the scope of these? What is the function of any of food security and foreign direct investment. The outcome of the such guarantee or warranties (e.g. to apportion risk, parliamentary process will only be known at the end of 2018 but, to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying as expected, the impact of this political decision has seen investors out his own diligence? adopt a cautionary approach to real estate investment, particularly in respect of agricultural land. It must be noted though, that The most common warranties are: broadly speaking almost all political parties agree that resolving the inequalities associated with land ownership, is a crucial in fighting ■ warranty of ownership or right to dispose of the property. A person or entity is entitled to sell something that does not vest poverty and boosting the economy. It is just the manner in which in ownership in that person in terms of common law but the to achieve that goal that parties differ about – some believing new requirement for transfer of ownership is delivery, which is or amending legislation is needed, others advocating that existing evidenced only by registration in the deeds registry; legislation is sufficient, it just needs to be implemented properly. ■ that there is no prior agreement, which may be stronger in law, to grant any rights to other persons relating to disposal 6.5 Have you observed any trends in particular market of the property; sub sectors slowing down in your jurisdiction in ■ that the buildings on the property are built in accordance with terms of their attractiveness to investors/developers? municipal approved plans; and Please give examples. ■ that on registration of the property in the deeds registry, that vacant and undisturbed occupation and possession, free from No definite trends have been observed, save to re-iterate what has encumbrances, will be granted and given to the Buyer. been stated already in respect of the current parliamentary process In terms of our common law, Sellers often include a voetstoots clause (to review whether the Constitution’s property clause needs to be in the sale agreement. This means that the property is sold as it amended) having an impact on local and foreign investment in stands, i.e. with its patent or apparent defects and at the Purchaser’s underlying real estate assets associated with mining and agriculture. risk. The Seller will not be held liable for patents defects. The There is currently a very large oversupply of office space in the Seller, however, has a duty to disclose any latent defects to the prime business centres but the warehousing and logistics sectors’ Purchaser. The test on whether to disclose a defect to the Purchaser real estate needs are showing solid growth and extensive new or not is to determine whether disclosure of the defect will affect the development being undertaken. Purchaser’s decision to purchase the property or not. If it is likely to affect the Purchaser’s decision, the Seller should disclose the defect. 7 Liabilities of Buyers and Sellers in Real Sellers can be held liable for failure to disclose a latent defect which Estate Transactions s/he was aware of at the time of the sale. The principle of caveat emptor which translates to “let the purchaser beware” places a responsibility on the Purchaser to conduct a due 7.1 What (if any) are the minimum formalities for the sale diligence of the quality of the goods (property) which s/he seeks to and purchase of real estate? purchase. The Purchaser must carry out the necessary inspections to ascertain whether the property will be suited to the purpose for The Alienation of Land Act, 1981 prescribes the essentialia. An which it is required. The Purchaser may not rely on information agreement, in writing, signed by the Purchaser and the Seller, in provided by the Seller to be absolute or to be sufficient to warrant terms whereof the property, price payable and payment terms are the Purchaser’s use of a property. clearly set out.

258 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

against the borrower to proceed to a sale in execution of the 7.5 Does the seller retain any liabilities in respect of the immovable property. As a result of a mortgage bond in its favour, the property post sale? Please give details. lender will however not have to first execute against the movables of the borrower, but can apply for an order of special executability Generally the Seller does not retain any liabilities, unless specifically against the property and proceed with a sale in execution. agreed to in the sale agreement.

8.4 What minimum formalities are required for real estate 7.6 What (if any) are the liabilities of the buyer (in addition lending? to paying the sale price)? A mortgage bond is to be registered. It is perfected by registering Some of the Buyer’s legal responsibilities include: it in the same Deeds Registry where the immovable property (over South Africa ■ Obtaining a mortgage bond grant, where third party financing which the bond is granted) is registered. A number of preconditions is required to pay the purchase consideration. must be fulfilled before a mortgage bond or real security right can ■ Paying transfer fees including Value Added Tax or Transfer come into existence: Duty to the South African Revenue Service. ■ the parties must have capacity to enter into a legal transaction; ■ Paying any other charges (e.g. due diligence and inspection and costs and conveyancer’s fees) that may have been agreed ■ the owner of the property must consent to the creation of upon in the sale agreement. the real right in property by signing a power of attorney and instructing a conveyancer to register the mortgage bond. 8 Finance and Banking 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other 8.1 Please briefly describe any regulations concerning creditors? the lending of money to finance real estate. Are the rules different as between resident and non-resident To reduce risk to the lender, the law has devised a process which persons and/or between individual persons and offers some protection to the lender, so that he may recover the corporate entities? money he is owed in the event that the borrower does not meet his obligations. Registration of mortgage bonds are done in terms of Financing of the acquisition of large real estate portfolios or a ranking system whereby the first bond registered provides the companies holding real estate varies, depending on the value of strongest right to that bondholder. the transaction and the parties involved. Non-residents may only borrow up to the value of the equity they inject into the property Real security rights give the lender the power to prevent the (i.e. half of the value can be financed and half must be equity). The borrower from disposing of it, as well as a right of preference. National Credit Act (NCA) protects primarily individual persons Where the borrower is unwilling to repay the principal debt, or is who are borrowers against unscrupulous lending practices. insolvent, the lender may, after the immovable property has been attached and sold in execution, claim the proceeds from that sale on a preferent basis before any other creditor. They confer limited and 8.2 What are the main methods by which a real estate specific entitlements on their holders and are enforceable against lender seeks to protect itself from default by the third parties as they are registered in the public deeds registry. borrower? Unless otherwise agreed by the parties, a real security right is Lenders providing finance usually require security packages indivisible, securing the entire debt and binding the borrower until consisting of one or more of the following forms of security: it is paid. Also unless otherwise agreed, a real security right secures not only the principal debt but all its “incidents” as well. These may ■ mortgage bonds over the immovable property; include: ■ suretyship and/or guarantee by parent company or directors, ■ costs incurred by the lender in preserving the security; or even shareholders; ■ interest charged by the lender; and ■ notarial bonds (both general and special in nature over movable property such as plant and equipment); ■ costs incurred by the lender in enforcing his rights. ■ cession of rental income and any other proceeds derived from Real security rights do not entitle the lender the use and enjoyment the property; and of the property, unless otherwise agreed by the parties. ■ pledge of shares in the property owning entity. In addition to security packages, lenders usually require a portion 8.6 Under what circumstances can security taken by a of the acquisition to be equity funded, the percentage varying lender be avoided or rendered unenforceable? depending of the nature of the property or the project. The most important legislative provisions are found in the Insolvency Act, 1936. In terms of section 88 (commonly referred to as hardening 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a periods), in general a mortgage bond passed for the purpose of securing mortgagee to realise a mortgaged property without the payment of a debt not previously secured, in which debt was involving court proceedings or the contribution of the incurred more than two months prior to the lodging of the bond with mortgagor? the registrar of deeds, or for the purpose of securing the payment of a debt incurred in novation of or substitution for any such first-mentioned A Lender cannot enforce a system of summary execution in respect debt, shall not confer any preference if the estate of the mortgage of the repossession of immovable property over which it holds a debtor is sequestrated/liquidated within a period of six months after registered mortgage. The lender will have to obtain a court judgment such lodging. Also, a registered mortgagee (i.e. lender) may run a risk

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 259 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

of its bond not being enforceable and even set aside, if the borrower the transaction forms part of the approved business rescue plan. An obtained financing for purposes of acquiring a business and the sale entity under business rescue may obtain financing if the loan can be of the business was not properly advertised in terms of section 34 of secured by means of an asset of the entity which is not encumbered. the Insolvency Act. Another instance relates to a mortgagor granting security as a surety/guarantor for the debts of a related company and 8.9 What is the process for enforcing security over the necessary Financial Assistance provisions of the Companies Act, shares? Does a lender have a right to appropriate 2008 (sections 44 and 45) having not been complied with. shares in a borrower given as collateral? If so, can shares be appropriated when a borrower is in administration or has entered another insolvency or 8.7 What actions, if any, can a borrower take to frustrate reorganisation procedure? enforcement action by a lender?

South Africa A shareholder may cede as security its shares and shareholder claims as A borrower enjoys the rights afforded to it in terms of the common security for the due performance of a borrower’s secured obligations. law and if enforcement is done through the Courts or through This is referred to as a pledge of shares (i.e. cession in securitatem Arbitration, the borrower will be a defendant and may then use the debiti). On insolvency or business rescue, the right which has been rules of Court or Arbitration Rules to defend the action taken against ceded (i.e. shares and claims) remains part of the borrower’s estate. In it to the fullest extent. practice, it is prudent for lenders to include insolvency events as events of default, allowing lenders to exercise their rights prior to such rights 8.8 What is the impact of an insolvency process or a falling into the insolvent estate. Such insolvency events include any corporate rehabilitation process on the position of a proceedings to commence business rescue or liquidation proceedings. real estate lender? On the occurrence of such an event, a lender can enforce its security and take over the pledged shares and use the proceeds of realisation In the event that a borrower is declared insolvent, the estate is placed of the pledged shares to settle the borrower’s outstanding obligations. under control of a trustee/liquidator, who is elected on approval of the

Master of the High Court. The trustee/liquidator must manage the insolvent estate’s affairs as best as possible for the benefit of creditors 9 Tax in accordance with the provisions of the Insolvency Act. Creditors, who are classified as secured creditors will have their debts settled 9.1 Are transfers of real estate subject to a transfer tax? prior to any concurrent creditors, save to state that the hierarchy of How much? Who is liable? payment in terms of the Insolvency Act dictates in general terms that, where property is liquidated for the benefit of creditors (i.e. sold and Yes. If a Seller is not registered for VAT purposes the Buyer will the proceeds are received), the tax authorities and the relevant local have to pay transfer duty in addition to the purchase price. The rates municipality are paid even prior to any secured creditors’ claims. for individuals, corporates and trusts are the same, and, with effect Different rules apply in relation to acquiring and disposing transactions, from 1 March 2017, changed to apply as follows for the following where the agreement was concluded prior to insolvency but registration property values: has not yet occurred. Where an insolvent entered into a contract to acquire immoveable property prior to insolvency, the trustee/liquidator R0 – R900 000 0% may elect to uphold or repudiate the transaction by way of written R900 001 – R1 250 000 3% of the value above R900 000 R10 500 + 6% of the value above notice within six weeks of being asked to do so by the Seller. If a R1 250 001 – R1 750 000 trustee fails to make an election the Seller may apply to a court to R 1 250 000 R40 500 + 8% of the value above cancel the contract and to have the property returned. The Seller will R1 750 001 – R2 250 000 R 1 750 000 be able to prove a concurrent claim for loss or damage suffered, against R80 500 +11% of the value above R2 250 001 – R10 000 000 the estate, as a result of the cancellation of the contract. R2 250 000 An insolvent may not dispose of property which forms part of the R933 000 + 13% of the value R10 000 001 and above insolvent estate, regardless if such sale transaction was signed prior to above R10 000 000 or after the date of insolvency as the insolvent’s affairs are managed by the trustee/liquidator. If the transfer is registered prior to the date VAT is payable either at the rate of 15% (as of 1 April 2018 the of insolvency, then the trustee/liquidator will investigate whether the VAT rate increased from 14% to 15%) or in some instances 0% (e.g. disposition was for a fair value and may, if directed by creditors, property is sold as a going concern) or in some instances exemptions apply to the Court to have the sale and transfer set aside if deemed may apply for example to charitable institutions. not for fair value. Shortly after an order of insolvency is granted, a caveat is noted against the insolvent’s property at the Deeds Registry. 9.2 When is the transfer tax paid? The effect of a caveat is to prevent the insolvent from transferring the property or registering any right over the property. Duty is payable within six months from the date of acquisition (i.e. “Corporate rehabilitation” is more commonly known as business the signing of the sale agreement). If the Transfer Duty is not paid rescue in South Africa. In the event that a juristic person is in a within this period, Transfer Duty penalties will be levied. position of financial distress the entity can be placed into business rescue on a voluntary or compulsory basis, the effect of which will 9.3 Are transfers of real estate by individuals subject to be the same. A business rescue practitioner is appointed to run the income tax? operations of the entity and to develop a business rescue plan which will alleviate and eventually combat the financial distress of an entity. Yes. Upon disposing a property, each property owner is liable for An entity under business rescue may dispose of property if it is in the Capital Gains Tax (CGT) unless an exemption applies. ordinary course of the entity’s business, if it is a bona fide arm’s length transaction which the business rescue practitioner has approved or it

260 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

9.4 Are transfers of real estate subject to VAT? How 10.2 What types of business lease exist? much? Who is liable? Are there any exemptions? Commercial, Industrial and Retail leases (short and long term). The sale of property attracts either VAT or transfer duty, depending on the VAT status of the Seller. If the Seller is a registered VAT 10.3 What are the typical provisions for leases of business vendor and the sale of the property is a supply subject to the VAT, premises in your jurisdiction regarding: (a) length of the Buyer must pay VAT on the purchase price, provided the term; (b) rent increases; (c) tenant’s right to sell or Buyer’s consideration is set out in the agreement. “Rx plus VAT” or sub-lease; (d) insurance; (e) (i) change of control of “excluding VAT”. If not, then VAT is deemed to be included in the the tenant; and (ii) transfer of lease as a result of a purchase consideration. The applicable rate of VAT is 15%. corporate restructuring (e.g. merger); and (f) repairs?

Exemptions may apply in the following scenarios: South Africa ■ Certain statutory exemptions apply in relation to intra-group Leases for a term shorter than nine years and 11 months are usually transfers between companies/entities, or if the Buyer has the referred to as short term leases. Most commercial leases have requisite public benefit organisation/institution of learning/ renewal options included which may take the lease period to longer charity/religious status. than 10 years. Long term leases that are to be endorsed against the ■ The sale of the property may be part of a business being sold title deeds must be in writing and need to be executed in front of a as a going concern, which may lead to VAT being levied on notary public so that they can be registered in the deeds registry. the transaction at a zero rate. Tenants have to contractually negotiate the right to assign the lease or even sub-let the leased premises. Usual provisions state that the 9.5 What other tax or taxes (if any) are payable by the tenant can only assign or sub-let with the landlord’s prior written seller on the disposal of a property? consent and on such terms as the parties may agree. Some commercial leases have more strict change of control provisions included. Capital Gains Tax (CGT) or if the Seller is a non-resident and the The Competition Commission authorities generally frown upon value of the sale is more than ZAR2 million, then a compulsory exclusivity clauses included in commercial retail leases. section 35A Withholding Tax applies as provision for the CGT liability. The rates of withholding tax being applied differ for 10.4 What taxes are payable on rent either by the landlord individuals, companies and trusts. or tenant of a business lease?

9.6 Is taxation different if ownership of a company (or Should the landlord be registered as a vendor in terms of the Value other entity) owning real estate is transferred? Added Tax Act, 1991 as amended, the tenant shall pay VAT on the monthly rental and on all applicable recoveries payable in terms of The Transfer Duty Act was amended to change this and strictly the lease. speaking the same taxes as aforementioned apply (VAT or Transfer Duty) unless there are statutory exemptions. 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party 9.7 Are there any tax issues that a buyer of real estate etc.)? Are there any special provisions allowing a should always take into consideration/conduct due tenant to extend or renew the lease or for either party diligence on? to be compensated by the other for any reason on termination? If the Buyer of real estate elects to buy shares in a property owning company as opposed to buying the property, then it is extremely If the CPA applies, a tenant does have the right to cancel the lease important to do a comprehensive check of ALL the property owning even though he may have signed an agreement to occupy the company’s different taxes and tax liabilities. A tax clearance premises for a specified fixed period. The tenant can do this without certificate relating to the company’s affairs can be obtained from giving any legitimate reason; however, tenants are obliged to give SARS but it is also important to investigate whether a potential GCT the landlord and/or his agent at least 20 business days’ notice and the liability arises in case the property is disposed of in future. landlord is empowered to charge a reasonable cancellation penalty. The landlord is fully entitled to recover all reasonable costs and losses incurred through the tenant exercising his right, as per the 10 Leases of Business Premises CPA, to terminate the fixed term agreement (or lease in this case). In general though, leases terminate based upon the effluxion of time or in case of unremedied default, usually on the part of the tenant. 10.1 Please briefly describe the main laws that regulate leases of business premises. 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective There are various laws which govern the way one does business, obligations under the lease once they have sold their particularly when it comes to renting out premises. With the interest? Can they be responsible after the sale in promulgation of the Consumer Protection Act (CPA) there are respect of pre-sale non-compliance? various rules and requirements which apply to leasing. In a lease agreement, the parties are bound by obligations which include Yes. The landlord will be absolved as the rights and obligations invariable obligations, provisions that the parties have contracted transfer to the new owner of the property on which the leased into and residual obligations. The CPA does not necessarily apply to premises are located. The tenant’s liability may transfer, subject all business premises leases though as there thresholds based on the to the consent of the landlord granting permission for the tenant’s tenant’s annual turnover or asset value (currently ZAR 2 million). rights and obligations being transferred to a third party.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 261 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

the lease term; c) tenants who do not vacate at the end of the lease 10.7 Green leases seek to impose obligations on term may be evicted by the landlord using the PIE Act, but most landlords and tenants designed to promote greater leases have a provision which automatically converts the lease into a sustainable use of buildings and in the reduction of month-to-month lease at a higher rental, or a penalty may be applied the “environmental footprint” of a building. Please in addition to the rental payable; and d) it depends on the agreement briefly describe any “green obligations” commonly found in leases stating whether these are clearly between the parties what obligations regarding contribution to costs defined, enforceable legal obligations or something and maintenance and repair exist. Commonly, a tenant pays a fixed not amounting to enforceable legal obligations (for monthly amount plus usage and consumption charges in relation example aspirational objectives). to water, gas and electricity and if damage is caused to the leased premises, such amounts may also be recovered from the tenant. Please refer to question 13.1. South Africa 11.4 Would there be rights for a landlord to terminate a 10.8 Are there any trends in your market towards more residential lease and what steps would be needed flexible space for occupiers, such as shared to achieve vacant possession if the circumstances short-term working spaces (co-working) or shared existed for the right to be exercised? residential spaces with greater levels of facilities/ activities for residents (co-living)? If so please provide Yes. Breach provisions usually require a landlord to place the examples/details. recalcitrant tenant on terms to rectify the breach, failing which the landlord may cancel the lease and claim damages and eviction of the The notion of flexible workspaces is relatively new in South Africa but tenant. The steps to be taken are detailed in the PIE Act read with has gained popularity. There has been an increase in the development the rules of Court in case the tenant fails to vacate as requested. The of shared or flexible working spaces within central business districts landlord also enjoys a statutory hypothec in terms whereof it may and along nodes between the central business districts. This trend has attach the tenant’s movable property in case of failure to pay rental. been on the rise with an increasingly difficult economic climate and the The hypothec is usually enforced together with the cancellation, increase in small businesses which require professional workspaces recovering of damages and eviction processes. and facilities. Specialist developers in the flexible workspace field have reported rapid growth over relatively short periods of time. 12 Public Law Permits and Obligations In respect of residential developments, the general trend has been for high rise and high density mixed use developments as a measure to alleviate the pressure of urban sprawl. Local municipalities have 12.1 What are the main laws which govern zoning/ increasingly been in favour of developments which are of a high density permitting and related matters concerning the use, and mixed-use design which is in line with Urban Development and development and occupation of land? Please briefly Spatial Development Frameworks published from time to time in terms describe them and include environmental laws. of the Spatial Planning and Land Use Management Act (SPLUMA). Planning in each jurisdiction is currently governed by the local authorities in terms of the local government planning ordinances. In 11 Leases of Residential Premises 2013, the Spatial Planning and Land Use Management Act (SPLUMA) was promulgated. This will serve as a guideline legislation that will provide for the enactment and, where necessary, amendment of 11.1 Please briefly describe the main laws that regulate provincial and local planning legislation to ensure uniformity. From an leases of residential premises. environmental perspective the National Environmental Management Act, 1998 (NEMA) is extremely important in relation to use of land The Rental Housing Act prescribes mandatory provisions relating and liability for rehabilitation. See also question 12.8 below. to leasing of residential properties. The rights of property owners and tenants are also governed by the Prevention of Illegal Eviction and Unlawful Occupation Act (commonly referred to as PIE Act) 12.2 Can the state force land owners to sell land to which prevents arbitrary and unlawful actions. The common law as it? If so please briefly describe including price/ compensation mechanism. adjudicated by the Courts also offers invaluable guidance on what rights and obligations exist between landlord and tenant. Property can only be expropriated in terms of law of general application for a public purpose or in the public interest, subject 11.2 Do the laws differ if the premises are intended for to compensation being paid on a basis agreed by those affected, multiple different residential occupiers? or decided or approved by a court (section 25, Constitution 1996). The amount of compensation payable must be just and equitable, by No – the same principles would apply. reflecting an equitable balance between the public interest and those affected by the expropriation. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: 12.3 Which bodies control land/building use and/or (a) length of term; (b) rent increases/controls; (c) the occupation and environmental regulation? How do tenant’s rights to remain in the premises at the end of buyers obtain reliable information on these matters? the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? In almost all instances the local municipal authorities have the relevant jurisdiction but in cases of heritage properties and a) Residential leases are mostly for a year but can be for longer environmentally sensitive properties, mining properties and/or periods; b) if a lease is for multiple years, an annual escalation agricultural properties, various other statutes may apply which will depending on market conditions is applied upon the anniversary of require additional permissions.

262 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

12.4 What main permits or licences are required for 12.8 How can e.g. a potential buyer obtain reliable building works and/or the use of real estate? information on contamination and pollution of real estate? Is there a public register of contaminated land Change of land use (or rezoning) approval will require: in your jurisdiction? ■ Traffic impact assessments. The National Environmental Management: Waste Act, 59 of 2008 ■ Environmental impact review. (NEMWA) came into operation, in July 2009. NEMWA (section ■ Consent from adjacent property owners. 40(1)) provides that no person may transfer contaminated land without ■ Review of title conditions and other conditions of informing the person to whom that land is to be transferred that the establishment relating to the broader township. land is contaminated and, in the case of a remediation site, without Consideration of what servitudes (or example, access and notifying the Minister or the MEC and complying with any conditions

■ South Africa egress) may be required over adjacent properties. that are specified by them. These provisions have direct consequences ■ Filing of a proposed site development plan. for alienation of land that may be contaminated, including potentially ■ Building plan approval in accordance with the relevant local impacting on the right of freedom to contract for the purchase and authority process and national building guidelines. sale of the land. In the event of non-compliance with the obligation to provide information on contaminated land in the event of transfer of such land, the same penalty provisions as are applicable to non- 12.5 Are building/use permits and licences commonly compliance with section 36(5), discussed above, will apply. obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? Owners of potentially contaminated land or persons undertaking activities that have the potential to contaminate land are advised In almost all instances of commercial development, rezoning to take note of the operation of the Contaminated Land Provisions applications will have to be made to ensure that the desired density particularly the issues discussed above. and bulk is allocated to the property from a services and infrastructure perspective. 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? 12.6 What is the typical cost of building/use permits and the time involved in obtaining them? The general principle applicable is “polluter pays” and any transgression of the environmental legislation and local municipal The price can vary depending on the development. The time frame bylaws require the owner of the property to attend to the also varies depending of the various departments involved. environmental remediation. If the current owner was not the polluter, the legislation nonetheless holds the owner liable, who in turn may have a claim against prior owners who were liable for the pollution. 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real 12.10 Please briefly outline any regulatory requirements estate or development/change of use? for the assessment and management of the energy performance of buildings in your jurisdiction. The South African Heritage Resources Agency (SAHRA) is the national administrative body responsible for the protection of South The Department of Energy is currently embarking on or developing Africa’s cultural heritage. According to South African legislation, an EE Target Monitoring System through the Energy Efficiency historical and cultural resources fall within the scope of the natural Monitoring and Implementation Project which is done jointly with environment for the purposes of environmental law. The National the South African Local Government Association (SALGA). This Heritage Resources Act, No 25 of 1999 makes provision for the project is supported through a collaboration between the Department protection of heritage objects. SAHRA is the custodian of the of Energy and the Swiss Agency for Development and Cooperation country’s heritage resources which form part of the national estate. (SDC). The purpose is to introduce and institutionalise an Energy Some heritage objects are located in public institutions and others Efficiency Target Monitoring System for measuring and reporting of are privately owned. Declaration of a specifically declared heritage the achievement of the sectoral targets set out in the National Energy object does not change its ownership status. Efficiency Strategy. In addition, the Minister of Public Works Development and change of land use are restricted on properties launched the National Green Building Framework in December declared as heritage resources. Heritage resources may undergo 2011, which also has elements of energy efficiency in buildings. necessary internal and/or structural changes; however, the façade The National Building regulations are also being amended to of the building has to be retained. Land use is restricted by the include mandatory energy efficiency standards for new buildings to requirement to maintain the building regarded as a heritage resource. support the improvement of energy efficiency buildings. Legislation, in this regard, has been promulgated at a national level. Each municipality may, at its discretion and with the approval of the 13 Climate Change provincial heritage resource authority, make by-laws relating to the protection of heritage resources. This can include public admission into heritage buildings/areas; regulation of the use of a heritage 13.1 Please briefly explain the nature and extent of any resource; protection of a heritage resource and the provision for regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions incentives to protect heritage resources. Municipalities may trading scheme). impose fines on any person who contravenes the laws relating to the protection of heritage resources. Various initiatives, in accordance with international treaties and co- operation agreements have been initiated and post COP21, we expect

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 263 © Published and reproduced with kind permission by Global Legal Group Ltd, London Norton Rose Fulbright South Africa Inc. South Africa

these objectives to be translated into firmer legislative measures over the next few years, with real sanctions for transgressors. Pieter Niehaus Norton Rose Fulbright South Africa Inc. 15 Alice Lane 13.2 Are there any national greenhouse gas emissions Sandton reduction targets? Johannesburg, 2196 South Africa

There are no formal targets yet to reduce greenhouse gas emissions Tel: +27 11 685 8619 from building in South Africa. The Green Building Council of Email: pieter.niehaus South Africa is a full member of the World Green Building Council @nortonrosefulbright.com URL: www.nortonrosefulbright.com and issues GreenStar ratings in respect of building projects. There are limited legislative requirements at this stage contained in local Pieter is a real estate lawyer and head of the South African real estate South Africa authorities’ by-laws. practice. He specialises in all property related matters including amongst others providing town planning advice, attending to the full spectrum of conveyancing services, property financing (commercial and residential) and general notarial work, with specific reference to 13.3 Are there any other regulatory measures (not already notarial bonds, all types of leases, and servitudes. mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? Pieter presently advises and assists all the major commercial and private banks and some foreign financial institutions in relation to financing and security arrangements, and also provides property Increasing awareness is prevalent in the development of commercial advice to a wide range of clients including renewable energy, mining, properties. Tenants, especially global entities, seek to commit professional services firms, student accommodation developers, developers to more environmentally sustainable building practices, property developers and from time to time also acts on behalf of the and in some instances even insist on including penalty clauses in local authority in a variety of property-related matters. development lease agreements if the developer does not meet a In 2015 and 2016 The Legal 500 Europe, Middle East & Africa edition required standard. Johannesburg recently hosted the C40 Cities recommended Pieter as a lawyer in the field of real estate law. Summit, which targets climate change and plans to mitigate the impact on communities.

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

264 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 27

Spain

Hogan Lovells Emilio Gómez Delgado

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

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 265 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

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

3.1 What are the types of rights over land recognised in There is no state guarantee of title. Title insurance is not commonly your jurisdiction? Are any of them purely contractual used because the legal system fully protects a third party acquiring between the parties? title from the registered owner.

Generally, real estate can be held by: 4.3 What rights in land are compulsory registrable? What

Spain ■ Freehold, under: (if any) is the consequence of non-registration? i. full ownership; ii. joint co-ownership; or Under Spanish law, a mortgage and a building lease are compulsorily registrable and registration is required for the iii. a time share. validity and existence of these rights. ■ Leasehold, under: i. a lease; 4.4 What rights in land are not required to be registered? ii. usufruct; iii. a public concession contract; or As mentioned in question 4.1 above, land registration is not iv. a building lease. compulsory; however, if not registered, any right or obligation over land will only remain valid and with full effects among the parties. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed 4.5 Where there are both unregistered and registered land thereon? or rights is there a probationary period following first registration or are there perhaps different classes The general principle is that real estate is indivisible (section 334, or qualities of title on first registration? Please give Civil Code) and comprises: details. First registration means the occasion upon ■ land; which unregistered land or rights are first registered in the registries. ■ buildings; and ■ everything attached to land or buildings. First registration is the same for all types of unregistered land. The Land and buildings located on such land are registered together applicant must provide a detailed description of the property, including: on the same title in the competent land registry (registro de la ■ A description of the property and its nature. propiedad) (Mortgage Act). ■ The property’s boundaries. A description of land and relevant buildings is also registered with ■ The ownership title and a chain of registration of title. the Cadastre, a different registry under the control of the Ministry of ■ Any charges and encumbrances. Treasury, which aims to provide a base for property tax assessment. ■ The date of the registration of title, charges and encumbrances. The way to split both the right over the land and the right over the construction erected thereon is the building lease (derecho de Owners of adjoining properties and third parties with a potential superficie). interest have a trial period to challenge registration or details of such registration within two years (section 207, Mortgages Act).

3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration 4.6 On a land sale, when is title (or ownership) transferred consequences of any split? Are there any proposals to the buyer? to change this? Registration There is no split between legal title and beneficial title but the Transfer of title is formalised in a public deed of sale and purchase purchaser may declare that the acquisition of the property is for the before a notary public. After that, the buyer can register the title benefit of a third party (as a fiduciary). In any case the registered with the corresponding land registry to protect the title against third owner, vis-à-vis third parties, is the entity acquiring legal title. parties. However, if there is a right of first refusal through an option to 4 System of Registration purchase, the beneficiary of the option can register his option with the land registry before executing the transaction, to protect his right to acquire the property against other potential buyers. 4.1 Is all land in your jurisdiction required to be When title transfers registered? What land (or rights) are unregistered? Title transfers on delivery of the real estate to the buyer; this normally occurs (unless agreed otherwise) when a notarial deed is Title to real estate is evidenced by the corresponding public deed signed (see above, Registration). of sale and purchase. Registration at the land registry is not compulsory. However, when registered, title is enforceable against bona fide third parties with a potential interest in the real estate. Land registries are managed by the Registrars Bar, an administrative body controlled by the Ministry of Justice (Ministerio de Justicia).

266 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

4.7 Please briefly describe how some rights obtain 6 Real Estate Market priority over other rights. Do earlier rights defeat later rights? 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally Registered rights will prevail over other rights based on priority in be involved in a real estate transaction in your applying for registration to the competent land registry. jurisdiction? Please briefly describe their roles and/or duties. 5 The Registry / Registries

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

5.2 How do the owners of registered real estate prove their title? 6.2 How and on what basis are these persons remunerated? Owners can prove title showing original title deeds together with updated online excerpts from the competent Land Registry. Each party bears the costs of its own transaction advisors. These remunerations are freely negotiated with the service providers and may be determined as a percentage of the purchase price or a fixed 5.3 Can any transaction relating to registered real estate remuneration. The Spanish Civil Code establishes the general rule be completed electronically? What documents need to be provided to the land registry for the registration that the notary fees are borne by the seller and registry fees are borne of ownership right? Can information on ownership of by the purchaser, but this rule may be changed by the parties. registered real estate be accessed electronically? 6.3 Is there any change in the sources or the availability No. All transactions relating to real estate will have to be completed of capital to finance real estate transactions in in writing, by means of a public deed. Immediately afterwards, the your jurisdiction, whether equity or debt? What are notary is obliged to notify the land registry electronically in order to the main sources of capital you see active in your get priority of registration, but this must be confirmed by delivering market? the original title deed for registration. Information on ownership can be easily accessed electronically. The Foreign equity has driven the recovery of the Spanish property competent land registry issues an online excerpt with all relevant market; initially the opportunistic international funds put their shoes facts of the property (titleholder, third party rights and description in the country in 2013, but now the bulk of the investment is driven of the property). by Spanish REITs (SOCIMIs) and added-value funds.

5.4 Can compensation be claimed from the registry/ 6.4 What is the appetite for investors and/or developers registries if it/they make a mistake? to invest in your region compared to last year and what are the sectors/areas of most interest? Please give examples. Yes, it is feasible to claim compensation from a land registrar who makes mistakes during the registration process. The registrars will Tourism is a key sector in Spain and, as a consequence, the activity be legally liable for all damages and costs they have caused. in the hotel and leisure industry in secondary areas is really high. Investment in the Canary Islands and Mallorca remains quite active, 5.5 Are there restrictions on public access to the similar to the South Coast (Malaga area). register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved 6.5 Have you observed any trends in particular market by a search of the register? If not, what additional sub sectors slowing down in your jurisdiction in information/process is required? terms of their attractiveness to investors/developers? Please give examples. Registered information can be accessed by parties with a lawful interest in finding out the status of a property and its registered Nowadays in Spain, all sub sectors are increasing the levels of rights. If requested, the information may be translated into English activity exponentially. A slowing-down trend has only been seen and presented in a double column format, with all information in in some regions like Cataluña due to the political instability of the Spanish listed alongside its translated counterpart. region in the second half of 2017.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 267 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

7 Liabilities of Buyers and Sellers in Real 7.3 Can the seller be liable to the buyer for Estate Transactions misrepresentation?

Yes; the terms of this liability are mutually agreed among the parties. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? 7.4 Do sellers usually give any form of title “guarantee” Marketing or contractual warranties to the buyer? What would be the scope of these? What is the function of any Major property companies and institutional investors usually engage

Spain such guarantee or warranties (e.g. to apportion risk, a major consultancy investment firm to: to give information)? Would any such guarantee or ■ Conduct the sales process. warranties act as a substitute for the buyer carrying out his own diligence? ■ Organise the marketing materials. ■ Lead marketing actions. Real estate warranties vary depending on the transaction. However, Medium-sized companies prefer to conduct the marketing process the warranties most frequently given by the seller relate to: themselves. ■ Tenancy status and validity of the main conditions of the Commercial negotiation lease. Negotiations usually occur between representatives from both ■ The non-existence of charges and encumbrances other than of the parties, supervised by lawyers and real estate advisers. In those registered at the land registry. some circumstances, negotiations are directly executed between the ■ Compliance with applicable planning rules. parties’ lawyers and advisers. ■ Having lawful power of attorney to enter into the sale and Pre-contractual arrangements purchase agreement. Arrangements are usually related to: ■ The validity of insurance policies. ■ Confidentiality. ■ The absence of legal disputes or court proceedings affecting the real estate. ■ Non-disclosure. ■ Temporary exclusivity for: ■ due diligence; and 7.5 Does the seller retain any liabilities in respect of the property post sale? Please give details. ■ making offers (initial offers and subsequent binding offers). Pre-contractual arrangements are fully binding on both parties. This depends on the undertakings assumed in the transfer deed. The Sale contract Civil Code provides for title eviction and liability for hidden defects A private sale and purchase contract, exchanged between the parties, during a short period of time after closing, but this purchaser’s contains the transactions terms and conditions, including: right can be waived in the transfer deed. A seller also has statutory liability for structural defects for 10 years if he was the developer ■ Any conditions precedent. of the property. ■ The timing for closing. ■ The conditions for closing. 7.6 What (if any) are the liabilities of the buyer (in addition ■ The object of the sale (that is the real estate) and the purchase to paying the sale price)? price.

The contract is usually executed once the parties agree the terms and The buyer is only responsible to pay the purchase price and conditions and satisfactory due diligence has taken place. applicable taxes. When legally binding Parties are legally bound as soon as they agree (section 1450, Civil 8 Finance and Banking Code): ■ The object of the sale. ■ The price. 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the This applies even if other ancillary elements are not yet fully agreed. rules different as between resident and non-resident In addition, parties can be legally bound by other pre-contractual persons and/or between individual persons and arrangements, which are usually agreed through a letter of intent. corporate entities? Such arrangements can include: ■ Confidentiality. The Spanish Mortgages Act is the relevant Act setting out the requirements to secure a loan via real estate properties. ■ A prohibition on disclosing know-how information.

8.2 What are the main methods by which a real estate 7.2 Is the seller under a duty of disclosure? What matters lender seeks to protect itself from default by the must be disclosed? borrower?

The seller must act in good faith without concealing any information (a) Security package. A security package for a real estate loan that, if known by the buyer, would prevent the buyer from completing will usually comprise: the transaction. The Civil Code allows legal actions against a seller ■ a mortgage over the asset; for title defects and buyers also have access to public registries (land a charge over receivable rents; registry and cadastral office). ■

268 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

■ a charge over all bank accounts into which all rents must be paid; and 8.8 What is the impact of an insolvency process or a ■ a charge over all relevant contracts including leases, corporate rehabilitation process on the position of a real estate lender? insurance policies and construction guarantees. (b) Corporate guarantees. Corporate guarantees are sometimes demanded by lenders if the borrower is using SPVs. The debtor is protected against potential enforcement of guarantees by real estate lenders. On the other hand, lenders with mortgages (c) Insurance coverage. Lenders will require the borrowers to granted over real estate properties have a privileged status compared take out appropriate buildings insurance. with other non-guaranteed lenders in insolvency proceedings. (d) Covenants. The loan documentation will also contain both

financial covenants (loan to value, debt service cover) and Spain non-financial covenants (obligations to maintain the asset in 8.9 What is the process for enforcing security over good state of repair or disposal limitations) to be granted by shares? Does a lender have a right to appropriate the borrower in order to ensure that the value of the asset is shares in a borrower given as collateral? If so, maintained. can shares be appropriated when a borrower is in administration or has entered another insolvency or reorganisation procedure? 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a Assuming the debtor is solvent, an event of default must take place mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the for the lender to enforce a security over shares. In general, the lender mortgagor? is entitled to initiate three courses of action for the enforcement of the security: (i) declaratory proceedings; (ii) executive proceedings; and In Spain, the lender with a secured loan needs to start a foreclosure (iii) notarial proceedings. In declaratory and executive proceedings, proceeding, where the main step is the public auction of the asset. the sale is supervised by a court. In notarial proceedings, the sale is There are two types of proceedings: (i) judicial proceeding, to be supervised by a Spanish notary public and, if after two auctions no followed before Spanish courts; and (ii) extrajudicial proceedings, one is willing to purchase the relevant asset, the lender can acquire to be followed before a Notary Public. This extrajudicial proceeding control of the pledged asset, provided it accepts the debtor’s full may only be followed if agreed upon by the parties. discharge. The ECJ judgment of 14 March 2013 (C-415/11) ruled that certain provisions of Spanish law do not comply with the Unfair Terms 9 Tax in Consumer Contracts Directive 93/13/EC. As a result of the judgment, enforcement of mortgages against consumer borrowers will be more difficult. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable?

8.4 What minimum formalities are required for real estate lending? Stamp duty and transfer tax (Impuesto sobre Transmisiones Patrimoniales) are different forms of the same tax. A mortgage over real estate is granted in a public deed and is only Stamp duty is paid when the transaction is formalised in a notarial, valid when registered with the Land Registry. corporate or administrative document. The rates are defined by each regional government (commonly 1% of the real estate value). A pledge over income arising from lease tenants is usually notarised, but notarisation is not mandatory. However, it is advisable to notify Transfer tax is payable when the sale or purchase of real estate the tenants of the pledge. is exempt from VAT. Rates for transfer tax are also set by each regional government, with a general rate of 7%, except for Canarias In share deals, it is common to grant a pledge over the shares of the which has a general rate of 6.5%. SPV acquired by the buyer; this must be granted before a notary public. The buyer pays stamp duty and transfer tax.

8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other 9.2 When is the transfer tax paid? creditors? Transfer tax is payable when the sale or purchase of real estate The protection of a real estate lender depends on the priority of the is exempt from VAT. Rates for transfer tax are also set by each ranking of the secured loans, and this priority is subject to the registration regional government, with a general rate of 7%, except for Canarias principle, unless mutually agreed between the borrower and the lender. which has a general rate of 6.5%. The buyer pays transfer tax. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 9.3 Are transfers of real estate by individuals subject to income tax? Spanish courts are ruling that the enforcement of a guarantee is not valid unless a material condition of the loan agreement is breached Yes, for the difference between the sale value and the original by the borrower. acquisition value (including all costs).

8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender?

Remediation of the breach during the enforcement proceeding.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 269 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

9.4 Are transfers of real estate subject to VAT? How 10.2 What types of business lease exist? much? Who is liable? Are there any exemptions? The Act on Urban Leases does not distinguish the legal regime Generally, VAT is payable for all sales or purchases of real estate applicable to different types of business leases if the object of the when the transaction takes place in the framework of a business lease is only the real estate property. If the lease includes an industrial activity. or a business activity, then the Act on Urban Leases does not apply, The seller charges VAT to the buyer and the seller then pays the VAT but a different regime governed by the Spanish Civil Code does. to the tax authorities.

Spain The general rate of VAT is 21%. However, a reduced rate of: 10.3 What are the typical provisions for leases of business ■ 10% applies to residential buildings. premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or ■ 4% applies to government-subsidised dwellings (viviendas sub-lease; (d) insurance; (e) (i) change of control of de protección oficial). the tenant; and (ii) transfer of lease as a result of a There are exemptions when the transaction relates to the: corporate restructuring (e.g. merger); and (f) repairs? ■ sale or purchase of rural land; ■ delivery of plots of land to a compensation committee (Junta The term of a non-residential lease can be freely agreed by the de Compensación) to develop the land; or parties. An initial term of between two and five years is commonly ■ second or subsequent sales or purchases of real estate. used, with extensions depending on the nature of the lease. The abovementioned transactions are subject to transfer tax. In non-residential leases, unless agreed otherwise, the tenant can However, the seller can waive the exemption, provided both of the sublet the premises or assign the lease without the landlord’s following apply: approval. It is sufficient to give notice to the landlord ofthe subletting or the assignment. However, the landlord is then entitled ■ the buyer acquires the real estate as part of its business to increase the rent by 10% to 20%. activity, for example, if it is a VAT taxable person; and ■ the buyer is entitled to a total reduction of the charged VAT. Unless agreed otherwise, business premises can be shared by the tenant with companies belonging to its group by a subletting agreement. 9.5 What other tax or taxes (if any) are payable by the In most non-residential leases, the parties agree that the landlord is seller on the disposal of a property? responsible for structural and major repairs, and the tenant carries out internal repairs and maintenance as well as interior decoration. The seller is responsible for paying a municipal duty (the municipal The Act on Urban Leases for residential leases otherwise applies to increase of the cadastral value of the property). non-residential leases. The landlord insures the premises but usually recovers premiums 9.6 Is taxation different if ownership of a company (or from the tenant as part of the ancillary costs under the lease. other entity) owning real estate is transferred?

This has to be analysed on a case-by-case basis. In principle, due to 10.4 What taxes are payable on rent either by the landlord a recent reform, in cases where the object of the transfer is the shares or tenant of a business lease? of the company owning the property, the transfer is free of VAT and Transfer Tax if the underlying real property asset is connected to a There are two taxes relevant to the occupation of business premises: business activity (e.g. lease activity), unless the Tax Authorities can ■ Property Tax (Impuesto sobre Bienes Inmuebles). This prove that the sale has been implemented as a share deal, the only taxes the ownership of Spanish real estate. This tax is purpose of which was to avoid Transfer Tax. calculated in accordance with the cadastral value. It is common to charge the tax to the tenant if the property is leased. 9.7 Are there any tax issues that a buyer of real estate ■ Tax on Economic Activities (Impuesto sobre Actividades should always take into consideration/conduct due Económicas). This taxes the economic activity of companies diligence on? with a gross business income of more than EUR 1 million. Non-resident companies operating in Spain through a In case of share deal, latent capital gains of the SPV to be acquired permanent establishment and with a gross business income and latent tax liabilities are the key area of concern for a buyer. In the of up to EUR 1 million are exempt. event of asset deal, the relevant areas of concern are related to potential application of Real Estate Transfer Tax (RETT) instead of VAT and 10.5 In what circumstances are business leases usually tax liens and the assessment of potential contingencies arising thereto. terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party 10 Leases of Business Premises to be compensated by the other for any reason on termination?

10.1 Please briefly describe the main laws that regulate Landlord leases of business premises. Landlords can terminate leases early (both non-residential and The Act on Urban Leases 29/1994 (Ley de Arrendamientos Urbanos) residential) on the following grounds (unless agreed otherwise): regulates leases in urban properties for dwelling and commercial ■ Breach of contract by the tenant. uses. ■ Lack of payment of the rent or service charge.

270 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

■ Carrying out activities which are: 11 Leases of Residential Premises ■ aggravating; ■ unhealthy; ■ harmful; 11.1 Please briefly describe the main laws that regulate leases of residential premises. ■ dangerous; or ■ illegal. The Spanish law on Urban Leases (LAU) provides for the main The landlord has the following additional grounds for terminating regulation for residential premises. Touristic activities are governed the lease early in residential leases: by Regional governments and some regions have enacted their own

■ Lack of payment of statutory deposit. rules for this activity. Spain ■ Subletting or assignment without the landlord’s prior consent. ■ Voluntarily causing damage to the premises. 11.2 Do the laws differ if the premises are intended for ■ Carrying out non-authorised works. multiple different residential occupiers? ■ The dwelling no longer being allocated for residential use. Not for rental activities, but in some regions the touristic regulations Tenant impose different requirements in case the residential property is Under the Act on Urban Leases, the grounds for early termination totally or partially devoted to touristic apartments. by the tenant are: ■ The landlord’s execution of improvement works in the leased premises (subject to certain conditions). 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: ■ Execution of conservation works or works imposed by the (a) length of term; (b) rent increases/controls; (c) the competent authority, provided these works prevent the tenant tenant’s rights to remain in the premises at the end of from using the leased premises. the term; and (d) the tenant’s contribution/obligation ■ Breach of contract by the landlord. to the property “costs” e.g. insurance and repair? In addition, in non-residential leases, any grounds for early termination agreed in the lease are enforceable by the tenant. The length of term is freely agreed by the parties but if this is less than three years the tenant has the statutory right to extend the lease on an annual basis up to three years. Rent increases are linked 10.6 Does the landlord and/or the tenant of a business to the CPI variation (upwards/downwards). There is no right for lease cease to be liable for their respective the tenant to remain in the premises at the end of the term, but the obligations under the lease once they have sold their Spanish Civil Code states that if the landlord consents the tenant interest? Can they be responsible after the sale in respect of pre-sale non-compliance? to retain possession of the property for more than 15 days after expiration, then the lease is extended for an additional term of one year. Landlord’s insurance is not normally charged to the tenant Yes, unless mutually agreed by the parties in a different way. under the lease of a residential property.

10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater 11.4 Would there be rights for a landlord to terminate a sustainable use of buildings and in the reduction of residential lease and what steps would be needed the “environmental footprint” of a building. Please to achieve vacant possession if the circumstances briefly describe any “green obligations” commonly existed for the right to be exercised? found in leases stating whether these are clearly defined, enforceable legal obligations or something In Spain, the legal system is protective of the tenant in case of dispute not amounting to enforceable legal obligations (for so the eviction proceedings take a long time. In addition, tenants have example aspirational objectives). faculties to stop the eviction during the proceedings if the breach of contract is remedied. In turn, the Spanish law allows the landlord The main “green obligation” lies with the landlord, since he is to immediately recover possession of the residential property in case obliged to provide an energy efficiency certificate to the tenant the landlord or relatives must use the property as its own residence. before signing the lease contract. 12 Public Law Permits and Obligations 10.8 Are there any trends in your market towards more flexible space for occupiers, such as shared short-term working spaces (co-working) or shared 12.1 What are the main laws which govern zoning/ residential spaces with greater levels of facilities/ permitting and related matters concerning the use, activities for residents (co-living)? If so please provide development and occupation of land? Please briefly examples/details. describe them and include environmental laws.

Co-working spaces are becoming more visible in CBD areas in the Regional governments in Spain are responsible for town and cities of Madrid and Barcelona. In the residential sector, co-living country planning in its designated territory. Consequently, there is not having a significant presence but touristic apartments are a are 17 different planning law systems in Spain. However, these clear product for development, despite the efforts implemented by systems are inspired by the same planning law system which was in regional government to restrict or even prohibit these activities in force before the Constitution. Therefore, the systems have common city centres. institutions and regulations.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 271 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

Regional government legislation is generally confirmed by the In these circumstances, before the city council’s final approval, the corresponding regional Planning Act (Ley Urbanística) and regional application form is published in official gazettes, and the procedure Planning Decree (Decreto Urbanístico), which complements the enters a public information stage for about one month, during which Planning Act. They are passed by the corresponding regional any party can: parliament and regional government, respectively. ■ study the relevant documentation in the municipal offices; Parliament and the government have legislative and executive and powers for other planning matters, such as: ■ address written pleadings to the city council to enforce their ■ Land valuation. own rights and interests concerning the licence. ■ Compulsory purchase. Public inquiries Spain ■ Protection of coasts and rivers. The approval of basic planning regulation is always subject to ■ Road legislation. public information, and, in some cases, the granting of licences is subject to public consultation. The city councils are the most important authorities concerning town planning and are responsible for the following: Initial decision ■ Initiation and processing of the basic planning regulations Depending on the regional planning legislation and the works or (planeamiento urbanístico general), which are subsequently activities to be authorised, it takes between one and six months approved by the competent regional governments. to obtain approval. The city councils must decide and notify the ■ City design and development. parties within this time. ■ Classification of the land clasificación( urbanística) into: If the maximum term expires and the city council has not notified ■ urban land (suelo urbano); its decision, the licence is generally deemed to have been granted by positive administrative silence (silencio administrativo positivo). ■ land fit for urban development suelo( urbanizable); and ■ land protected from urban development (suelo no Appeals urbanizable). There is a right of appeal against a planning decision. Any party can ■ Defining the permitted uses and construction parameters in make a judicial appeal in court (recurso contencioso-administrativo) each of the types of land. against a public authority decision concerning planning or ■ Granting authorisations of constructions and uses. environmental issues provided the following conditions are met: ■ Inspections. ■ The decision to be appealed must be final, that is, the administrative procedure for adopting the decision must be ■ Sanctioning and expropriation. concluded, including any appeals to public authorities. ■ Approving supplementary planning regulation (planeamiento ■ The judicial appeal must be lodged at the competent court urbanístico de desarrollo). within two months from the date of notification or the date of publication of the decision in the Official Gazette. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price/ 12.4 What main permits or licences are required for compensation mechanism. building works and/or the use of real estate?

Yes; land owners can be forced to sell land which is included in a The following are subject to authorisations, or licences (licencias), planning sector and is due to be developed with the backing of the from the city council: majority of the land owners of such sector. ■ Works. Such land owner is compensated with the corresponding indemnity. ■ Constructions. The land is valued in accordance with the valuation methods established by law. It must be taken into account that in most cases, ■ Divisions of plots. valuation will not be coincident with the fair market value of the ■ Carrying out any activities. land at that time; such valuation, however, can be challenged by the Environmental licences for carrying out activities land owner in court. Activity licence (licencia de actividad). The developer applies to the city council for this licence. The licence authorises the 12.3 Which bodies control land/building use and/or activity for which the developed property will be used (for example, occupation and environmental regulation? How do activities carried out by a hotel, factory or a car park). The city buyers obtain reliable information on these matters? council grants an activity licence provided the activity requested by the developer complies with environmental regulations. Initial consents Opening licence (licencia de apertura). Once the installation of fit- In most cases, the city council grants initial and final planning out works has been duly completed to allow the authorised activities licences. to be performed, municipal technicians inspect the property to Third party rights assess that the fit-out works comply with the activity licence. If they do, the opening licence is granted. Third parties do not always have the right to object. This depends on the corresponding regional government. Regional planning Planning licences for carrying out works legislation generally sets out public information about administrative Works licence (licencia de obras). The developer must apply to the procedures to grant licences if third parties are affected by the city city council for the works licence before the works begin, after the council’s final decision (for example, an activity licence application activity licence has been granted. The city council grants the works to carry out industrial activities in a residential area). licence if the construction complies with the urban parameters in the planning regulations.

272 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

Occupancy licence (licencia de primera ocupación/funcionamiento). Once the construction works have been duly completed, city council 12.10 Please briefly outline any regulatory requirements technicians inspect the property to assess that the works comply with for the assessment and management of the energy performance of buildings in your jurisdiction. the works licence. If they are satisfied, the occupancy licence is granted. In Spain, the following regulations have been enacted to transpose Directive 2002/91/EU of the European Parliament and Council of 12.5 Are building/use permits and licences commonly 16 December 2002: obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? ■ The new Building Technical Code, approved by virtue of Royal Decree 314/2006, which envisages specific measures Spain on energy efficiency and integration of renewable energies. See the answer to question 12.4. ■ The Regulation on Thermic Systems in Buildings, approved by virtue of Royal Decree 1027/2009. 12.6 What is the typical cost of building/use permits and ■ The Regulation of the Energy Efficiency in External the time involved in obtaining them? Lightning, approved by virtue of Royal Decree 1890/2008.

The fees for obtaining the relevant permits are defined locally by municipal authorities. 13 Climate Change

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

The Spanish government enacted Law 16/1985 of 25 June to protect Spain, as part of the EU, is on track to meet its targets for cutting Spanish Historical Heritage. Regional governments have also greenhouse gas emissions both under its own internal target in implemented their own regulations for local historical heritage not the Europe 2020 Strategy and under the Kyoto Protocol’s second protected by Spanish national regulations. commitment period (2013–2020). For 2020, the EU has made a In addition, town master plans may establish different levels of unilateral commitment to reduce overall greenhouse gas emissions protection in case demolition, change of uses, refurbishment or from its 28 Member States (including Spain) by 20% compared to fitting-out works of an existing building. 1990 levels which is one of the headline targets of the EU 2020 strategy.

12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real 13.2 Are there any national greenhouse gas emissions estate? Is there a public register of contaminated land reduction targets? in your jurisdiction? Spain’s goal, in relation to the reduction of gas emissions, consists of The land registry provides for relevant information if a piece of compliance with the Kyoto Protocol and the objectives established land has been declared as contaminated land by environmental by the EU. authorities, or in the event there is an ongoing investigation. In addition, the Ministry of Environment has created a public registry 13.3 Are there any other regulatory measures (not already of contaminated land. mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? The most relevant measure is Royal Decree 235/2013, which transposed Directive 2010/31/EU, regarding energy efficiency in Environmental clean-up is always mandatory as from the buildings, which has an impact on real estate transactions and leases. declaration of contamination by the environmental authorities until the remediation is complete.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 273 © Published and reproduced with kind permission by Global Legal Group Ltd, London Hogan Lovells Spain

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

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

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

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

274 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 28

Switzerland Wolfgang Müller

Meyerlustenberger Lachenal AG Denise Läubli

abolished altogether on the one hand, or made even stricter on the 1 Real Estate Law other. Swiss Parliament decided to maintain the Lex Koller since it is widely recognised that the Lex Koller is the only effective measure 1.1 Please briefly describe the main laws that govern to reduce the demand for Swiss residential properties and thus reduce real estate in your jurisdiction. Laws relating to the risk of “over-heating” residential real estate markets. leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to 3 Real Estate Rights question 12.1. Those relating to tax should be listed in response to questions in Section 9. 3.1 What are the types of rights over land recognised in Switzerland is a civil law country. Real estate is mainly governed your jurisdiction? Are any of them purely contractual between the parties? by written laws on a federal level, such as the Swiss Civil Code, the Swiss Code of Obligations, the Act on the Acquisition of Real Estate by Persons Abroad (the so-called Lex Koller), the Debt Enforcement The most important types of rights over land are ownership, co- and Bankruptcy Act and the Ordinance on the Land Register. ownership (in particular, in the form of the condominium-principled co-ownership), building rights and usufructuary rights on the one hand. On the other hand, lease contracts play a major role, with both 1.2 What is the impact (if any) on real estate of local residential and commercial properties. The latter are purely contractual common law in your jurisdiction? between the parties unless they are annotated in the land register.

As mentioned above, Switzerland is a civil law country. Hence, there is, in principle, no common law in Switzerland. Nevertheless, 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed there is case law which offers guidance on the interpretation of thereon? written laws. In particular, such case law has an impact in the field of landlord-tenant law, where a lot of cases are produced, in Yes, in the case of a building right, the right to a real estate diverges particular in the Western (French-speaking) part of Switzerland. from the right to a building constructed thereon. In such a scenario, there are two owners: one that owns the soil; and the other that owns 1.3 Are international laws relevant to real estate in your the building built thereon. jurisdiction? Please ignore EU legislation enacted locally in EU countries. 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration International laws do not play an important role with respect to real consequences of any split? Are there any proposals estate in Switzerland. The Agreement on the Free Movement of to change this? Persons, however, has an impact on the Lex Koller mentioned above. Beneficial ownership cannot be based on property law provisions, 2 Ownership because Swiss law does not know a legal principle comparable to the common law concept of trust (even if trusts under foreign law are under certain conditions recognised under Swiss law – in the case of 2.1 Are there legal restrictions on ownership of real estate assets under a trust established abroad that are entered in the name of by particular classes of persons (e.g. non-resident the trustees in the land register in Switzerland reference shall be made persons)? to the trust relationship by means of an annotation; a trust relationship that is not annotated in the land register in such a way may be The Lex Koller (see the answers to questions 1.1 and 1.3 above) considered invalid against bona fide third parties). Any beneficial restricts the acquisition of Swiss residential and other non-commercial ownership is therefore of purely contractual nature under Swiss law, real estate by foreign (i.e. non-Swiss) persons while the acquisition which means, in particular, that the right of the beneficiary is not of business premises is, as a rule, unrestricted under the Lex Koller. based on an in rem title to the property, but only on a contractual claim In recent years it has been debated whether the Lex Koller should be against the holder of the property rights. If that holder disposes of the

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 275 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

property in violation of the contractual provisions, the beneficiary is limited to a claim for damages. Although a purchase of property on 4.6 On a land sale, when is title (or ownership) transferred a fiduciary basis is considered to be valid, such fiduciary purchase is to the buyer? void where the parties intended to circumvent legal provisions; this may especially be the case if a non-resident foreigner or a company Transfer of title occurs upon the respective entry into the “journal” with registered office abroad, respectively, intends to acquire a of the land register, provided, however, that the application is later Swiss property in breach of the Lex Koller without disposing of registered in the “main register” of the land register. the necessary permit (see question 2.1 above). A common method of acquiring a beneficial interest in land is by purchasing shares or 4.7 Please briefly describe how some rights obtain priority the majority of shares in a real estate company; the ownership of the over other rights. Do earlier rights defeat later rights? property in an economical sense is transferred simply by conveying Switzerland the shares of the company owning the property – however, also in Except for mortgages, which have an assigned rank among each such a case the restrictions of the Lex Koller apply. See question 2.1 other, irrespective of the time of registration, registered rights obtain above regarding the failed attempt to amend Lex Koller. priority over other rights in accordance with the “rule of seniority”, which means, in principle, “first in time, first in right”. Such rule, 4 System of Registration however, can be contracted away.

4.1 Is all land in your jurisdiction required to be 5 The Registry / Registries registered? What land (or rights) are unregistered? 5.1 How many land registries operate in your jurisdiction? In principle, all privately-owned land is registered in the land If more than one please specify their differing rules register. However, no rights of private ownership apply to public and requirements. waters or to land not suitable for cultivation, such as rocks and scree, fern and glaciers, or springs rising therefrom, unless proof to the For land register purposes, the cantons are divided into districts. contrary is produced. Immovable property which is not privately Hence, the 26 cantons are responsible for setting up the land owned and is in public use will be recorded in the land register only registries, the demarcation of the districts, the appointment and if rights in rem attaching to such property are to be registered or if remuneration of officials and supervision arrangements. cantonal law provides for its registration.

5.2 How do the owners of registered real estate prove 4.2 Is there a state guarantee of title? What does it their title? guarantee? The owner is shown in the land register, which is deemed to be There is no explicit state guarantee of title. However, the land register correct and complete (“public faith”, see question 4.2 above). No is assumed to be complete and correct and everyone may in good faith further proof is necessary. rely on it. Therefore, the state (i.e. the respective canton) is liable for any losses arising from the undue maintenance of the land register. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need 4.3 What rights in land are compulsory registrable? What to be provided to the land registry for the registration (if any) is the consequence of non-registration? of ownership right? Can information on ownership of registered real estate be accessed electronically? All acquisition of land ownership must be recorded in the land register. The consequence of non-registration is that the title remains The cantons can allow their land registries to communicate and with the seller – hence, the respective transaction is not yet closed. In conduct transactions electronically. The transferor of real estate addition, all rights relating to the property and relevant to everyone (e.g. the seller) has to file to the land register an application for the (not just to a contractual party) must be registered in the land register. registration of the new owner (e.g. the buyer) and furnish supporting documents (e.g. the purchase and sale deed).

4.4 What rights in land are not required to be registered? 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? Emption rights, pre-emption rights, repurchase rights and lease agreements, for example, are rights in land that are not required to be registered. Yes, the state (i.e. the respective canton) is liable for any losses arising from the undue maintenance of the land register.

4.5 Where there are both unregistered and registered land or rights is there a probationary period following first 5.5 Are there restrictions on public access to the registration or are there perhaps different classes register? Can a buyer obtain all the information he or qualities of title on first registration? Please give might reasonably need regarding encumbrances and details. First registration means the occasion upon other rights affecting real estate and is this achieved which unregistered land or rights are first registered by a search of the register? If not, what additional in the registries. information/process is required?

No, there is no such probationary period following first registration Any person is entitled to obtain the following information from the under Swiss law. register without showing a legitimate interest:

276 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

1. the name and description of the immovable property; single-family homes and rented apartments, for example in Zurich, 2. the name and identity of the owner; investors expect increasing demand for office space, in particular 3. the form of ownership and the date of acquisition; in Zurich City, Zug and Zurich West. Investors are also looking at special real estate such as city hotels and logistics properties. 4. the charges and mortgages; and 5. the notifications (subject to exceptions). 6.5 Have you observed any trends in particular market A person showing a legitimate interest is entitled to consult the full sub sectors slowing down in your jurisdiction in land register or to be provided with an extract. Hence, a buyer could terms of their attractiveness to investors/developers? also directly obtain from the land register all the information it might Please give examples. reasonably need regarding encumbrances and other rights affecting real estate. Furnishing evidence to establish a legitimate interest, however, With respect to the slight cooling-down in the residential property Switzerland takes time. In practice, it is thus more convenient for the buyer to get market see question 6.4 above. Although construction activity an extract from the land register via the seller or, in certain cantons, has slowed down quite considerably in Q3/2018, applications for via the notary public. Accordingly, the land register cannot simply be new construction projects remain at a high level and the general searched without reason; a legitimate interest needs to be proven for a economic prospects for Switzerland and the construction industry particular property in order to get a full land register extract. remain promising. Therefore, developers continue to profit from high demand from investors. 6 Real Estate Market 7 Liabilities of Buyers and Sellers in Real 6.1 Which parties (in addition to the buyer and seller Estate Transactions and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or 7.1 What (if any) are the minimum formalities for the sale duties. and purchase of real estate?

Lawyers who assist the seller and/or the buyer in conducting a due The purchase and sale deed needs to be notarised by a notary public, diligence, drafting and/or reviewing the contract documents are and the seller (or the notary public, respectively) has to file to the often involved. In addition, notaries public draft and notarise the land register an application for the registration of the new owner purchase and sale deed. Other parties involved are, for example, (i.e. the buyer). banks, realtors, technical/environmental consultants and appraisers. 7.2 Is the seller under a duty of disclosure? What matters 6.2 How and on what basis are these persons must be disclosed? remunerated? There is no formal duty of disclosure. However, the seller is under The fees of the notaries public are subject to the respective laws of a duty to act in good faith which implies, for example, that it has to the cantons. Realtors normally receive a certain percentage of the answer questions of the buyer relating to the transaction truly and purchase price for their brokerage services. Lawyers, consultants accurately. and appraisers are normally remunerated on an hourly basis. 7.3 Can the seller be liable to the buyer for 6.3 Is there any change in the sources or the availability misrepresentation? of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the Yes; if the seller does not disclose important information or gives main sources of capital you see active in your market? false information, it may be liable for misrepresentation.

In Switzerland, it has always been possible to access reasonable 7.4 Do sellers usually give any form of title “guarantee” finance for real estate transactions, even following the 2008 or contractual warranties to the buyer? What would financial crisis. While real estate as an asset class is still attractive to be the scope of these? What is the function of any insurance companies and pension funds, new standards put in place such guarantee or warranties (e.g. to apportion risk, by the Swiss National Bank and the Swiss Bankers Association have to give information)? Would any such guarantee or meant that banks have been forced to be more prudent when lending warranties act as a substitute for the buyer carrying money to private individuals (see the answer to question 8.1 below). out his own diligence?

According to the Swiss Code of Obligations, the seller is liable to 6.4 What is the appetite for investors and/or developers the buyer for any breach of warranty and for any defects that would to invest in your region compared to last year and what are the sectors/areas of most interest? Please materially or legally negate or substantially reduce the value of give examples. the purchase object or its fitness for the designated purpose. Such warranty is, however, in practice, often contracted away (at least As long as interest rates remain low, real estate remains an attractive to some extent) in real estate asset transactions. However, any asset class and there is a lack of alternatives with a comparable risk/ agreement to exclude or limit the warranty obligation is void if return ratio. This applies also to the current year, in which no turn the seller has fraudulently concealed the failure to comply with the away from negative interest rates is to be expected. Since vacancies warranty. Other than that, any additional warranty is a result of the in residential properties are slowly rising and market participants negotiations and depends on the type of property that is sold (e.g. expect stable but slowly decreasing prices for condominium, rent, soil contamination, etc.).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 277 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

7.5 Does the seller retain any liabilities in respect of the 8.3 What are the common proceedings for realisation of property post sale? Please give details. mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without The seller retains no connection with the property after sale. involving court proceedings or the contribution of the mortgagor? However, if the property gains tax has not been secured in the contract, the seller must make sure to pay the relevant taxes. Otherwise, a liability may only arise from the warranties given as If the creditor’s debt is secured by a mortgage, the pledged property described in question 7.4 above or from post-closing obligations is seized and sold at auction by the debt enforcement office (the agreed upon in the sale contract. respective foreclosure proceedings are governed by the Debt Enforcement and Bankruptcy Act and its respective ordinances).

Switzerland In a security agreement, the lender and borrower may, however, 7.6 What (if any) are the liabilities of the buyer (in addition also agree on the private realisation of the collateral. In the latter to paying the sale price)? case, there are no court proceedings to be initiated to realise the mortgaged property. In addition to paying the purchase price, the buyer has to pay the fees and taxes, as provided for by law and/or contract. 8.4 What minimum formalities are required for real estate lending? 8 Finance and Banking The establishment of a new mortgage certificate is to be notarised, and a respective application is to be filed with the land register. At 8.1 Please briefly describe any regulations concerning the same time, there are no formalities in place regarding entering the lending of money to finance real estate. Are the into a credit facility. rules different as between resident and non-resident persons and/or between individual persons and corporate entities? 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other The Swiss National Bank (SNB) and the Swiss Bankers Association creditors? have taken several measures against the continued increase of residential property prices and the amount of mortgage loans in 2014 Mortgages have a certain assigned rank among each other. In which are still in place today. These measures have shown effects general, the claims based on mortgage certificates prevail over and – despite the persisting low interest rate environment, including unsecured or unprivileged claims. negative interest rates – a certain slow down (fewer transactions, decreasing prices) resulted in some areas and some segments of the 8.6 Under what circumstances can security taken by a residential and commercial real estate market (see also the answers lender be avoided or rendered unenforceable? to questions 6.3 and 6.5 above). Some players in the market have therefore raised the question as to whether the time has come to abolish Under the Swiss Debt Enforcement and Bankruptcy Act, the or mitigate such measures. However, negative interest rates continue following acts that disadvantage certain creditors, carried out by to make investments in real estate attractive and imbalances in the the debtor or security provider before the opening of bankruptcy mortgage and real estate markets persist. The SNB has thus reserved proceedings, can be voidable (anfechtbar): the possibility to introduce further measures if deemed required. ■ The debtor or security provider disposes of assets against no In addition, the SNB and the Swiss Federal Council, respectively, consideration or against inadequate consideration in the year increased the countercyclical capital buffer from 1% to 2% of the before the adjudication of bankruptcy or an equivalent event. risk-weighted positions secured by residential property situated in ■ The debtor or security provider carries out certain acts within Switzerland. The SNB rules apply to both resident and non-resident one year from the opening of bankruptcy proceedings, while persons. it is over-indebted, including, inter alia, the granting of Also in 2014, another set of regulations was put in place: the Swiss collateral for previously unsecured debt. Bankers Association’s guidelines on the minimum requirements for The debtor or security provider carries out any act during the five mortgage financing for owner-occupied residential property. Under years before the opening of bankruptcy proceedings that has the these guidelines, a deposit of at least 10% of the loan value must be paid purpose of disadvantaging creditors or preferring certain creditors (with funds that do not come from the second pillar) for new purchases to the detriment of others (that is, avoidance is the intent). and mortgage increases. If the purchase price is higher than the loan value, the difference must be paid in full with own funds that do not 8.7 What actions, if any, can a borrower take to frustrate come from the second pillar. The mortgage debt must be reduced to 2/3 enforcement action by a lender? of the loan value of the property within a maximum period of 15 years, with repayments made on a straight-line basis starting at the latest 12 According to Art. 17 of the Swiss Debt Enforcement and Bankruptcy months from the date on which the deposit was paid. Act, an appeal on the grounds of incorrect application of the law or inappropriate exercise of discretion is, in principle, possible against 8.2 What are the main methods by which a real estate any order made by a debt enforcement or a bankruptcy office. No lender seeks to protect itself from default by the charge is made for the respective appeal proceedings (Art. 20a of borrower? the Debt Enforcement Act). A party which, however, appeals in temerity or in bad faith, or its legal representative, can be fined up In Switzerland, the main method by which a real estate lender seeks to 1,500 Swiss francs. Against this backdrop, some borrowers seek to protect itself from default by the borrower is the mortgage. every opportunity to appeal (without taking a big financial risk)

278 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

in order to hold up the enforcement action by the lender. We have seen cases in which it took the lender up to five years to enforce a 9.4 Are transfers of real estate subject to VAT? How mortgage. much? Who is liable? Are there any exemptions?

Transfers of real estate are, as a rule, exempt from VAT. However, 8.8 What is the impact of an insolvency process or a waiver of exemption and option for VAT on the purchase price of corporate rehabilitation process on the position of a the building(s) is possible, provided that the real estate is not used real estate lender? for private purposes. As a result, the investor will be able to reclaim Swiss input VAT on the purchase price (the current VAT rate is If insolvency proceedings are initiated, all debts are due with 7.7%). A careful analysis regarding VAT in connection with Swiss the exception of those secured by the borrower’s real estate by real estate transactions is required as VAT consequences can be very collateral. In addition to the principal debt, the creditor can claim relevant in economic terms. Switzerland the interest up to the opening date and the collection costs. A real estate lender generally secures its credit with a mortgage; those debts are paid in advance (hence prior to all other creditors) and 9.5 What other tax or taxes (if any) are payable by the thus treated preferably. seller on the disposal of a property?

There are no other taxes. It should be noted, however, that the buyer 8.9 What is the process for enforcing security over and seller are jointly liable for Swiss income tax on brokerage fees shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, paid to a foreign (non-Swiss) broker involved in the transaction. The can shares be appropriated when a borrower is in tax liability is limited to 3% of the purchase price of the property. administration or has entered another insolvency or reorganisation procedure? 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? Lending money is a risky business as the only obligation of the borrower by law is the repayment of the money in the same amount. The real estate transfer tax, if any, is owed in case of an asset or share In commercial relations, the borrower has to pay interest as well. It is deal (see the answer to question 9.1 above). It may, however, be not common in Switzerland to give shares as collateral; in connection possible to reduce or eliminate taxes on capital gains if a company with real estate, the credit is generally secured by mortgage. holding a property instead of the property itself is sold.

9 Tax 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due diligence on? 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? Real estate transactions regularly require an in-depth analysis with regard to income tax, VAT and tax-optimised financing and The acquisition of real estate or the majority (in certain cantons even structuring. The relevant issues depend on the specific case. a minority stake) of the shares in a Swiss real estate company may be subject to real estate transfer tax of between 1% and 3%, depending on the canton where the property is located. Certain cantons do not 10 Leases of Business Premises apply a real estate transfer tax, such as Zurich, which abolished real estate transfer tax a few years ago. The tax is normally payable by the buyer. Often, the buyer and seller are jointly and severally liable 10.1 Please briefly describe the main laws that regulate for the real estate transfer tax. Contractual agreements are possible leases of business premises. with respect to the internal allocation of the tax burden between buyer and seller. In certain cantons, tax laws may foresee a lien on The laws that regulate leases of business premises are, on one the property to secure the transfer taxes. Also, registration fees of hand, the Swiss Code of Obligations (Arts 253 to 301) and, on the the land register may depend on the value of the property. other hand, the Ordinance regarding the Lease of Residential and Business Premises. There is no separate Swiss act that deals with the leases of business premises only. 9.2 When is the transfer tax paid?

It depends on the regulations of the respective canton. In an asset 10.2 What types of business lease exist? deal, the transfer tax is sometimes paid through the notary public. In some cantons, the notary is personally liable for the payment of In practice, various types of business leases exist, such as fixed-term the transfer tax. leases or leases that last for an indefinite period of time, ordinary leases or leases which come close to double or triple net lease agreements. 9.3 Are transfers of real estate by individuals subject to income tax?

Yes, the gain realised through the real estate transfer is subject to tax either as a special real estate income tax or – in exceptional cases – as normal income tax.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 279 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

10.3 What are the typical provisions for leases of business 10.7 Green leases seek to impose obligations on premises in your jurisdiction regarding: (a) length of landlords and tenants designed to promote greater term; (b) rent increases; (c) tenant’s right to sell or sustainable use of buildings and in the reduction of sub-lease; (d) insurance; (e) (i) change of control of the “environmental footprint” of a building. Please the tenant; and (ii) transfer of lease as a result of a briefly describe any “green obligations” commonly corporate restructuring (e.g. merger); and (f) repairs? found in leases stating whether these are clearly defined, enforceable legal obligations or something (a) Length of term: business leases typically last for five or 10 not amounting to enforceable legal obligations (for years, possibly with an option of one additional five-year example aspirational objectives). period. (b) Rent increases: the parties often agree on indexed rents based In Switzerland, there are commonly no such provisions in lease Switzerland on the Swiss consumer price index. agreements. (c) Tenant’s right to sell or sub-lease: subject to the landlord’s approval, the tenant is entitled to sublet the premises. 10.8 Are there any trends in your market towards more (d) Insurance: we often see clauses according to which the tenant flexible space for occupiers, such as shared has to provide liability insurance. short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ (e)(i) Change of control of the tenant: in principle, change of activities for residents (co-living)? If so please provide control does not affect the commercial lease agreement. examples/details. (e)(ii) Transfer of lease as a result of corporate restructuring: in a merger, a lease agreement is transferred to the new (restructured) The trend towards co-working space has also arrived in Switzerland. entity. The acquiring legal entity shall, however, secure claims of the creditors involved in the merger, if creditors so demand, There is increasingly more such places, especially in the business within three months after the merger becomes legally effective. cities like Zurich and Geneva. (f) Repairs: generally speaking, and as a basic rule, the landlord is responsible for major repairs; however, exceptions may 11 Leases of Residential Premises apply with leases which come close to double and triple net lease agreements. 11.1 Please briefly describe the main laws that regulate leases of residential premises. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? The laws that regulate leases of business premises are, on one Under certain circumstances, and if opted for VAT, the rent to be hand, the Swiss Code of Obligations (Arts 253 to 301) and, on the paid for business leases may be subject to VAT (which is currently other hand, the Ordinance regarding the Lease of Residential and at 7.7%). Business Premises. There is no separate Swiss act that deals with the leases of residential premises only.

10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party 11.2 Do the laws differ if the premises are intended for etc.)? Are there any special provisions allowing a multiple different residential occupiers? tenant to extend or renew the lease or for either party to be compensated by the other for any reason on No, they do not. termination?

Depending on the circumstances of the case at hand, business leases 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: can indeed be terminated at expiry, on default or by either party (a) length of term; (b) rent increases/controls; (c) the giving notice. The tenant may request the extension of a fixed-term tenant’s rights to remain in the premises at the end of or open-ended lease where termination of the lease would cause a the term; and (d) the tenant’s contribution/obligation degree of hardship for it that cannot be justified by the interests of to the property “costs” e.g. insurance and repair? the landlord. A commercial lease may be extended by up to six years. The typical provisions are as follows: a) an indefinite term with a 10.6 Does the landlord and/or the tenant of a business notice period of three months; b) official benchmark interest rate lease cease to be liable for their respective applies (specific laws can apply in the canton of Geneva); c) it is obligations under the lease once they have sold their possible to extend the term for a maximum of four years; and d) interest? Can they be responsible after the sale in insurance and repairs are to be paid by the tenant via net rent or respect of pre-sale non-compliance? ancillary costs, if agreed upon accordingly.

As a basic rule, the lease passes to the acquirer together with 11.4 Would there be rights for a landlord to terminate a ownership of the property sold. The new owner may, however, residential lease and what steps would be needed serve notice to terminate a lease on commercial premises as of the to achieve vacant possession if the circumstances next legally admissible termination date if it claims an urgent need existed for the right to be exercised? to use the premises itself. If the new owner terminates sooner than is permitted under the contract with the existing landlord, the latter For valid reasons rendering the performance of the contract is liable for all resulting losses. intolerable, the landlord may terminate any lease observing a notice

280 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

period of three months. The landlord has to take court action (eviction proceedings) in order to achieve vacant possession if the 12.7 Are there any regulations on the protection of historic circumstances exist for the right to be exercised. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use? 12 Public Law Permits and Obligations There are regulations on the protection of historic monuments on a federal, cantonal and community level. They do not directly affect the 12.1 What are the main laws which govern zoning/ transfer of rights in real estate. The buyer should, however, be aware permitting and related matters concerning the use, that certain modifications to a building may be impossible and/or development and occupation of land? Please briefly subject to negotiations with the authorities. Hence a change of use – describe them and include environmental laws.

provided that the change has been permitted – is only possible without Switzerland any affection as long as the buyer does not make any modifications to The Swiss system of zoning and planning is performed on four the protected property, which is not common in practice. levels (federal, cantonal, regional and local). On each level, respective laws exist. Environmental protection is mainly addressed on a federal level. 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land 12.2 Can the state force land owners to sell land to in your jurisdiction? it? If so please briefly describe including price/ compensation mechanism. Yes, each canton has a public register of contaminated real estate. More and more of such registers are available online. However, If the rules of expropriation are followed, the state can force land the fact that a property is not entered into such register does not owners to sell land to it in order to achieve certain goals which necessarily mean that the property is not contaminated or polluted. are in the public’s interest. The basic rules of expropriation are as follows: the state needs to establish that (i) there is a sufficient legal basis for the expropriation, (ii) the expropriation is in the public’s 12.9 In what circumstances (if any) is environmental clean- interest, (iii) the expropriation is in accordance with the principle of up ever mandatory? proportionality, (iv) the goal of the state cannot be achieved by other reasonable measures, and (v) the land owner is fully compensated. A property must be cleaned up if it is listed in the public register of contaminated real estate as being polluted. When it comes to the sale or division of immovable property located on a site that is entered 12.3 Which bodies control land/building use and/or in the register of polluted sites, an authorisation of the competent occupation and environmental regulation? How do authorities is to be obtained. buyers obtain reliable information on these matters?

Land/building use and/or occupation and environmental regulation 12.10 Please briefly outline any regulatory requirements are in most cases controlled by authorities determined by the cantons for the assessment and management of the energy and the communities. In order to get reliable information on these performance of buildings in your jurisdiction. matters, the respective authorities have to be contacted. More and more information is available online. The assessment and management of the energy performance is regulated on a cantonal level. In general, it is not mandatory for the owners to perform respective tests. 12.4 What main permits or licences are required for building works and/or the use of real estate? 13 Climate Change In most cases, a permit is necessary to build, modify, demolish or change the use of a building. 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide 12.5 Are building/use permits and licences commonly emissions (including any mandatory emissions obtained in your jurisdiction? Can implied permission trading scheme). be obtained in any way (e.g. by long use)? Under the heading “energy strategy 2050”, a comprehensive set of It depends on the circumstances of the case at hand. Implied documents has been produced in recent years. As part of the energy permission is hardly ever seen. strategy 2050, the CO2 Act has been revised and came into force on 1 January 2013 (it will be further revised and become harsher under 12.6 What is the typical cost of building/use permits and the new Energy Law. As to the new Energy Law, see the answer to the time involved in obtaining them? question 13.3 below. Under the revised CO2 Act, subsidies in the amount of 450 billion Swiss francs per year for the reduction of CO2 Time and costs vary from canton to canton and community to from buildings will also be made available). The CO2 Act sets out community. They range (depending on the project) from several targets for emission reductions until 2020 and contains measures hundred to several hundred thousand Swiss francs. for buildings, transport and industry. Among others, a building programme has been established in order to promote energy efficient technologies for the renovation of buildings and the investment in

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 281 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

renewable energies, waste heat recovery and the optimisation of gave the go-ahead to the first series of measures to restructure the building utilities. There is a plan to replace the existing concept of country’s energy system. These are intended to reduce energy subsidies with a steering charge. consumption, improve energy efficiency and promote the use of renewable energies. Furthermore, the construction of new nuclear power stations has been prohibited. The totally revised Energy 13.2 Are there any national greenhouse gas emissions reduction targets? Act came into force on 1 January 2018. By applying this strategy Switzerland can reduce its dependency on imported fossil fuels and strengthen domestic renewable energies. It can also create jobs and Based on the Kyoto protocol, the CO2 Act aims at reducing boost investment in the country. greenhouse gas emissions by 2030 by 50% compared to 1990 levels. Over this period, the Federal Council intends to achieve a minimum Moreover, the Environmental Protection Law also contains provisions relating to construction work and buildings and the

Switzerland of 30% in Switzerland and a maximum of 20% abroad with various actions. Environmental Compatibility Assessment Law provides that any construction or building measures which materially influence the environment need to undergo an environmental compatibility 13.3 Are there any other regulatory measures (not already assessment. mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

The Energy Strategy 2050 is being implemented gradually. By approving the revision of the Energy Act in May 2017, Swiss voters

282 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Meyerlustenberger Lachenal AG Switzerland

Wolfgang Müller Denise Läubli Meyerlustenberger Lachenal AG Meyerlustenberger Lachenal AG Schiffbauplatz Schiffbauplatz 8005 Zurich 8005 Zurich Switzerland Switzerland

Tel: +41 44 396 91 91 Tel: +41 44 396 91 91 Email: [email protected] Email: [email protected] URL: www.mll-legal.com URL: www.mll-legal.com

Dr. Wolfgang Müller is a partner at Meyerlustenberger Lachenal and Denise Läubli specialises in real estate, construction and rental law heads the real estate team. His practice focuses on real estate, in matters, including real estate transactions and property developments. Switzerland particular real estate, M&A and capital markets. Wolfgang Müller She graduated from the University of Zurich, Switzerland, in 2010 graduated from the University of Zurich in 1990, and in 1992 was and was admitted to the Bar in Switzerland in 2013. After the Bar conferred a doctoral degree by the University of Zurich (Dr.iur.). exam, she spent a year in Cape Town where she worked for a small He was admitted to the Bar in Switzerland in 1993. After having consulting firm. Before joining Meyerlustenberger Lachenal AG, successfully completed his MBA at the Australian School of Business Denise Läubli worked with a law firm specialised in real estate and in Sydney/Australia and the University of Michigan Business School construction law. in Ann Arbor/USA, he joined the company in 1997 and has been a partner since 2004. Wolfgang Müller is, among others, recommended by The Legal 500 as a leading individual for real estate and construction in Switzerland.

Meyerlustenberger Lachenal AG offers the full range of services relating to real estate and provides comprehensive advice from the acquisition to the sale of properties, and from the planning to the construction and use of buildings and properties. With its 100 lawyers and offices in Zurich, Geneva, Zug, Lausanne and Brussels, Meyerlustenberger Lachenal AG provides efficient solutions for its domestic and international clients in all areas of business law.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 283 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 29

Ukraine Taras Burhan

Taras Burhan Law Office LLC Zvenyslava Kit

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to Foreign ownership of agricultural land is prohibited in Ukraine. question 12.1. Those relating to tax should be listed in response to questions in Section 9. Foreign ownership of non-agricultural land is limited. The below table demonstrates conditions when non-resident persons may The main laws that govern real estate in Ukraine include the own non-agricultural land in Ukraine. Such conditions depend following: on whether land is located within or beyond the boundaries of a settlement (i.e. city or village). ■ Civil Code of Ukraine; ■ Commercial Code of Ukraine; Within the Beyond the ■ Land Code of Ukraine; boundaries of a city/ boundaries of a city/ village village ■ Law of Ukraine “On the Lease of Land”; and Only if they own real estate objects ■ Law of Ukraine “On State Registration of Property Rights to Yes, may own (no Foreign individuals (i.e. buildings or Real Estate and their Encumbrances”. restrictions apply). structures) located on such land. 1.2 What is the impact (if any) on real estate of local Only for construction Only if they purchase common law in your jurisdiction? purposes, or if they real estate objects purchase real estate Foreign legal entities (i.e. buildings or objects (i.e. buildings structures) located on Ukraine is a civil law country and the impact of local common law or structures) located such land. is therefore relevant only for the interpretation and application of on such land. the statutory law. State or municipal land may be sold to a foreign legal entity only if its permanent establishment (with a right to carry out commercial 1.3 Are international laws relevant to real estate in your activity on the territory of Ukraine) has been registered. Such jurisdiction? Please ignore EU legislation enacted locally in EU countries. condition does not apply to purchase of private land. It is worth mentioning that the Land Code of Ukraine does not In Ukraine, real estate is mostly governed by local law. However, specifically allow Ukrainian legal entities with 100% foreign Ukraine is a party to a number of international treaties and bilateral ownership to own any land in Ukraine. In practice, due to this agreements that may have impact on real estate transactions involving limitation, two-tear corporate structures are often used by foreign foreign nationals, in particular, bilateral investment treaties that investors to hold property in Ukraine (i.e. foreign parent – Ukrainian provide protection for real estate ownership rights against unlawful subsidiary – Ukrainian property holding company); alternatively, a actions by governmental agencies such as unjustified expropriation, Ukrainian partner (with a minimum participation share/interest) can as well as treaties on avoidance of double taxation that may prescribe be involved in order to convert a fully owned subsidiary into a joint more favourable taxation regime in contrast to local law. venture (to which the abovementioned limitation does not apply). Finally, even with respect to Ukrainian residents, the turnover of agricultural land is subject to moratorium until a specialised law regulating such turnover becomes effective (no bill has been adopted; various drafts have been discussed for years).

284 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

The said moratorium means that, save for a few exceptions in the Ukrainian legal system. The legal and beneficial owner is one (inheritance, land swap or production-sharing purposes), there is person who is registered in the State Register of Property Rights to a ban on: Real Estate (hereinafter – the “Rights Register”). (i) sale of all state- and municipally-owned agricultural land We are not aware of any proposals to change this. plots; and (ii) sale or other alienation, contribution to charter capital of legal entities and/or changes to permitted use for certain parts of 4 System of Registration privately-owned agricultural land, namely: (a) agricultural commodity land; (b) individual household land allocated in kind to the owners of land shares; and (c) land shares. 4.1 Is all land in your jurisdiction required to be

registered? What land (or rights) are unregistered? Ukraine

3 Real Estate Rights All land in Ukraine is required to be registered. Land plots should be registered with the State Land Cadastre. Rights to land plots should be registered with the Rights Register. 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual In reality, however, a great number of land plots in Ukraine remain between the parties? unregistered. Mostly, these are land plots acquired prior to launching mandatory registration procedures (i.e. prior to January 1, 2013). Rights The following types of rights over land are recognised in Ukraine: to such land plots are recognised despite the absence of registration. (i) ownership (private, municipal, state); However, any further legal transaction with such unregistered land plot (ii) use (term or perpetual); and requires prior registration of both land plot and rights thereto. (iii) mortgage. Save for a few exceptions (law, court order, will/inheritance), rights 4.2 Is there a state guarantee of title? What does it guarantee? of term use are purely contractual between the parties. Such rights include: One of the principles of the state registration of rights in Ukraine, as ■ Lease (sub-lease), i.e. a temporary contractual use right on chargeable basis. illustrated by the Law of Ukraine “On State Registration of Property Rights to Real Estate and their Encumbrances”, is guaranteeing ■ Servitude, i.e. a right to use a land plot belonging to another by the state of objectivity, authenticity and completeness of data person for specific purpose (for instance, passing by foot or by vehicle, installing utilities and communications, collecting about registered rights with respect to real estate and encumbrances water, locating building equipment, etc.). thereof. It is not clear if expression of such principle in the law on its own is sufficient to conclude that there is a state guarantee of title ■ Emphyteusis, i.e. a right to use a land plot belonging to another person for farming. in Ukraine. No relevant court practice exists yet. ■ Superficies, i.e. a right to use a land plot belonging to another person for construction. 4.3 What rights in land are compulsory registrable? What Right of mortgage can also be classified as purely contractual. (if any) is the consequence of non-registration?

All rights to land are subject to mandatory state registration. The 3.2 Are there any scenarios where the right to land diverges consequence of non-registration is that the rights do not become from the right to a building constructed thereon? effective.

One of the principles of Ukrainian property law is that rights to land should follow the right to a building constructed thereon. As 4.4 What rights in land are not required to be registered? illustrated under the Land Code, in case of acquiring the ownership right to real estate (i.e. buildings or structures), ownership right with Only rights that validly arose prior to January 1, 2013 are not respect to the land plot under such real estate terminates and the new required to be registered in the Rights Register. owner of the real estate acquires the ownership right to such land plot. However, in practice, there is a great number of privately owned 4.5 Where there are both unregistered and registered land buildings and other real estate objects located on state or municipal or rights is there a probationary period following first land (where rights to land are documented as lease, permanent registration or are there perhaps different classes use, or not yet documented at all – so-called “actual use”). Since or qualities of title on first registration? Please give details. First registration means the occasion upon there is no mandatory buy-out (privatisation) of state or municipal which unregistered land or rights are first registered land plots under privately owned buildings, split in ownership for in the registries. buildings and underlying land between different persons is likely to continue. The same refers to buildings and other real estate objects There is neither probationary period following the first registration, that have been lawfully constructed on private land plots leased for nor different classes or qualities of title on the first registration. the purpose of construction (or used on terms of superficies).

4.6 On a land sale, when is title (or ownership) transferred 3.3 Is there a split between legal title and beneficial title to the buyer? in your jurisdiction and what are the registration consequences of any split? Are there any proposals to change this? The title (ownership) transfers from the seller to the buyer at the moment of state registration of such transfer (right) in the Rights There is no split between legal title and beneficial title to real estate Register.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 285 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

(v) extract from the State Land Cadaster (in case other documents 4.7 Please briefly describe how some rights obtain do not contain reference to the cadaster number of the land priority over other rights. Do earlier rights defeat later plot); and rights? (vi) payment confirmations (administrative fee). Information on ownership of registered real estate can be accessed Earlier registered rights defeat later rights (in practice, this is mostly electronically (see question 5.5). relevant to the rights of the mortgagee).

5.4 Can compensation be claimed from the registry/ 5 The Registry / Registries registries if it/they make a mistake? Ukraine

5.1 How many land registries operate in your jurisdiction? Compensation from the registries if they make a mistake can be If more than one please specify their differing rules claimed on general civil law grounds governing liability in case of and requirements. infliction of damages/harm. No specific liability provision exist at present. Currently, there are two relevant registers operating in Ukraine, namely: (i) the State Land Cadastre; and (ii) the Rights Register. 5.5 Are there restrictions on public access to the The State Land Cadastre contains information on formed land plots. register? Can a buyer obtain all the information he A land plot is deemed to be formed once a cadastral number has might reasonably need regarding encumbrances and been assigned to it. Forming a land plot involves determining its other rights affecting real estate and is this achieved by a search of the register? If not, what additional area and boundaries and entering certain other details about the land information/process is required? plot in the State Land Cadastre. A land plot can be the subject of civil law transactions only when it is formed. Any person may request and receive information from the Rights The Rights Register contains information about ownership and Register online (https://kap.minjust.gov.ua/login/index/) by the other rights over real estate, including land plots. Encumbrances following search criteria: and other property rights to a land plot may be registered only after ■ address; the registration of the ownership rights to such land plot. ■ registration number of a real estate object; ■ cadastre number of a land plot; 5.2 How do the owners of registered real estate prove ■ identification data of a physical person; and their title? ■ identification data of a legal entity. Typically, the owners of registered real estate prove their title by two In order to obtain online access, it is necessary to register as an online documents: (i) an information certificate from the Rights Register; user of the search service (i.e. to obtain a login and password; in and (ii) a relevant title document (i.e. sale-purchase contract, gift practice, this might not be possible to non-residents of Ukraine until granting agreement, property swap agreement, inheritance certificate, they receive a Ukrainian tax identification number). Alternatively, privatisation/registration certificate, ownership certificate, etc. as the search can be carried out through the registers (including private or case may be). state notaries). Typically, real estate transactions involve not only search of the 5.3 Can any transaction relating to registered real estate Rights Register, but also review of the original title documents and be completed electronically? What documents need other underlying documents that served as grounds for registration to be provided to the land registry for the registration of encumbrances and other rights affecting real estate. of ownership right? Can information on ownership of registered real estate be accessed electronically? 6 Real Estate Market Theoretically, transactions that do not require notarisation (such as, land lease or sub-lease, servitude, emphyteusis, superficies, or 6.1 Which parties (in addition to the buyer and seller a real estate lease for the term up to three years), can be completed and the buyer’s finance provider) would normally electronically (provided that the parties have electronic digital be involved in a real estate transaction in your signatures). However, we have not seen this in practice yet, and all jurisdiction? Please briefly describe their roles and/or real estate transactions are in paper form. duties. Transactions that require notarisation (sale, mortgage, long-term (three+ years) lease of real estate) cannot be completed electronically The following parties are normally involved in real estate at present. transactions in Ukraine: The following documents must be provided for purposes of ■ Notary – verifies the compliance of the transaction document with the requirements of the law, checks the validity of registration of the ownership right with the Rights Register: the seller’s title and encumbrances, verifies capacity of (i) application; the parties to enter into transaction, certifies the contract, (ii) applicant’s ID (i.e. passport); registers ownership change in the Rights Register and issues (iii) applicant’s tax identification number; an information certificate from the register naming buyer as a new owner of the real estate. (iv) document serving as a ground for origination, transfer or termination of title (i.e. sale-purchase agreement, property ■ Real estate appraiser (not always mandatory) – issues swap agreement, gift granting agreement, court order, etc.); valuation report that serves as a ground for application of state duty and other mandatory payments related to the transaction.

286 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

■ Real estate agent (optional) – helps the parties to find a good (ii) the sale-purchase agreement must be notarised and registered; deal. and ■ Parties’ lawyers (optional) – structures transaction, conducts (iii) title change (i.e. ownership of the buyer) must be duly legal due diligence and other relevant checks, assists parties registered in the Rights Register. with signing and closing of the transaction. Non-resident buyers may also need to complete some preliminary ■ Interpreter – is involved in transactions with non-resident steps such as translating foreign documents into Ukrainian (this may parties, provides written and/or oral translation of transaction also involve legalisation or apostilisation depending on country of documents and other materials to the parties that do not speak documents’ origin), obtaining a Ukrainian tax identification number Ukrainian. (in case of individuals), opening an investment or other type of account at local banks, etc. Ukraine 6.2 How and on what basis are these persons remunerated? 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? ■ Notary – public notaries charge a state duty in the amount of 1% of the contract price; fees of private notaries are negotiable, but, in practice, are very close to what public The seller’s duty of disclosure is rather limited in Ukraine. The notaries charge, i.e. 1%. seller must disclose all existing third-party rights to the property. ■ Real estate appraiser – fixed fee depending on the size of the object (typically in the range of EUR 50–5000 per object). 7.3 Can the seller be liable to the buyer for ■ Real estate agent – success fee (typically in the range of misrepresentation? 2–5% depending on the type and size of the object). ■ Parties’ lawyers (optional) – hourly rate (typically EUR 50– Ukrainian law does not prescribe/recognise the concept of 500 per hour, depending on the type, size and complexity of contractual representations. However, under the general principles the deal; quite often the fees are caped). of the Civil Code, a transaction can be invalidated by a court in case ■ Interpreter – hourly rate (typically EUR 10–50 per hour, when one party purposely deceives the other party with regard to depending on the language of the parties/documents). circumstances that are of significant importance.

6.3 Is there any change in the sources or the availability 7.4 Do sellers usually give any form of title “guarantee” of capital to finance real estate transactions in your or contractual warranties to the buyer? What would jurisdiction, whether equity or debt? What are the be the scope of these? What is the function of any main sources of capital you see active in your market? such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or We do not observe any significant change in the sources or the warranties act as a substitute for the buyer carrying out his own diligence? availability of capital to finance real estate transactions in Ukraine. The availability of bank financing is still very limited. Title “guarantee” is usually not given in Ukraine. Nevertheless, it is common practice to include in the texts of sale-purchase contracts 6.4 What is the appetite for investors and/or developers certain statements of the seller given to the buyer that are similar to to invest in your region compared to last year and contractual warranties. Typically, they cover the following: what are the sectors/areas of most interest? Please give examples. ■ seller’s capacity to enter into the contract; ■ due title to the property; There is an appetite for high-quality residential objects with good ■ absence of encumbrances and other third party rights (or locations, as well as good-quality office premises. Investment into disclosure thereof); and construction of new hotels also attract investors’ interest. ■ absence of technical defects (or disclosure thereof). The main function of such statements is to give information. Such 6.5 Have you observed any trends in particular market statements do no act as a substitute for the buyer carrying out his sub sectors slowing down in your jurisdiction in own due diligence. terms of their attractiveness to investors/developers? Please give examples. 7.5 Does the seller retain any liabilities in respect of the property post sale? Please give details. It seems that the appetite for low-quality (budget) housing and residential objects with unattractive locations is declining. The seller does not retain any liabilities in respect of the property post sale, except for situations when transfer of title and transfer of 7 Liabilities of Buyers and Sellers in Real property does not happen simultaneously (i.e. the seller is given a Estate Transactions right to use the property for some time after the sale and to physically transfer it to the buyer at a later date). In such a case, the seller is under an obligation to continue paying for utilities, and also can be 7.1 What (if any) are the minimum formalities for the sale held liable for accidental loss of the property. and purchase of real estate?

The minimum formalities for the sale and purchase of real estate in 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? Ukraine are as follows: (i) validity of seller’s ownership should be confirmed (relevant checks are done at the Rights Register); In addition to paying the sale price, the buyer pays a 1% contribution

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 287 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

to the State Pension Fund of Ukraine (if applicable). Unless ■ sale of mortgaged property by the mortgagee; or otherwise agreed by the parties, the buyer will also pay the fees of ■ conveyance/transfer of ownership over the mortgaged the notary (including 1% state duty), and remuneration of the realtor. property to the mortgagee. Such proceedings can be applied in case they are envisaged in 8 Finance and Banking the respective mortgage agreement or in a separate agreement on satisfaction of the mortgagee’s claims.

8.1 Please briefly describe any regulations concerning 8.4 What minimum formalities are required for real estate the lending of money to finance real estate. Are the lending? rules different as between resident and non-resident Ukraine persons and/or between individual persons and corporate entities? The minimum formalities required for real estate lending include: ■ signing a loan agreement (in a simple written form, unless Formally, lending of money to finance real estate falls within the one of the parties requests notarisation); definition of a financial service and, therefore, can be carried out ■ registering the loan agreement with the NBU (in case of by banks and financial institutions. At the same time, the Civil cross-border loans; no registration is needed for domestic Code of Ukraine also allows for loans to be granted by individuals loans); and legal entities, and despite a few attempts by the regulator to ■ signing and notarising a mortgage agreement; and limit application of this rule (by obtaining a special permit or other ■ registering the mortgage as an encumbrance of real estate authorisation), the application of the Civil Code prevails. with the Rights Register. The rules with respect to residents and non-residents differ. Loans from non-residents are subject to registration by the National Bank 8.5 How is a real estate lender protected from claims of Ukraine (hereinafter – the “NBU”) prior to any amount of the against the borrower or the real estate asset by other loan being disbursed; also, the maximum amount of interest and creditors? other payments under cross-border loans in hard currencies (such as EUR, USD, GBP) is capped and shall not exceed 11% for fixed- A real estate lender as mortgagee has priority in satisfying its claims rate loans granted for more than three years (10% for loans of one from the mortgaged property. If, in addition to the mortgage, the to three years, and 9.8% for loans up to one year) or LIBOR+7.5% real estate lender keeps pledges over movable property (including for floating rate loans. During 2019 these rules may change as a property rights), the lender has priority in satisfying its claims consequence of the new Law of Ukraine “On Currency” becoming from the pledge property, provided that relevant pledges have effective as of 7 February 2019 and further steps taken by the NBU been registered with the Register of Encumbrances over Movable in the direction of liberalisation of currency market. Property (hereinafter – the “Encumbrance Register”) with ranking higher than encumbrances of other creditors.

8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the 8.6 Under what circumstances can security taken by a borrower? lender be avoided or rendered unenforceable?

The most commonly used collateral is mortgage, as well as, to a lesser Clawback in bankruptcy may be relevant: there are a number of extent, sureties and bank guarantees. Pledge of shares/participatory grounds on which transactions entered into by a Ukrainian debtor interest in the project company, pledge of rights to funds at bank up to one year before commencement of the bankruptcy may be accounts, pledge of rights under leases, etc. are used as supplementary challenged; inter alia, such challenges can be made where the debtor security instruments for more complex/sophisticated deals. pledged its property to secure the fulfilment of pecuniary claims.

8.3 What are the common proceedings for realisation of 8.7 What actions, if any, can a borrower take to frustrate mortgaged properties? Are there any options for a enforcement action by a lender? mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the In practice, in order to frustrate enforcement actions by a lender, mortgagor? quite often borrowers bring a court claim for invalidation of the loan agreement and/or the mortgage agreement. Generally speaking, in The common proceedings for realisation of mortgaged property case of properly executed contracts, this is more like delay tactics, include the following steps: not a winning path. However, we have seen situations where debtors ■ sending a 30-day notice (optional for court proceedings); managed to delay enforcement for five years. ■ obtaining an enforcement document (notarial writ or court judgment); 8.8 What is the impact of an insolvency process or a ■ engaging a bailiff (public or private); corporate rehabilitation process on the position of a ■ seizure of mortgaged property; real estate lender? ■ evaluation (if applicable) and sale of collateral on public auction; and Simultaneously with the opening of proceedings in a bankruptcy case, a moratorium on satisfaction of creditors claim is imposed, ■ transfer of money to a creditor. freezing all enforcement activities. A real estate lender will not be The Law of Ukraine “On Mortgage” provides for out-of-court allowed to enforce the mortgage (granted by the insolvent debtor) (extrajudicial) proceedings, namely: other than as part of the insolvency case.

288 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

VAT is collected from the buyer and is payable to the state budget 8.9 What is the process for enforcing security over by the seller. shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, Sale/transfer of land plots and land shares (except for land plots can shares be appropriated when a borrower is in located under VAT-able real estate and included into the sale value administration or has entered another insolvency or of such real estate) are exempted from VAT. reorganisation procedure? In real life, not all sellers are VAT-payers, which also makes transactions VAT-exempted. For instance, the following categories The process of enforcing security over movable assets, including of persons may not be or may not necessarily opt to be VAT-payers: shares, typically involves the following steps: ■ individuals – never;

■ registering information on enforcement in the Encumbrance Ukraine ■ users of simplified tax system (private entrepreneurs or Register; resident legal entities) – if they opt so; and ■ sending a 30-day notice (optional for court proceedings); ■ users of the general tax system (private entrepreneurs or legal ■ obtaining an enforcement document (notarial writ (if pledge entities) – until threshold for mandatory VAT registration is was notarised) or court judgment); met. ■ engaging a bailiff (public or private); ■ seizure of pledged property (shares); 9.5 What other tax or taxes (if any) are payable by the ■ evaluation and sale of collateral (shares) on public auction; seller on the disposal of a property? and ■ transfer of money to a creditor. For corporate sellers, the proceeds from the sale of a property are The Law of Ukraine on Securing Creditors Claims and Registration subject to corporate income tax at the rate of 18% (or, if they opted of Encumbrances allows for out-of-court enforcement of pledges of to be users of a simplified tax system – 3% or 5%, as the case may movable assets, including by way of transfer of ownership of the be, of the sale revenues). collateral (shares) to the pledgee. Individual sellers pay so-called “military contribution” at the amount Herewith, the shares can be appropriated when the borrower has of 1.5% of the transfer value (however, it is waived if exemption for entered the insolvency proceedings since the moratorium on payment of personal income tax applies – see question 9.3 above). satisfaction of creditors’ claims (mentioned in question 8.8) does Individual buyers of real property (other than land) pay 1% not extend to shares in the debtor. contribution to the State Pension Fund of Ukraine. Finally, although it is not a plain tax, 1% of the transfer value is 9 Tax payable as state duty (or its equivalent). This payment is negotiable in the sense that it can be split between the buyer and seller.

9.1 Are transfers of real estate subject to a transfer tax? 9.6 Is taxation different if ownership of a company (or How much? Who is liable? other entity) owning real estate is transferred?

Transfers of real estate in Ukraine are not subject to a transfer tax. Yes, taxation is different if ownership of a company (or other entity) However, according to the Tax Code of Ukraine, other taxes apply, owning real estate is transferred (in particular – VAT, pension fund depending on the identity of the seller and/or buyer, and depending contribution and state duty may not apply, tax rates (exemptions) on the type of the property (residential or non-residential). and/or rules for calculating tax base for purposes of personal income tax and corporate tax also differ). 9.2 When is the transfer tax paid? 9.7 Are there any tax issues that a buyer of real estate As mentioned above, transfer tax is not envisaged by Ukrainian law. should always take into consideration/conduct due diligence on?

9.3 Are transfers of real estate by individuals subject to income tax? It is always worth checking if there are no indebtedness for payment of land and/or property tax by the seller. Also, with respect to Yes, transfers of real estate by individuals are subject to personal residential property, it is advisable to verify at the early stage of income tax at the following rates: price negotiations if the property has been owned for more than three years and if this is the first property sale by the seller during calendar ■ 5% of the property value – in case of sale by residents of year – this will give an indication if relevant tax exemption would be Ukraine; or applicable to the seller as this may affect the final sale price. ■ 18% – in case of sale by non-resident persons. For residential property the law provides exemption from the abovementioned tax: 0% – if the property is owned for more than 10 Leases of Business Premises three years and this is the first sale in the calendar year.

10.1 Please briefly describe the main laws that regulate 9.4 Are transfers of real estate subject to VAT? How leases of business premises. much? Who is liable? Are there any exemptions? The laws that regulate leases of business premises include: Transfers of real estate are subject to VAT if the seller is a VAT-payer. ■ Civil Code of Ukraine; VAT is charged at the rate of 20% on the transfer value. ■ Commercial Code of Ukraine;

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 289 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

■ Law of Ukraine “On Lease of State and Municipal Property”; and 10.6 Does the landlord and/or the tenant of a business ■ Law of Ukraine “On State Registration of Property Rights to lease cease to be liable for their respective obligations under the lease once they have sold their Real Estate and their Encumbrances”. interest? Can they be responsible after the sale in respect of pre-sale non-compliance? 10.2 What types of business lease exist? The general principles of the Civil Code and Commercial Code In practice, various types of business leases exist, such as fixed-term allow the conclusion that the landlord and/or the tenant remain leases or leases that last for an indefinite period of time. It is worth responsible to each other in respect of pre-sale non-compliance even after the sale of their interest (i.e. sale of property in case of Ukraine mentioning that long-term leases (i.e. for three years and more) require notarisation and state registration in the Rights Register. landlord, and assignment of lease right in case of tenant).

10.3 What are the typical provisions for leases of business 10.7 Green leases seek to impose obligations on premises in your jurisdiction regarding: (a) length of landlords and tenants designed to promote greater term; (b) rent increases; (c) tenant’s right to sell or sustainable use of buildings and in the reduction of sub-lease; (d) insurance; (e) (i) change of control of the “environmental footprint” of a building. Please the tenant; and (ii) transfer of lease as a result of a briefly describe any “green obligations” commonly corporate restructuring (e.g. merger); and (f) repairs? found in leases stating whether these are clearly defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for (a) Length of term: either one year with automatic extension or example aspirational objectives). 5–7 years; (b) rent increases: typically, rent is expressed with reference In Ukraine, there are normally no such provisions in lease to the equivalent in hard currencies such as USD or EUR; however, if expressed in local currency (UAH), parties often agreements yet. agree on monthly indexation by official inflation rate; (c) tenant’s right to sell or sub-lease: typically, subject to prior 10.8 Are there any trends in your market towards more written consent of the landlord; flexible space for occupiers, such as shared (d) insurance: practice is not uniform, quite often tenants are not short-term working spaces (co-working) or shared under an obligation to insure property or provide liability residential spaces with greater levels of facilities/ insurance; activities for residents (co-living)? If so please provide examples/details. (e) (i) change of control of the tenant: in principle, change of control does not affect the commercial lease agreement; and (ii) transfer of lease as a result of a corporate restructuring Shared short-term working spaces (co-working) are gaining (e.g. merger): typically, corporate restructuring (merger) also popularity in Ukraine in recent years, especially in the IT and does not affect the commercial lease agreement; and consulting industries. (f) repairs: generally speaking, and as a basic rule, the landlord is responsible for major (capital) repairs; however, this approach is sometimes modified by the parties if the lease 11 Leases of Residential Premises term is more than five years. 11.1 Please briefly describe the main laws that regulate 10.4 What taxes are payable on rent either by the landlord leases of residential premises. or tenant of a business lease? The laws that regulate leases of residential premises include: If opted for VAT (i.e. if the landlord is VAT-payer), the rent to be ■ Civil Code of Ukraine; paid for business leases is subject to VAT (20%). ■ Housing Code of Ukraine; and ■ Law of Ukraine “On State Registration of Property Rights to 10.5 In what circumstances are business leases usually Real Estate and their Encumbrances”. terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party 11.2 Do the laws differ if the premises are intended for to be compensated by the other for any reason on multiple different residential occupiers? termination? No, they do not. Depending on the circumstance of the case at hand, business leases may indeed be terminated at expiry, on default, or by either party 11.3 What would typical provisions for a lease of giving notice. If a tenant uses the premises after the lease expiration residential premises be in your jurisdiction regarding: and the landlord has no objection, the lease agreement is deemed (a) length of term; (b) rent increases/controls; (c) the renewed for the same term and on the same conditions. tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair?

(a) Length of term: one year or for indefinite period (which basically means that the agreement is entered into for five years);

290 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

(b) rent increases/controls: typically, rent is expressed with needs (such as construction of transport and energy infrastructure, reference to the equivalent in hard currencies such as USD or extraction of minerals, creation of city parks to name a few). EUR; Landowners who disagree to the alienation of their land plots for (c) the tenant’s right to remain in the premises at the end of the term: public needs can be forced to sell the land by court order. The land tenant has a pre-emptive right for entry into the lease agreement plot price is determined based on the monetary valuation of the for another term; if, not later than three months prior to expiry land plot calculated in accordance with methodology approved by of the lease agreement, the landlord did not notify the tenant the government. In practice, the price so determined is quite often about his/her rejection to enter into the new lease agreement, lower than the market price. If the owner of land disagrees with the and the tenant uses the premises after the lease expiration, the proposed land plot price, the matter should be decided by the court. lease agreement is deemed renewed for the same term and on the same conditions; if the landlord has rejected to enter into Ukraine new lease agreement with the tenant, but, within one year enters 12.3 Which bodies control land/building use and/or into a lease agreement with another person, the tenant has a right occupation and environmental regulation? How do to demand the rights under such new agreement be assigned/ buyers obtain reliable information on these matters? transferred to him, or demand compensation of damages; and (d) the tenant’s contribution/obligation to the property “costs”: in The following bodies can be listed as such that have certain authority most of the cases, tenant’s contribution is limited by payment/ to control or influence land/building use and/or occupation and compensation of costs of utilities only. environmental compliance: ■ Ministry of Regional Development, Building and Housing of 11.4 Would there be rights for a landlord to terminate a Ukraine; residential lease and what steps would be needed ■ State Architectural-Construction Inspection of Ukraine; to achieve vacant possession if the circumstances existed for the right to be exercised? ■ State Service of Geodesy, Cartography and Cadaster of Ukraine; A landlord has a right to terminate a residential lease under the ■ local self-government authorities; and following circumstances: ■ public prosecution authorities. (i) non-payment of rent for six months (or, in case of a shorter In order to get reliable information on these matters, the respective term lease – twice); and authorities have to be contacted. More and more information is (ii) damage of premises by tenant (or by other persons for whom available online. the tenant is responsible). Useful online resources: The lease agreement can also be terminated, subject to two months’ ■ http://map.land.gov.ua/kadastrova-karta – public cadaster map notice, in case the owner needs the premises (part of a house, flat of Ukraine that contains information on formed land plots; or room (part thereof)) for his own living and living of his family ■ https://dabi.gov.ua/declarate/list.php – register of authorisation members. documents for construction; and The required steps to achieve vacant possession may include: giving ■ websites of local self-governmental authorities (cities, notice; obtaining court judgment on termination of a residential villages) that may contain information on zoning, for instance lease agreement and eviction of the tenant; and enforcement through in the city of Lviv – https://map.city-adm.lviv.ua/ua/map/ the bailiffs. zoning.

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

12.1 What are the main laws which govern zoning/ In most cases, an authorisation is needed to build, modify, demolish permitting and related matters concerning the use, or change the use of the building. Depending on the complexity of development and occupation of land? Please briefly construction, such authorisation can take the form of (i) a permit describe them and include environmental laws. for commencement of construction works issued by a competent authority (for more complex buildings), or (ii) a notification on The main laws governing zoning/permitting and related matters commencement of construction works filed by the developer with concerning the use, development and occupation of land in Ukraine a relevant authority and registered by the latter (for less complex are: buildings). Likewise, once the building is finished by construction, ■ Civil Code of Ukraine; its commissioning can be evidence by a certificate on readiness ■ Land Code of Ukraine; for operation (for more complex buildings), or by a registered ■ Law of Ukraine “On Regulation of Town-Planning Activity”; declaration of readiness for operation (for less complex buildings). ■ Law of Ukraine “On Lease of Land”; Construction activity is subject to licensing in Ukraine. A contractor/ ■ Law of Ukraine “On Land Management”; sub-contractor hired to perform construction works must possess the relevant licence. ■ Law of Ukraine “On State Control over Use and Protection of Lands”; and ■ Law of Ukraine “On Environmental Protection”. 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price/ compensation mechanism. Authorisations for construction and use of more complex objects (industrial, commercial, residential) are usually obtained. Private developers of smaller objects (individual houses and small Yes, the state can force land owners to sell land to it for social

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 291 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

buildings) quite often proceed to construction without proper of Ukraine, as well as departments/units responsible for ecology authorisation, expecting to have their building legalised under so- and natural resources at the regional state administrations and/or called “construction amnesty” which have been announced by the local self-governmental authorities. Also, independent research government on several occasions over the past years. However, (environmental due diligence) is strongly advisable before in our opinion, such practice is on decline as the procedure for transactions in land or other real estate. obtaining the relevant authorisations became more transparent, less complex and expensive in recent years. 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? 12.6 What is the typical cost of building/use permits and the time involved in obtaining them?

Ukraine Environmental clean-up is mandatory in case the soil is damaged as a result of constructions or other works. Time and costs vary depending on the complexity of the building. For complex objects, the entire authorisation circle (including 12.10 Please briefly outline any regulatory requirements various consents for design documentation, verifications, etc.) may for the assessment and management of the energy take up to six months (provided that the developer’s rights to land performance of buildings in your jurisdiction. have been properly obtained and documented). The entire costs related to obtaining relevant authorisations (including official fees In 2017, the Law of Ukraine “On Energy Efficiency of Buildings” as well as documents production and filing expenses) may vary from introduced so-called energy certificates, which contain information several hundred to several hundred thousand Euros. on the energy performance of the building and recommendations for improvement. The law also sets certain minimum requirements for 12.7 Are there any regulations on the protection of historic the energy performance of the buildings, both newly built as well monuments in your jurisdiction? If any, when and how as existing. are they likely to affect the transfer of rights in real As of 1 July 2019, energy certificates become mandatory. Save for estate or development/change of use? a few exceptions, an energy certificate must be obtained, inter alia, for any complex object of construction (so called CC2 and CC3), be There are regulations on the protection of historical monuments in it new construction, reconstruction or capital repairs. Ukraine (the Law of Ukraine “On Protection of Cultural Heritage” is the core piece of legislation in this area). In case of sale or lease of property (residential or non-residential) that is subject to rules governing mandatory energy certification, the In case of sale on an object that is listed as an historical monument, seller/landlord must provide information on energy certificate of the prior written consent shall be obtained from the relevant cultural building upon the request of the buyer/tenant. heritage protection authority, depending on whether the monument is classified as one of national or local importance. Such consents are issued to the sellers; herewith, the identity of the prospective 13 Climate Change buyer must be disclosed. Within one month upon completion of the purchase, the buyer (new 13.1 Please briefly explain the nature and extent of any owner) shall enter into a contract on the protection of the respective regulatory measures for reducing carbon dioxide cultural heritage with the relevant cultural heritage protection emissions (including any mandatory emissions authority, and should protect the monument in compliance with the trading scheme). law and the contract (for instance, to preserve the façade, wooden windows and doors, historic stoves, parquet, and to obtain all the Since 2004, Ukraine has been a party to the international Kyoto necessary permits prior to any renovation works, etc.). Protocol, which extends the 1992 United Nations Framework It is worth mentioning that transactions involving land plots Convention on Climate Change. Since 2016, Ukraine has also been designated for historical-cultural use (or having historical a party to the 2015 Paris Agreement. Accordingly, in 2016, the monuments located on it) have a number of limitations and nuances government of Ukraine adopted the Concept for State Policy in the (for instance, more strict and complex authorisation procedures). Area of Climate Change for the Period till Year 2030 (hereinafter – Finally, Ukraine is a member of United Nations Educational, the “Climate Change Policy Concept”), which is the first document Scientific and Cultural Organization (UNESCO) and there area on the state level aiming at the reduction of gas emissions. Detailed number of Ukrainian properties inscribed on the UNESCO World regulatory measures are yet expected to be introduced in the course Heritage List – https://whc.unesco.org/en/statesparties/ua. Ukraine of 2019–2020. One of them shall be the creation and implementation follows Guidelines for the Implementation of the World Heritage of an internal emissions trading scheme in compliance with the Convention, and it shall inform the World Heritage Committee of European Union Directive 2003/87/EU establishing a scheme for its intention to undertake or to authorise in an area protected under greenhouse gas emission allowance trading within the Community. the Convention major restorations or new constructions which may affect the outstanding universal value of the property. 13.2 Are there any national greenhouse gas emissions reduction targets? 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real Yes, according to the Climate Change Policy Concept, the current estate? Is there a public register of contaminated land target is to achieve by 2030 emissions that shall not exceed 60% in your jurisdiction? of the base level as of 1990 (note: the total volume of Ukraine’s emissions in 1990 was 618 million tons). In 2020 the above There is no specific public database or other register of mentioned target shall be reviewed, to take into account the level of contaminated lands or polluted properties in Ukraine. Relevant social-economic development of the country. information requests may be filed with the State Ecology Inspection

292 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Taras Burhan Law Office LLC Ukraine

installations (roof/housetop) seem to be the most appropriate in the 13.3 Are there any other regulatory measures (not already context of newly constructed and existing buildings. The following mentioned) which aim to improve the sustainability of minimum green tariff rate (EUR cent per 1kWh) applies to roof/ both newly constructed and existing buildings? housetop solar installations (power plants): ■ EUR 16.37 – if commissioned between 01.01.2017 and Yes, the new legal framework recently adopted in Ukraine provides 31.12.2019; for certain incentives for the operation and development of ■ EUR 14.76 – if commissioned between 01.01.2020 and renewable energy sources (hereinafter – the “RES”), including a so- 31.12.2024; and called “green” tariff (introduced in 2009). Ukraine’s green tariff has a guaranteed “minimum floor” set in EUR and is probably one of ■ EUR 13.09 – if commissioned between 01.01.2025 and 31.12.2029. highest in the world. The types of eligible RES vary; however, solar Ukraine

Taras Burhan Zvenyslava Kit Taras Burhan Law Office LLC Taras Burhan Law Office LLC 3/3 Katedral’na Sq. 3/3 Katedral’na Sq. Lviv, 79008 Lviv, 79008 Ukraine Ukraine

Tel: +38 032 253 1000 Tel: +38 032 253 1000 Email: [email protected] Email: [email protected] URL: www.burhan.ua URL: www.burhan.ua

Taras Burhan, partner, concentrates his practice in the areas of banking Zvenyslava Kit, associate, concentrates her practice in the area of real and real estate law. He offers over 15 years of legal experience in estate, corporate and inheritance law. She often conducts due diligence banking, mergers and acquisitions, real estate and litigation matters. of real estate objects for purposes of acquisition or leasing transactions by local and foreign clients. On a regular basis, Zvenyslava drafts and Taras graduated cum laude from the Lviv National University Law negotiates real estate contracts, carries out research of Ukrainian law, Faculty in 1997. He then expanded his education abroad. Taras and represents client vis-à-vis state authorities, notaries, registrars, holds a Master of Law degree from the University of Cambridge and appraisers, banks, translation agencies. She also assists the clients a Master of Law degree from the Columbia University School of Law. of the firm with registering/establishing their legal presence in Ukraine Originally from Lviv, Taras spent more than 10 years in Kyiv practicing (either in a form of an SPV for purposes of a particular real estate deal, law as a lawyer at well-known international law firms, representing or in a form of subsidiary or joint venture for purposes of conducting global and regional clients on a number of complex multi-million dollar general business activities in Ukraine). deals. Zvenyslava graduated from the Lviv National University Law Faculty In 2012, Taras Burhan, a seasoned Ukrainian lawyer who is also with a Master of Law degree in 2013. The same year she joined Taras admitted to practice as an attorney and counselor-at-law in the state of Burhan Law Office LLC as a trainee, and was promoted to the position New York, founded his own law firm in Lviv. of associate in 2014. Taras speaks English, Russian and Ukrainian. Zvenyslava speaks English, Russian and Ukrainian.

Taras Burhan Law Office LLC is a boutique law firm based in Lviv and servicing clients in Western and Central Ukraine. The firm concentrates its practice in the areas of banking, corporate and real estate law. The firm represents banks and financial institutions in lending transactions with corporate clients; foreign and local investors in acquisitionsor disposals of existing businesses; investment funds, developers and wealthy individuals in real estate transactions. The firm offers the following services related to real estate: ■■ structuring sale or leasing transactions, including off-shore structures; ■■ drafting and negotiating term sheets; ■■ conducting legal due diligence of real estate objects and their owners; ■■ advising clients regarding Ukrainian law requirements with respect to acquisition, maintenance, use and transfer of real estate; ■■ drafting and negotiating Ukrainian law governed sale-purchase/transfer/leasing agreements; ■■ organising signings, including notarisation; ■■ assisting clients with closing of transactions, including collection of conditions precedent; and ■■ assisting parties with recordation of real estate transactions and dealing with authorities (including local administrations, land cadaster, bureaus of technical inventory, etc.).

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 293 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 30

USA

Greenberg Traurig, LLP Christina Braisted Rogers

1 Real Estate Law 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in While international laws do not govern real estate assets in the USA, response to question 10.1. Those relating to zoning foreign laws are relevant in a number of circumstances. Those and environmental should be listed in response to include foreign exchange controls and the ability to sue foreign question 12.1. Those relating to tax should be listed in investors in order to collect on judgments under guaranties, where response to questions in Section 9. the assets are in overseas jurisdictions. The other international law element that contributes to the structure of every transaction Each state within the United States (and the District of Columbia) involving foreign investors is home tax law or tax treaties. The debt follows a mix of statutory and common law (Louisiana, however, and equity investment authority of foreign financial institutions are employs a civil law system, derived from the Napoleonic Code). governed by their respective charters and home-country laws. There are three levels of laws in the USA: federal; state; and local. Under common law, changes in law come by way of case law and new legislation, each of which is given equal weight. Rules on parol 2 Ownership evidence, and requirements that agreements be in writing in order to be enforced, vary from state to state. Courts will generally rely on 2.1 Are there legal restrictions on ownership of real estate the express terms of the document unless the intent of the parties is by particular classes of persons (e.g. non-resident unclear. Courts in the USA may take into account the conduct of persons)? the parties if the terms of the document in question are ambiguous. In general, contracts for the sale or transfer of real estate should be There are few, if any, controls prohibiting a foreigner from owning in writing. real estate property in the USA. The one limitation that still exists in certain states pertains to ownership of U.S. agricultural and natural resources. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? Reporting is required from foreign persons who: ■ purchase (directly or indirectly) at least 10% of a U.S. Each case that is decided has an impact on the way transactions are business (including real estate ownership), who must file a structured or documents are drafted for future transactions. For private report within 45 days (in addition to possible quarterly and annual reports) with the bureau of Economic Analysis of example, in New York in 2010, there was a State Supreme Court the U.S. Department of Commerce (under the International decision which ruled on the language of intercreditor agreements. Investment Survey Act (the International Investment and The large majority of intercreditor agreements between mortgage Trade in Services Survey Act) of 1976), though exemptions lenders and mezzanine lenders typically contain language that are available in certain cases; requires a mezzanine lender to cure “all defaults” under the mortgage ■ purchase or transfer U.S. agricultural land, who must file a loan in certain situations. The issue in the New York case hinged on public report within 90 days with the Secretary of Agriculture whether that requirement was a precondition to foreclosure on UCC (under the Agricultural Foreign Investment Disclosure Act of collateral by a mezzanine lender or whether the failure to cure would 1978); simply trigger the mortgage lender’s right to accelerate the payment ■ hold any direct U.S. real estate investments valued over obligations under the mortgage loan. In this instance, the court ruled $50,000 during the previous calendar year, who must file that the mezzanine lender could not foreclose without first curing an information return (under the Foreign Investment in an existing default, which meant paying off the already-accelerated Real Estate Property Tax Act of 1980, which also subjects mortgage loan in full. While there is disagreement within the legal any income of the foreign investor from U.S. real estate community regarding that decision, it should be noted that, in 2011, transactions to federal taxation); and a federal District Court in Arizona came to a similar conclusion. As ■ control a domestic or foreign corporation – the corporation a result, the relevant provisions in the common forms of intercreditor must file an information return annually with the Internal agreements are likely to be more heavily negotiated. Revenue Service (under the Tax Equity and Fiscal Responsibility Act of 1982).

294 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

Additional reporting may be required under: the Hart-Scott Rodino would suffice and be recorded in similar fashion with a typical deed, Antitrust Improvements Act of 1976; the Internal Revenue Code without need for a separate recording. We are not aware of any and Executive Order No. 13224 on Terrorist Financing, effective proposals to change this in any jurisdiction. from September 24, 2001, and relating to Blocking Property and Transfers of interests in real property held indirectly through Prohibiting Transactions With Persons Who Commit, Threaten to ownership of interests in the entity holding legal title to the real Commit, or Support Terrorism; and the Uniting and Strengthening property have no effect on the legal title to the property, but may America by Providing Appropriate Tools Required to Intercept and have Federal and state tax law implications. For example, in New Obstruct Terrorism Act of 2001 (the “Patriot Act”). York, with a few exceptions, if 50% or more of the beneficial interest in a property is transferred, transfer tax is applicable and the USA 3 Real Estate Rights parties are required to file transfer tax forms, but no new deed would recorded because legal title remains the same.

3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual 4 System of Registration between the parties?

4.1 Is all land in your jurisdiction required to be Land is usually owned by fee title. Record notice of title is established registered? What land (or rights) are unregistered? by recording an instrument of conveyance in the local recording office. Title can be owned in whole by an individual or an entity. Title While property rights are recorded and not registered, the Torrens can be owned by individuals as tenants in common or tenants by the system of property registration, and remnants of this system, do entirety (marital). Legal title can be held by trusts for the benefit of still exist. The Torrens system was historically used extensively in the equitable owners. Parties can hold an interest in land by contract. Illinois, Massachusetts and Minnesota. Illinois repealed its Torrens A lender secures repayment of its loan by obtaining a mortgage (or Act in 1992 and New York has also repealed its registration of title in some states a deed of trust, or in Georgia a deed to secure debt) (a law. At one time, up to 20 states employed some form of the Torrens “mortgage”) granting the lender a security interest in the property or system, including Colorado, Georgia, Hawaii, Massachusetts, ground lease being financed. A trustee holds title for the benefit of Minnesota, North Carolina, Ohio and Washington. The Torrens trustors pursuant to a trust agreement. A tenant under a lease holds a system, until fairly recently at least, was in regular use only in contractual interest in the demised premises, which may or may not certain parts of Massachusetts, Minnesota and Hawaii. In the constitute an interest in real property, depending on the length of the jurisdictions in which some form of the Torrens system is still in lease term and applicable state law. Parties may also hold the right effect, the system is voluntary, and it functions side by side with the to use or occupy property under a licence agreement. A licence may more common title recording system. give a party an access right over the property of another, but it is easily terminated. The more common form of granting an appurtenant right across the property of another is by a recorded easement. Because 4.2 Is there a state guarantee of title? What does it most states require a recorded notice to enforce use rights against third guarantee? parties, even agreements that do not “run with the land” are often recorded to give third parties notice of the rights accorded thereby. No. Most owners obtain “insurance” that they have good title by buying title insurance from title insurance companies, who search and underwrite the title of the property. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed thereon? 4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? Title to land may diverge from the ownership of a building constructed thereon in the case of a ground lease. In a ground lease, the tenant Unlike many legal systems, there is no requirement in the USA will typically lease the underlying land for a long term, but, by the that title be registered. There is no obligation to record evidence of terms of the ground lease, the tenant will often own, rather than lease, ownership, leasehold, easement or other rights. The act of recordation the temporary or permanent buildings and other objects placed upon protects owners or benefited parties from prior, unknown, unrecorded it during the term of the ground lease. At the end of the term of the and subsequently filed/recorded third party claims. ground lease, title to those improvements typically, by the terms of the ground lease, will revert to the landowner (most often at the end 4.4 What rights in land are not required to be registered? of their useful life). Similarly, development within air rights parcels above the land can has become a popular means for utilising excess As noted above, there is no requirement in the USA that title be development rights associated with a parcel and enables developers registered. to build taller towers with highly profitable upper floors.

4.5 Where there are both unregistered and registered land 3.3 Is there a split between legal title and beneficial title or rights is there a probationary period following first in your jurisdiction and what are the registration registration or are there perhaps different classes consequences of any split? Are there any proposals or qualities of title on first registration? Please give to change this? details. First registration means the occasion upon which unregistered land or rights are first registered This distinction arises in the case of a trust where the beneficiary of in the registries. a trust holds a beneficial interest in the trust property and receives the benefits of ownership. Legal title to the trust property, however, This is not applicable. is held by the trustee. A deed reflecting the ownership in trust

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 295 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

over ownership. In order to minimise this risk, purchasers usually 4.6 On a land sale, when is title (or ownership) transferred rely on title insurers to insure their ownership, and to underwrite to the buyer? such insurance policies, the title insurers rely on a variety of factors, including searching local real estate records, requiring surveys of In most jurisdictions, title passes upon the delivery of the deed. the property to be conducted by a licensed surveyor, and requiring Recordation of the conveyance instrument follows to preserve rights affidavits and indemnities from the seller. and protect against third party claims. Title insurance is utilised in many jurisdictions to protect against any “gap” interests or claims arising between execution and recording of the deed. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need USA to be provided to the land registry for the registration 4.7 Please briefly describe how some rights obtain of ownership right? Can information on ownership of priority over other rights. Do earlier rights defeat later registered real estate be accessed electronically? rights? The Real Property Electronic Recording Act, completed by the Property rights are protected by recording. In virtually every Uniform Law Commissioners in 2004, has been enacted by Alabama, jurisdiction, recordation in the real estate records establishes priority. Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, A mortgage becomes perfected only upon recordation and it must be Hawaii, Idaho, Illinois, Indiana, Kansas, Maryland, Michigan, recorded within 10 days after execution to become perfected as of Minnesota, Mississippi, Nevada, New Mexico, New York, North the date of delivery. Anything of record at the time of recording will Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, be in right to the document that is recorded later. This basic premise South Dakota, Tennessee, Texas, Utah, Virginia, Washington, may be altered, however, as follows: Washington, D.C., Wisconsin, Wyoming and the U.S. Virgin Islands. ■ a significant change in the mortgage, such as the interest rate The purpose of the Act is to give county clerks and recorders the and/or maturity date, may result in the priority being brought legal authority to prepare for the electronic recording of real property forward to the date on which the modification is recorded; instruments. Certain municipalities and counties already offer an intervening lien or encumbrance would have priority electronic recording systems, which may be accessed and searched (title insurance can be procured to insure priority where by the general public. Typically, recording offices only accept appropriate); fully executed documents, correctly notarised and meeting certain ■ local taxes have priority over recorded deeds and mortgages other requirements, for recording. In order to record a transfer of irrespective of whether the taxes are due and payable after the ownership rights, recording offices typically require, among other recording of the deed or mortgage; things, transfer documentation (deed) and evidence of payment of ■ federal tax liens may have priority; real estate taxes and real estate assessment valuations. ■ parties can allocate priority pursuant to intercreditor or other subordination agreements; or 5.4 Can compensation be claimed from the registry/ ■ the filing and existence of mechanics’ and materialmen’s registries if it/they make a mistake? liens. No. Most documents are submitted to recording offices by third 5 The Registry / Registries party title insurance companies. In consideration of the payment of a premium, the title insurance companies issue a policy insuring that the deed or mortgage recorded has been validly recorded, subject 5.1 How many land registries operate in your jurisdiction? only to scheduled encumbrances. The title insurance company is If more than one please specify their differing rules liable if there is a mistake, subject to limitations contained in the and requirements. title insurance policies.

Each county (or parish, in Louisiana) in each state has its own recording office, and certain states have different recording offices/ 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he books for conveyances and for mortgages. Requirements are state- might reasonably need regarding encumbrances and specific, and may be county-specific. Some states require signatures other rights affecting real estate and is this achieved in black or blue ink. Every state requires a state-approved form of by a search of the register? If not, what additional notary acknowledgment. The variations thereafter range from page information/process is required? size and margins to legends that must be affixed to the document, to some state requirements that an attorney admitted to practise in the There are no restrictions on public access to the recording office. state must have prepared the document and/or be the stated party A buyer can learn certain matters at the recording office. A buyer for the return of recorded documents. can identify the owner of the property and research recorded liens, easements, and other encumbrances. In addition, UCC filings 5.2 How do the owners of registered real estate prove evidencing any security interest in personal property located at the their title? real property can be searched in the UCC records of the applicable state. The real estate records will not provide information as to As noted above, in most jurisdictions, legal title passes upon whether a building has been built in accordance with local codes and delivery of the deed to the new owner. While recordation of the is in compliance with zoning ordinances with valid certificates of deed is not required, it is customarily done to provide evidence of occupancy, but this information is also publicly available from the priority of ownership and in most jurisdictions recording of the deed applicable jurisdiction. Additionally, while a search of the records is sufficient evidence to establish priority of ownership. Thus, if an will reveal the existence of easements or other rights or appurtenances, owner gave two deeds to two different parties on the same day, the only a survey of the subject property will show the location and the party that recorded the deed first would usually prevail in any dispute impact of such easements or other rights or appurtenances on any

296 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

improvements located thereon. In addition to ordering a survey, With respect to sources of debt capital, traditional institutional many buyers also supplement their due diligence by contracting with lenders such as banks are facing increased competition from non- third-party providers to conduct physical inspections, environmental traditional alternative lending sources such as private equity funds testing, and zoning and building code analysis. and private real estate investors and operators. As property values continue to appreciate, cap rates compress and interest rates begin to rise, the rates of return that these non-traditional alternative lenders 6 Real Estate Market received in the past on equity financing have become increasingly difficult to achieve. As a result, many traditional sources of equity financing have become increasingly involved in debt 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally capital markets. Additionally, while these alternative lenders are USA be involved in a real estate transaction in your increasingly providing debt financing, they are seeking higher rates jurisdiction? Please briefly describe their roles and/or of return than are usually sought by traditional institutional lenders, duties. thereby making an abundance of debt capital available for riskier types of financing such as construction loans and bridge loans. In connection with an acquisition of real estate, different parties may assist depending on the type of asset. In all cases, a broker is likely 6.4 What is the appetite for investors and/or developers to be involved. A purchaser will typically engage structural and to invest in your region compared to last year and environmental engineers to evaluate the property and improvements what are the sectors/areas of most interest? Please and they will evaluate zoning compliance, matters of title and give examples. survey, and any existing leases. An expert in zoning and municipal codes, an architect, and contractors might also be involved to assess Surplus capital, as well as competition and rising prices in the the development potential of raw land. traditional gateway markets, has led investors to expand their interest in secondary and tertiary markets. These markets tend to 6.2 How and on what basis are these persons have faster growing demographics (as the primary markets become remunerated? less affordable), diverse job opportunities in desirable industries, and intentional development of urban centres that offer the benefits The seller normally employs a broker to sell the property. The of urban living at a significantly lower cost. A number of secondary commission is usually a percentage of the sale price, payable by markets in the United States (Austin, Texas; Nashville, Tennessee; the seller. The percentage varies by product type and locality. If San Antonio, Texas; Portland, Oregon; Seattle, Washington are the purchaser identifies the property through a different broker, the examples) have become generally considered “hip” on account seller’s broker or the listing broker will share its commission with the of their unique culture. While investments in the gateway cities purchaser’s broker. Other service providers are compensated on the have traditionally provided the perception of security, the wealth of basis of an agreed-upon hourly rate times the hours spent. Brokers data that is now available to investors enables them to focus more are paid at the closing. Other service providers are paid a usual and precisely on defined neighbourhoods and asset characteristics in customary fee for the jurisdiction based on the arrangements made other markets that suit their investment profile. in advance. There is a significant need for affordable housing projects throughout the United States, which will likely continue to grow. Following the passage of the Tax Cuts and Jobs Act of 2017, the U.S. Congress 6.3 Is there any change in the sources or the availability of capital to finance real estate transactions in created a new community development program to encourage your jurisdiction, whether equity or debt? What are long-term investments in low-income urban and rural communities the main sources of capital you see active in your throughout the country. The “opportunity zones” program provides market? tax incentives for investors to re-invest their unrealised capital gains into “opportunity funds” that are dedicated to investing in The sustained increase in capital allocation toward real estate over designated opportunity zones. The legislation encourages long-term the past few years slowed somewhat in both the debt and equity investment in these communities by providing greater tax incentives sectors. Capital is readily available for refinancing and acquisition based on the amount of time the investment is held. debt, and on a more disciplined basis for development. Regulation under Dodd-Frank and Basel III has required large commercial 6.5 Have you observed any trends in particular market banks to be more conservative, but there is growth at the community sub sectors slowing down in your jurisdiction in and regional bank level. Life insurance companies make similarly terms of their attractiveness to investors/developers? conservative long-term investments, typically in “core assets”. Please give examples. CMBS lending remains a consistently important source of capital, particularly in secondary and tertiary markets, but no longer It is difficult to identify a particular slowing trend for the entire maintains a large pricing advantage and the lack of flexibility country. Some asset classes perform better in different regions, and working with servicers can be a disincentive to borrower. Private in some areas, a particular asset class may be considered over-built debt funds and mortgage REITS provide more flexibility than the or on the verge of becoming so. Regional malls, power centres and regulated or core-asset focused lenders, but at a higher price. Equity shopping centres serving middle-income households have failed to investment comes from the traditional sources such as institutional rebound over the last several years, while top-tier shopping malls investors and REITS, but private equity is one of the fastest and urban/high street retail have prospered, and therefore these growing sources of investment capital. International investment is assets may be less appealing for investment, although many are significant, particularly in the gateway markets, by large institutions priced below replacement cost and are well-located for alternate such as insurance companies or sovereign wealth funds, and by uses. In addition, suburban office assets have suffered in recent individuals (including development capital made available under years as a result of a trend of companies relocating from the suburbs the EB-5 Immigrant Investor Program). into urban centres to attract young, talented employees.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 297 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

apportion risk; however, sellers will attempt to limit liability when 7 Liabilities of Buyers and Sellers in Real possible. In the case of leases, sellers will attempt to get a purchaser Estate Transactions to rely on estoppel certificates from tenants rather than provide representation about the leases. Similarly, purchasers will rely on third party assessments as to environmental and structural concerns. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? State statutes provide for the use of various types of deeds ranging from full warranty deeds, which warrant title from the beginning of time, to Customarily, the parties enter into a contract of sale, which sets up forms that warrant only with respect to acts of the seller, to quit claim the mechanics of the closing as well as the conditions and actions deeds which convey bare legal title. Subject to written agreement to USA that must be satisfied or occur between the date of signing and the contrary, local custom typically dictates the extent of the warranty closing. While a contract is not required, it will protect both parties, of title provided. Similar to contractual warranties, the form of deed neither of whom will be obligated to close if specified conditions and scope of warranties contained therein is negotiable but is usually precedent are not met. The form of deed must be sufficient to not a buyer’s best “guarantee” of title. Ultimately, most buyers view transfer title under the laws of the situs state. It must also be in title insurance policies as their best form of “guarantee” of title. recordable form so that a title insurance company will issue a policy of owner’s title insurance. Even in the case of a transfer of a single- 7.5 Does the seller retain any liabilities in respect of the family home, a purchaser will want time to perform due diligence property post sale? Please give details. and will require seller representations with respect to the condition, water quality, certificate of occupancy, appliances, etc. For office In virtually all jurisdictions, the “merger doctrine” provides that buildings and other income-producing properties, evaluation of the unless stated otherwise in the purchase and sale agreement, all leases will be an important due diligence consideration. In all cases, obligations and liabilities contained in the purchase and sale the requirements of a lender providing purchase money financing agreement “merge” into the deed and are no longer enforceable after must be satisfied. closing. For this reason, buyers customarily attempt to negotiate a post-closing survival period with respect to representations and 7.2 Is the seller under a duty of disclosure? What matters warranties made by seller in the purchase and sale agreement, must be disclosed? while sellers attempt to limit the post-closing survival of seller’s representations and warranties to as short of a post-closing period The seller does not generally have a duty of disclosure in a as possible. In addition, parties often negotiate as to which specific commercial transaction. Sales of real estate are “caveat emptor”. obligations and liabilities will survive closing. When a property has However, if a question is asked and the seller answers fraudulently, tenants, the seller also usually remains liable for any claims by such the seller will be liable for damages. Specific disclosures are tenants which accrued prior to the date of closing. As noted above, customary in the residential context. agreed warranties of title can be included in the deed. States and municipalities have laws which do require disclosures in specific instances. In New York City, the existence of lead paint must 7.6 What (if any) are the liabilities of the buyer (in addition be disclosed in residential sales. Similarly, the existence of asbestos to paying the sale price)? must be disclosed. A statement regarding the potential presence of radon gas must be included in real estate contracts concerning Risks are apportioned in the contract of sale. The buyer is obligated Florida properties. These types of laws are local in nature. to come to the closing table, ready, willing and able to close. That means bringing cash or cash equivalent (i.e., purchase money loan) to the closing. If the buyer breaches its warranties or obligations, 7.3 Can the seller be liable to the buyer for misrepresentation? the seller will be entitled to damages, often limited to retention of an earnest money deposit. The buyer’s primary responsibility is Yes. The remedies for such misrepresentation will be set forth in to come up with funds when required. If the seller is paid in full the contract of sale. Customarily, a buyer may rescind the contract at closing, it is hard for the seller to show damages. Allocation if the misrepresentation is discovered prior to closing; thereafter of closing costs (such as transfer taxes, title insurance and escrow damages may be sought. Again, the representations must be in charges) is dictated by local custom and is often negotiable. writing. Parties will negotiate the period of time after closing that the representations will survive, and may agree to a cap on the 8 Finance and Banking seller’s maximum liability for the breach of such representations.

8.1 Please briefly describe any regulations concerning 7.4 Do sellers usually give any form of title “guarantee” the lending of money to finance real estate. Are the or contractual warranties to the buyer? What would rules different as between resident and non-resident be the scope of these? What is the function of any persons and/or between individual persons and such guarantee or warranties (e.g. to apportion risk, corporate entities? to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying out his own diligence? With respect to residential real estate, there are both federal and local requirements. At both levels, the purpose of the regulations Customarily, purchasers will acquire “as-is”, with certain specific is to protect the consumer. The federal regulations make sure that representations given as to matters that are more difficult for a lenders fully disclose all costs and expenses of financing; i.e. all purchaser to discover itself during its inspection period. The specific interest payments, fees and closing costs over the life of the loan. items warranted, caps on seller liability and the warranty survival Localities have regulations dealing with physical risks, such as lead period are heavily negotiated. The function of warranties is to paint, radon gas and asbestos, among others.

298 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

required recording office within 10 days of the execution thereof. In 8.2 What are the main methods by which a real estate order for a lender to have a perfected security interest over personal lender seeks to protect itself from default by the property, accounts and receivables among other collateral that is borrower? categorised as personal property, the lender must record a financing statement in the place and in the manner required by the Uniform Most real estate lenders “underwrite” commercial or multi-family Commercial Code governing the collateral. properties by looking at the cash flow, the “projected” rent stream, the physical and environmental condition of the property, and the as-is value and the projected value of the property as compared 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other to the amount of the loan. Borrowers look for commercial loans USA creditors? to be non-recourse, meaning that the borrower or its sponsor – individual or entity – will not be personally liable if the loan is not repaid, but lenders will in turn protect themselves with a If the real estate lender has a properly perfected security interest in guaranty from a sponsor triggered by the borrower’s bad acts, such the collateral securing loan, the lender’s security interest protects as misappropriation, fraud, malfeasance or voluntary or collusive it from claims of other creditors. Title insurance insuring the first involuntary bankruptcy. Lenders require more equity if a property priority of the lender’s lien on real estate assets securing a loan is risky; such equity may take the form of upfront capital as well as is an essential component of a real estate finance transaction. In letters of credit and payment guaranties. In addition, lenders often transactions like mezzanine loans, where control over real estate impose cash management systems with varying levels of control assets is achieved by a pledge of ownership interests, the priority over the property’s cash flow, depending on the type of asset and the of filings under the Uniform Commercial Code (“UCC”), adopted underwriting of the property and the borrower, pursuant to which in all 50 states, the District of Columbia and the U.S. Territories revenues are deposited by tenants or the property manager directly can also be insured in many instances. It is important that security into a controlled account and either applied directly to debt service interests in real property and other assets interests be perfected in or disbursed to the borrower, only so long as no default exists and compliance with local law and the UCC, and that that appropriate certain loan performance thresholds continue to be met. filings are kept in effect. Covenants in loan documents generally prohibit additional debt and transfers that might result in claims against the borrower, and guaranties are required to support specific 8.3 What are the common proceedings for realisation of borrower covenants not to take actions that could jeopardise a mortgaged properties? Are there any options for a lender’s security. mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the mortgagor? 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? Judicial foreclosure is available in every state (and required in many) and entails the foreclosing lender filing a lawsuit against Insolvency laws, failure to comply with local law requirements the defaulting borrower. Upon judgment in the lender’s favour, and formalities, and borrower fraud can cause security taken the property is typically subject to a public auction conducted by a lender to be avoided or rendered unenforceable. Lenders by a court-appointed officer. With the spate of foreclosures in protect themselves against these risks by thoroughly investigating recent years, certain states have attempted to ensure the integrity the credit status of their borrowers, by engaging local counsel to of the foreclosure process by imposing certain restrictions and advise and opine as to specific local requirements and limitations requirements on foreclosing lenders. In New York, for example, of enforceability of loan covenants, and by obtaining third party a foreclosing lender must be careful to comply with all notice guaranties that can be enforced upon a borrower’s breach of specific requirements, especially as this may concern residential occupants representations, warranties and covenants. of the subject property, and the attorneys of foreclosing lenders may be required to submit an affirmation that they themselves have taken 8.7 What actions, if any, can a borrower take to frustrate reasonable steps to verify the accuracy of documents filed in support enforcement action by a lender? of residential foreclosures. If non-judicial foreclosure is allowed then, typically, if the borrower fails to cure a default after receipt Filing for bankruptcy protection is the most common method used of a notice of default and intent to foreclose from the lender, or use by borrowers to frustrate enforcement actions. At a minimum other lawful means (such as filing for bankruptcy to temporarily stay the lender will be significantly delayed in exercising its remedies the foreclosure) to stop the sale, the lender or its representative may and motivated to reach agreement regarding a forbearance. In conduct a public auction of the property in a manner similar to the jurisdictions where judicial foreclosure is required, borrowers can auction conducted in connection with a judicial foreclosure. The more readily contest and delay enforcement actions. As noted timeframe necessary to complete any type of foreclosure can vary above, a borrower’s action to frustrate enforcement by a lender will widely depending on the circumstances and the requirements of the typically trigger recourse to a third party guarantor. jurisdiction.

8.8 What is the impact of an insolvency process or a 8.4 What minimum formalities are required for real estate corporate rehabilitation process on the position of a lending? real estate lender?

In order to have an enforceable loan, most states require that contracts The filing of a bankruptcy case triggers an automatic stay or relating to real estate be in writing. In particular, each state’s statute injunction on collection activity which will prevent the secured of frauds legislation will be applicable. In order for a lender to have lender from foreclosing without seeking relief from the stay. A real a perfected security interest in the real estate, a mortgage or deed of estate lender’s secured claim in a bankruptcy case, however, will trust meeting the requirements of state law must be recorded in the generally be protected in accordance with the priority of the lender’s

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 299 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

security interest in the real property collateral. If the real estate transfer of a controlling interest in the entity). Many states also lender’s collateral is disposed of through the bankruptcy process, have mortgage or intangibles taxes payable in connection with and the real estate lender is unsecured, its claim will be bifurcated indebtedness secured by real estate. The obligation to pay transfer into its secured and unsecured components under Section 506(a) of taxes can be allocated by contract, but is typically allocated pursuant the Federal Bankruptcy Code based on the value of the property. The to local custom. In some states, the obligation to pay transfer taxes secured claim will generally be paid in an amount equal to the value is joint and several, so even if the obligation is allocated to one party, of the property, with a distribution to the lender on the unsecured the state is not bound by such allocation, so the state could seek portion of its claim on a pro rata basis along with the claims of payment from the other party if the proper amount of tax is not paid. other unsecured creditors of the debtor. As a result, the secured Mortgage recording or note intangibles taxes are typically allocated

USA lender’s valuation of real property can be contested in bankruptcy to the borrower. If not paid, recording offices will not record deeds. proceedings and potentially lead to litigation in the bankruptcy Both the purchaser and the seller typically have liability. court over the correct amount to be allowed for the lender’s secured claim. Additionally, there are some built in protections for real 9.2 When is the transfer tax paid? estate lenders in “single-asset” real estate bankruptcy cases, where the primary income from a debtor is based on a single commercial Payment of the applicable transfer and/or mortgage recording or real estate project. On request of a creditor with a claim secured intangibles tax is a condition precedent to recordation of a deed by the single asset real estate and after notice and a hearing, the or mortgage, as applicable. Payments are, however, subject to court will grant relief from the automatic stay to the creditor unless subsequent audit in many jurisdictions. In states that impose the the debtor files a feasible plan of reorganisation or begins making transfer tax on a transfer of a controlling interest in an entity that interest payments to the creditor within 90 days from the date of the owns real property, a return must be filed within a certain time filing of the case, or within 30 days of the court’s determination that period, typically 30 to 60 days of the transfer. the case is a single asset real estate case. The interest payments must be equal to the non-default contract interest rate on the value of the real estate lender’s interest in the real estate. 9.3 Are transfers of real estate by individuals subject to income tax?

8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate Unless the transfer of real estate qualifies for special treatment under shares in a borrower given as collateral? If so, the U.S. Internal Revenue Code of 1986, as amended (the “Code”), can shares be appropriated when a borrower is in the transfer of real estate by a U.S. person is a taxable transaction. administration or has entered another insolvency or The individual seller will have taxable gain or loss equal to the reorganisation procedure? difference between the fair market value of the consideration received (including any liabilities assumed or to which the real “Mezzanine” financing is a hybrid of debt and equity financing estate transferred is subject) and the tax basis that the individual where the parent company of the borrower pledges its equity interest has in such real estate, which tax basis is reduced by depreciation in the borrower to the lender as collateral for the loan. Perfection deductions taken for tax purposes. The gain or loss will be capital of the lender’s security interest is governed by the UCC. In the in nature if the real estate was held as a capital asset (i.e., generally, event of a default, the lender has the right to foreclose on the parent held for investment). Long-term capital gains (i.e., gains with company’s equity interest, thereby taking control of the borrower respect to capital assets held over 12 months) are currently taxed and the property owned by the borrower. Foreclosure on an equity at significantly more favourable tax rates as compared with the interest by a mezzanine lender is accomplished through a UCC tax rates on ordinary income in the case of individuals and other foreclosure which is generally believed to be a less cumbersome non-corporate taxpayers. Exclusions from taxable income (up to and faster process than a foreclosure on real property by a mortgage maximum dollar amounts) are available for gains recognised by lender. However, if the underlying real property is also mortgaged individuals on the sale of a principal residence. as collateral for a senior loan, the ability and desire of a mezzanine As mentioned above, if certain requirements are met, the exchange lender to foreclose on the equity interest in the borrower is of real property with other real property that is of a like-kind may usually limited by an intercreditor agreement between the senior qualify as an exchange under Section 1031 of the Code. Section 1031 secured lender and the mezzanine lender. Once an insolvency provides an exception to the general rule of current gain recognition or reorganisation proceeding against the borrower is initiated, an and allows owners to postpone paying tax on the gain from the sale automatic stay will initially prohibit the mezzanine lender from of real estate if the owner reinvests the proceeds in similar property initiating a UCC foreclosure on the equity interest in the borrower. that is located in the United States as a part of the like-kind exchange. The gain is deferred until the transferor exits out of its investment in 9 Tax the like-kind property received in the exchange.

9.4 Are transfers of real estate subject to VAT? How 9.1 Are transfers of real estate subject to a transfer tax? much? Who is liable? Are there any exemptions? How much? Who is liable?

There is no VAT in the U.S. Most of the states in the U.S. do In most jurisdictions, there are state and sometimes local transfer impose a transfer tax on the transfer of real estate. The rate is not taxes on a deed transfer, which are usually calculated as a percentage uniform and it varies from state to state and may have an additional of the consideration being exchanged for the deed. In some tax imposed by a city, county, or other locality. Many states will jurisdictions (New York, for example), long-term leases (49 years or require the purchaser to withhold state income taxes if the seller is more) of real estate are subject to transfer tax. Some states impose not a resident of the state, or if the seller is a pass-through entity for their real property transfer tax in cases where an interest in an entity tax purposes, will require the entity to pay the estimated state taxes that owns real property in the state is sold (usually requiring the owed by the partners who are not residents of the state.

300 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

Many states exempt transfers of real estate, the gain from which the acquisition of certain assets, sales taxes may be an issue as well, would be deferred for U.S. federal income tax purposes under and a buyer should obtain a tax clearance certificate from the taxing special provisions (for example, the like-kind exchanges discussed authority to confirm there are no outstanding tax liabilities that above or transfers of real estate to wholly owned entities). would transfer with the asset. Some jurisdictions have bulk sales laws in place, that require, among other things, a buyer to notify the seller’s creditors if it is acquiring a significant portion of the seller’s 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? business or assets.

While foreign investors are generally not subject to U.S. income or 10 Leases of Business Premises USA withholding tax on gains from the sale of U.S. investments (such as stocks and bonds), an exception applies in the case of interests in real property located in the U.S., which are subject to tax pursuant 10.1 Please briefly describe the main laws that regulate to the Foreign Investment in Real Property Tax Act (“FIRPTA”). leases of business premises. In such cases, the gain is treated as income from a U.S. business, and is taxable to the foreign seller in the same manner in which In most states, leases are contracts and governed by applicable a similar U.S. person (e.g., an individual or a corporation, as contract law. Local law governs damages on breach and other applicable) would be taxed. This requires the foreign seller to file remedies, and procedures to evict defaulting tenants. Local law a U.S. tax return and to report and pay the tax liability. Foreign will dictate whether a lease is subordinate to a mortgage, absent sellers of real estate that are corporations are also potentially subject a provision in the lease that automatically subordinates the lease to an additional branch profits tax on the gain at a 30% rate (which to any mortgage. If a landlord or tenant files for bankruptcy, their may be reduced or eliminated by a tax treaty). Collection of the respective rights will be as set forth in the Federal Bankruptcy Code, tax under FIRPTA is enforced through an obligation of the seller which pre-empts state law. or other responsible party to withhold, generally at a rate of 15% of the gross purchase price following a change of law late in 2015. 10.2 What types of business lease exist? (Prior to the change in law, the withholding rate was 10%.) The difference between the actual tax liability pursuant to FIRPTA and There are “modified gross” leases, generally used in office the amount withheld is either paid or refunded in connection with buildings, which build into the rent a base for real estate taxes and the filing by the foreign seller of its U.S. tax return. Some states, operating expenses; the tenant will be allocated its percentage share such as Georgia, have enacted similar withholding requirements for of annual increases above that base. A net lease on the other hand, the sale of property by non-residents of the state. is generally used for long-term leases of entire buildings, industrial/ warehouse leases, retail outparcel leases and some retail leases. In 9.6 Is taxation different if ownership of a company (or this type of lease, the tenant pays directly for utilities, taxes and other entity) owning real estate is transferred? property insurance, and is responsible for the maintenance of the premises. However, in most cases, they are not responsible for If equity interests in an entity that directly or indirectly holds certain structural repairs. A land lease or ground lease is a long-term U.S. real estate are sold, apart from transfer tax considerations as lease by which the tenant rents and uses land, but during the term of discussed above, the seller (or its owners in the case of a seller such a lease the tenant also owns the improvements it constructs on that is a partnership or other pass-through entity) will generally be the land (and is therefore responsible for all maintenance, taxes and subject to income tax on any resultant gain. In the case of foreign other costs related thereto). investors, gain from the sale of interests in an entity that directly or indirectly holds U.S. real estate, including interests in a real estate 10.3 What are the typical provisions for leases of business investment trust (“REIT”) or other corporation, may be subject to premises in your jurisdiction regarding: (a) length of U.S. income tax pursuant to FIRPTA (see discussion in question term; (b) rent increases; (c) tenant’s right to sell or 9.5 above). A variety of exemptions from FIRPTA are potentially sub-lease; (d) insurance; (e) (i) change of control of available, including for: (i) shares in corporations that have less the tenant; and (ii) transfer of lease as a result of a than 50% of their business assets throughout a prescribed testing corporate restructuring (e.g. merger); and (f) repairs? period comprised of interests in U.S. real estate; (ii) small portfolio investors (owning less than 5%, or 10% in the case of a REIT) that These terms are negotiated for each individual lease: sell shares in a public company; (iii) sales of shares of REITs that a) Length of term are domestically controlled (i.e., less than 50%-owned throughout a The length of the term can vary. Landlords prefer a longer term with testing period by non-U.S. investors); and (iv) foreign pension funds frequent rent increases. Tenants may want to lock in space for 10 that meet certain requirements. years, but will not want rent increases. No right to renew will be afforded to a tenant unless set forth in the lease, and then the tenant 9.7 Are there any tax issues that a buyer of real estate must exercise this right in a timely manner. should always take into consideration/conduct due b) Rent increases diligence on? See above. Renewal rents may be stipulated in advance, increased based on an independent factor (such as the Consumer Price Index) In addition to assessing local transfer and mortgage taxes as or reset based on the prevailing market rental rate. described above, a buyer should evaluate the impact of local ad valorem property taxes on the transaction, including the amount, c) Tenant’s right to sell or sub-lease schedule for payment, appropriate proration with the seller, and See below. potential for reassessment or application of “rollback” taxes as a d) Insurance result of a transfer or change in use or real property. With respect to Typically, the landlord will obtain property insurance for the

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 301 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

building (the cost of which may be passed through to its tenants), and the tenant will provide property insurance for the contents of 10.6 Does the landlord and/or the tenant of a business its premises and its tenant improvements. Each party will obtain lease cease to be liable for their respective obligations under the lease once they have sold their liability insurance for its acts or omissions. Other coverages may be interest? Can they be responsible after the sale in required according to the tenant’s use, the location of the property, a respect of pre-sale non-compliance? lender’s requirements, and as the market dictates. e)(i) Change of control of the tenant The answer to this question will depend on the language of the See below. contract. The tenant signing the lease will be liable for the performance of the obligations thereunder. If the tenant assigns its interest under

USA e)(ii) Transfer of lease as a result of a corporate restructuring (e.g. merger) the lease, it may cause a new tenant to assume its obligations, but the Provisions of leases dealing with assignment and subletting as well assignment will not release the tenant from acts prior to or after the as mergers or reorganisations or changes of control are significant assignment unless specifically released by the landlord. If the tenant points of negotiation. In all events, the landlord will want the right under a lease is a company and the shareholder sells the company, the to consent to a change of tenant, whether by assignment or subletting shareholder will not have personal liability before or after the sale by or change of control, but a significant tenant will want to preserve virtue of the liability limits afforded to such shareholder by the statutes its ability to restructure. Minimum net worth requirements for the governing entity liability. Leases typically provide that the landlord’s assignee and continued liability of the assignor are often utilised. liability is limited to its interest in the property and that the landlord will The sale of stock of publicly owned companies, however, should be released from further liability following a sale of the property. One not be prohibited by the terms of the lease. State law varies as to of the documents executed in a typical real estate sale will address the whether a change of control constitutes an assignment where a lease assignment of leases and assumption of obligations by the purchaser. is silent or unclear. The contractual terms of an assignment of leases are negotiable as to whether such assumed liability includes liability arising prior to the f) Repairs transfer as well as liability arising from and after the transfer. In some In most cases, interior repairs to the premises are the responsibility instances, state law may require an explicit assumption of liability for of the tenant and structural and systems repairs and common areas tenant security deposits transferred in connection with a sale. maintenance are the obligation of the landlord (subject to the ability of the landlord to pass the related costs through to the tenants). The exact allocation of repair obligations will vary by property type and location. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of 10.4 What taxes are payable on rent either by the landlord the “environmental footprint” of a building. Please or tenant of a business lease? briefly describe any “green obligations” commonly found in leases stating whether these are clearly defined, enforceable legal obligations or something The landlord pays income tax on rental income. Real estate taxes are not amounting to enforceable legal obligations (for allocated between the landlord and tenant. State sales taxes on rents, example aspirational objectives). which apply in some states (Florida, for example), are usually allocated to the tenant. New York City has a commercial occupancy tax. Green provisions are becoming more prevalent in leases today. Much of the demand for green buildings is being driven by corporate 10.5 In what circumstances are business leases usually tenants with enterprise-wide sustainability programmes and terminated (e.g. at expiry, on default, by either party landlords who are marketing the cost savings provided by “green” etc.)? Are there any special provisions allowing a and energy-efficient projects and by municipalities tying bids for tenant to extend or renew the lease or for either party projects and incentives to similar objectives. Institutional investors to be compensated by the other for any reason on have also shown a heightened interest in such projects. “Green” termination? leases regularly include provisions which provide for compliance with established “green” standards such as the LEED Certification Except in the case of certain financing leases that can be terminated standards promulgated by the U.S. Green Building Council, the upon payment, leases generally terminate at the end of a lease term. most widely accepted green building standard. If a tenant fails to vacate its premises at such a time, the landlord can move to evict the tenant and typically has the right to charge a significantly escalated “holdover” rent during such period. Tenants 10.8 Are there any trends in your market towards more and landlords can typically terminate leases upon a substantial flexible space for occupiers, such as shared condemnation or casualty. The degree of damage or loss and the short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ time that the tenant is unable to use the demised premises determine activities for residents (co-living)? If so please provide a tenant’s right to terminate, and these requirements are heavily examples/details. negotiated. If the leased premises are being constructed, the tenant may have the negotiated right to terminate the lease if the premises Whereas long-term leases have traditionally been viewed by landlords are not completed by a certain date. A tenant may negotiate a right as a way to reduce risk and create stable cash flow, the fast-moving to terminate the lease if services are not provided for a designated companies of today that are constantly transforming their business period of time. A tenant may also be able to negotiate a termination models and disrupting new industries have made long-term leases right at one or more points during the term in exchange for payment riskier since there is no way of knowing whether a tenant will still of a termination fee to compensate the landlord for unamortised be relevant to the consumer in five to 10 years. As a result, demand tenant improvement costs and leasing commissions and a portion for flexible workspace is high throughout the United States. By way of future rent. of example, WeWork, one of the biggest and fastest-growing of the “flex space” office providers, as of September 2018, now occupies

302 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

more Manhattan office space than any other company. Similarly, developers of residential multifamily apartments are facing ever 12 Public Law Permits and Obligations greater competition to attract tenants by providing the greatest amenities package. For example, communities that used to offer a 12.1 What are the main laws which govern zoning/ basic fitness centre and package room for 24-hour package delivery permitting and related matters concerning the use, are now offering game rooms with big screen TVs, video games, development and occupation of land? Please briefly pool tables and shuffleboard, flex working spaces equipped with wi-fi describe them and include environmental laws. internet, and concierge services that pick up and deliver dry-cleaning on-site and manage deliveries of groceries and other packages. The main laws governing construction, zoning, use, and occupation

of the land are local in nature. Each state adopts governing legislation. USA Local land use authorities then have their own ordinances, rules, 11 Leases of Residential Premises and regulations. Be aware, however, that not every location in the United States is in an incorporated municipality, and not every locality regulates land use by zoning or land development under 11.1 Please briefly describe the main laws that regulate leases of residential premises. any mechanism. In some locations, federal or state law may affect land development or land use, often in special areas. For example, in California, there are specific provisions dealing with coastline As with commercial leases, in most states, leases of residential property. In Maryland, development around the Chesapeake Bay is premises are contracts and governed by applicable contract specially regulated. In Florida, the Everglades are subject to special law. Local law governs damages on breach and other remedies, rules. Federal and state governments exercise more comprehensive and procedures to evict defaulting tenants. Generally, however, jurisdiction over environmental matters than do local governments, local law will provide for more protective treatment of residential who more typically regulate land development and land use. Under tenants than commercial tenants. For example, in some states, these laws, landowners must comply with a variety of statutes security deposits must be held in segregated and or interest-bearing and regulations governing emissions to the air, discharges to accounts, and must be returned to the tenant within a short period water, and disposal on land. Real estate practitioners will want to of time following expiration of the lease or penalties will apply to pay particular attention to restrictions on development in or near the landlord. Tenants may have a legal right to a walk-through at wetlands and streams, discharges of storm water during construction the beginning and end of a lease term to confirm any damage to the and after completion of a project, storage facilities for potentially premises for which the tenant could be held responsible. polluting materials like chemicals or heating oil, and equipment that may cause air pollution such as large space heating boilers or stand- 11.2 Do the laws differ if the premises are intended for by power generators. Similarly, certain materials raise questions if multiple different residential occupiers? they are present in existing structures, and generally cannot be used in new buildings; examples include lead-based paints, asbestos, Local laws often provide exemptions from certain residential tenant- polychlorinated biphenyls, and urea formaldehyde foam insulation. protective requirements for owners leasing fewer than a stipulated number of units. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price/ 11.3 What would typical provisions for a lease of compensation mechanism. residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the The state can condemn (force the owner to sell the property to the tenant’s rights to remain in the premises at the end of state) property for public use, but, based on recent cases, the courts the term; and (d) the tenant’s contribution/obligation are split as to whether economic development is a sufficient public use to the property “costs” e.g. insurance and repair? of the property which would enable them to acquire title and transfer it to a private entity. The state must provide the owner with “just Subject to requirements of local law, residential leases are typically compensation”. The price mechanism will vary from state to state, and for one year, with rents to be renegotiated upon renewal. Shorter from authority to authority taking land (as each may have a different term leases may require premium rents, depending on inventory and statutory obligation with respect to public uses and compensation). market conditions. A landlord’s acquiescence to a tenant holding over may establish a new tenancy (month to month or otherwise), which requires a landlord to monitor its lease expirations. A typical 12.3 Which bodies control land/building use and/or multi-family residential lease (for an apartment development), occupation and environmental regulation? How do would allocate responsibility for maintenance and insurance of the buyers obtain reliable information on these matters? real property to the landlord. A tenant would be responsible for insuring its personal property and for the cost of repairs of damage Federal and state governments have jurisdiction over environmental in excess of ordinary wear and tear at the end of the lease. law. As noted below, there are databases for violations of certain federal laws; states may maintain similar databases. Otherwise, parties hire environmental consultants (third-party experts) to 11.4 Would there be rights for a landlord to terminate a perform Phase I Environmental Site Assessments, which consist residential lease and what steps would be needed of site inspections, interviews with people knowledgeable about to achieve vacant possession if the circumstances existed for the right to be exercised? current and historical uses of the property, and searches of electronic databases of regulated and contaminated sites. The prior or existing Local law governs damages on breach and other remedies, and use of the property may require that sampling of soil, groundwater, procedures to evict defaulting tenants, but termination and eviction surface water, or other environmental media be performed. Such rights are typically provided to landlords. sampling is commonly referred to as a “Phase II Environmental Site Investigation”. Purchasers sometimes require the seller to provide

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 303 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

extensive representations concerning environmental matters, which in question 11.3 above. The Environmental Protection Agency, a may cause the seller to make disclosures of past environmental issues. federal agency, maintains a “National Priorities List” of the most contaminated known sites in the country, and many states have developed their own lists of contaminated sites. There are many 12.4 What main permits or licences are required for building works and/or the use of real estate? contaminated sites that are not on federal or state lists, however. Thus, an adequate Phase I Environmental Site Investigation and, if warranted based on the findings of the Phase I, a Phase II Each local governmental entity has its own requirements. As a Environmental Site Investigation, are the best means for obtaining general matter, a building permit is needed for construction and the most reliable and comprehensive information regarding a certificate of occupancy is needed specifying usage for each USA environmental conditions at a subject property. separate space in a building. Local ordinances are likely to require other forms of permission within the development stages, such as “site disturbance permits” or permits for water or sewage use. 12.9 In what circumstances (if any) is environmental clean- up ever mandatory?

12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission This is dependent on statute. Under certain federal and state laws, be obtained in any way (e.g. by long use)? parties in interest, including some existing and prior owners, are liable for remediating property that is contaminated above applicable Permits are obtained locally. Building permits must be issued before standards. Some states, including most notably New Jersey, also construction can take place. Certificates of occupancy, or their local have laws requiring sellers to verify to state regulatory authorities equivalent, must be issued before buildings (and tenant spaces) can the environmental condition of certain industrial and commercial be occupied. Requirements relative to reissuance and transfer of property before it is sold, and if the property is contaminated, the certificates of occupancy are governed by local law. seller must remediate it before the transaction can be consummated.

12.6 What is the typical cost of building/use permits and 12.10 Please briefly outline any regulatory requirements the time involved in obtaining them? for the assessment and management of the energy performance of buildings in your jurisdiction.

This is totally dependent upon the request, the local requirements, and There are no standards at this time. how busy the office granting the permits is at the time of the request.

12.7 Are there any regulations on the protection of historic 13 Climate Change monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use? 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions The federal government, through the Secretary of the Interior, trading scheme). maintains a National Register of Historic Places and the federal government administers certain grant programmes and encourages There are none that are applicable to real estate on a nationwide the preservation of these sites through various financial incentives. basis, but certain states, such as California, have enacted regulatory State and local governments will generally have a historic measures for reducing carbon dioxide emissions and have begun to preservation commission that will designate certain sites or districts implement emissions trading regimes. as historic and this commission will consider preservation interests before issuing building permits and review actions of the zoning and planning boards when historic sites will be affected. A historic 13.2 Are there any national greenhouse gas emissions designation may affect the use of the property, but generally it does reduction targets? not affect the transfer rights. Rather than stifling development, in some instances, regulations on There are certain states that have requirements. the protection of historic monuments can actually foster development through tax incentives which make development projects that would 13.3 Are there any other regulatory measures (not already not otherwise be financially viable for a developer worth the reward. mentioned) which aim to improve the sustainability of The IRS tax code provides “historic tax credits” to developers who both newly constructed and existing buildings? rehabilitate buildings constructed prior to a certain date or buildings that are “certified historic structures”. These historic tax credits can Most action taken on this front, thus far, has been taken by state and then be passed on by the developer to a bank or other company local governments. For example, New York and other jurisdictions which can use the tax credits to offset the company’s substantial tax have begun to require the auditing and reporting of energy basis in exchange for an equity investment in the project. consumption at the building level. California and Washington have begun requiring owners of non-residential buildings (including hotels) to release energy and water consumption data and ratings to 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real parties in any transaction concerning the sale, lease or financing of a estate? Is there a public register of contaminated land building. Many local jurisdictions in California have green building in your jurisdiction? standards modelled on LEED or other standard building guidelines.

Generally, parties hire third party environmental consultants to perform Phase I Environmental Site Assessments, as described

304 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenberg Traurig, LLP USA

Christina Braisted Rogers Greenberg Traurig, LLP 3333 Piedmont Road, NE, Suite 2500 Atlanta, Georgia 30305 USA

Tel: +1 678 553 2100 Fax: +1 678 553 2212 Email: [email protected] URL: www.gtlaw.com USA

Christina Braisted Rogers focuses her practice on real estate matters, including acquisition, joint venture, disposition, leasing transactions and financing matters involving multifamily residential, office, retail and industrial properties. She represents institutional real estate investors, including investment trusts, pension fund advisors, and construction and permanent lenders and borrowers. Christina is experienced with conduit, traditional, mezzanine and construction lending, representing major financial institutions, conduit lenders and insurance companies. Ms. Rogers is a member of the State Bar of Georgia, the Atlanta Bar Association, the American Bar Association, the Fellows of the American Bar Association, and Commercial Real Estate Women (“CREW”). She is a member of the Board of Directors for Cool Girls, Inc., a non-profit organisation dedicated to the self-empowerment of girls and breaking the cycles of poverty, low self-esteem and teen pregnancy. She is listed in Best Lawyers in America, Real Estate, The Legal 500, United States, Real Estate, and Georgia Trend magazine’s “Legal Elite”.

Greenberg Traurig, LLP is an international, multi-practice law firm with approximately 1,900 attorneys serving clients from 38 offices in the United States, Latin America, Europe, Asia, and the Middle East. The firm is No. 1 on the 2015Law360 Most Charitable Firms list, third largest in the U.S. on the 2015 Law360 400, Top 20 on the 2015 Am Law Global 100, and among the 2015 BTI Brand Elite. More information at: www.gtlaw.com. Greenberg Traurig provides integrated legal services for clients worldwide. The firm offers multidisciplinary teams that include senior lawyers who have been the chief legal officers at major multinational companies and have spent years solving real-world problems in the business, political and legal arenas. Teams are built around client needs, ensuring lean staffing, front-end planning and flexible billing, where appropriate. The firm’s experience in more than 100 practice areas and our network of contacts throughout the world position us to help clients achieve their objectives both domestically and in the global marketplace. The Greenberg Traurig Real Estate Practice is a cornerstone of the firm and recognised leader in the industry. Our attorneys deliver diversified and comprehensive legal solutions for property acquisition and investment, development, management and leasing, financing, restructuring, and disposition of all asset classes of real estate. The team draws upon the knowledge and experience of nearly 300 real estate lawyers from around the world, serving clients from key markets in the United States, Europe, the Middle East, and Latin America. Our clientele includes a broad range of property developers, lenders, investment managers, private equity funds, REITs, and private owners. We advise clients on a variety of matters across a broad spectrum of commercial, recreational and residential real estate, including structured equity and debt and the hybrids.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 305 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 31

Zambia

Eric Silwamba, Jalasi and Linyama Legal Practitioners Joseph Alexander Jalasi, Jr.

protection and conservation of the environment and use of natural 1 Real Estate Law resources, providing for the prevention and control of pollution and environmental degradation. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to 1.2 What is the impact (if any) on real estate of local leases of business premises should be listed in common law in your jurisdiction? response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in Local common law constitutes local judicial precedents which response to questions in Section 9. constitutes decisions of the various courts in Zambia which regularly pronounce themselves on land rights in Zambia. These cases have The main laws that govern real estate are: significant impact on real estate in Zambia. For example, the case of (a) The Lands Act Chapter 184 of the Laws of Zambia. Premesh Patel v Rephidim Institute Limited Judgment No. 3 of 2011 which states that a document purporting to the grant, convey and It provides for leasehold tenure, vesting of land in the president, transfer of land if it is longer than for one year must be registered, if conversion and recognition of customary tenure to leasehold tenure. it is not registered it shall be null and void. Another example is the (b) The Lands and Deeds Registry Act Chapter 185 of the Laws case of Davie Kebby Nyirongo v Rockstone Industry Company Ltd of Zambia. 2015/HP/558 where the court held that if a real estate agent is not It provides for the registration of documents, issuance of titles and registered they are not entitled to commission. transfer and transmission of registered land. (c) The Land Acquisition Act Chapter 189 of the Laws of 1.3 Are international laws relevant to real estate in your Zambia. jurisdiction? Please ignore EU legislation enacted It provides for compulsory acquisition of land by the President in locally in EU countries. the interest of the Republic. (d) The Rent Act Chapter 206 of the Laws of Zambia. Zambia is a former British protectorate and, as such, is under the It has provisions restricting the increase of rents, determining the English Law (Extent of Application) Act where laws enacted in standard rents, prohibiting the payment of premiums and restricting England prior to August 1911 are applicable to Zambia. By virtue the right to possession of dwelling-houses. of which the English Statute of Frauds Act 1677 and the Law of Property Act. These Acts make it mandatory for an instrument (e) The Common Leasehold Scheme Act Chapter 208 of the Laws of Zambia. relating to the sale of land to be in writing and regulates mortgages. It provides for the division of land and buildings into units with separate titles by means of common leasehold schemes. 2 Ownership (f) The Estate Agents Act No. 21 of 2000 of the Laws of Zambia.

This Act provides for governance of real estate in Zambia and for 2.1 Are there legal restrictions on ownership of real estate the regulation of the practice and business of estate agents: by particular classes of persons (e.g. non-resident ■ Zambia institute of Architects. persons)? ■ National Council for Construction. Yes, as a general rule land in Zambia can only be held by Zambians THE LAWS LISTED HEREUNDER ARE THOSE RELATING TO or entities which are 75% owned by Zambian shareholders. ZONING AND ENVIRONMENTAL: However, under Section 3 (3), non-Zambians can own land in the (a) The Land Survey Act Chapter 188 of the Laws of Zambia. following circumstances: 1) under the hand of the president; 2) he/ This Act provides for registration for the registration and licensing she is a permanent resident (has lived in Zambia for 10 continuous of surveyors and also to provide for protection of beacons and other years); and 3) an entity owned by 75% Zambian shareholders where survey marks. a person holds an investment licence. (b) The Environmental Management Act No.12, 2011 of the Laws of Zambia. This Act provides for integrated environmental management and the

306 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

Section 4 of the Lands and Deeds Act provides that every document 3 Real Estate Rights purporting to grant, convey or transfer of land or any interest in land, lease or agreement for a lease or permit of occupation of land for a 3.1 What are the types of rights over land recognised in term longer than one year, or creation of any charge or mortgage your jurisdiction? Are any of them purely contractual must be registered in accordance with Section 6 of the Lands and between the parties? Deeds Act. This Act provides that failure to register any document required to be registered by law and not registered within the time Zambia has two types of land rights: statutory; and customary law. specified, renders the documents null and void. Under statutory law, the land is given by way of a 99-year statutory lease between the President and the first land owner. A person who is

4.4 What rights in land are not required to be registered? Zambia granted a 99-year lease is at liberty to sell, by way of assignment, the remaining years of the lease; Zambia does not have a freehold system. Rights under customary tenure are not required to be registered. The vast majority of Zambian land is governed by customary law. This means that it is governed by the African customary law traditions in which the land is found, the custodian of the land is the king or 4.5 Where there are both unregistered and registered land chief. The Lands Act under the provisions of Section 8 allows for or rights is there a probationary period following first the conversion of land held under customary tenure to be converted registration or are there perhaps different classes or qualities of title on first registration? Please give to statutory tenure. Note should be taken that under statutory tenure details. First registration means the occasion upon English principles of common law and equity are regularly applied. which unregistered land or rights are first registered in the registries. 3.2 Are there any scenarios where the right to land diverges from the right to a building constructed This is not applicable. thereon?

4.6 On a land sale, when is title (or ownership) transferred No; however, there is a distinction between what are known as to the buyer? surfaces rights (land rights) and mining rights. There is a distinction between the owner of mining rights and the owner of land rights. Transfer of ownership occurs on registration of the transfer The land owner is only restricted to enjoy the rights on the surface documents, these documents are the deed of assignment, original of the land. Certificate of Title, State consent to assign, Tax Clearance Certificate and the immovable property transaction form (DR 53). These are 3.3 Is there a split between legal title and beneficial title lodged at the Lands and Deeds Registry and the new title is issued in your jurisdiction and what are the registration into the purchasers’ names. consequences of any split? Are there any proposals to change this? 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later A legal owner is one who is registered as the owner on the title rights? deed and the concept of beneficial title exists by way of mortgagees, trustees, receivers, liquidators, administrator general, administrators Section 7 of the Lands and Deeds Act provides for priority of and executors. documents and date of registration. The date of registration shall be the date upon which the document shall first be lodged for 4 System of Registration registration in the Registry. The case of Moonga v Makwabarara & Abeve Company Limited held that, as for priority of registration of interest, it is the first registered interest that takes priority even 4.1 Is all land in your jurisdiction required to be though an unregistered document was the first in existence. The registered? What land (or rights) are unregistered? Commissioner of Lands will then issue a certificate of title pursuant to Section 33 of the Land and Deeds Registry Act. No, land under customary tenure is not required to be registered except for rights held under statutory tenure pursuant to the provisions of the Lands and Deeds Act. 5 The Registry / Registries

4.2 Is there a state guarantee of title? What does it 5.1 How many land registries operate in your jurisdiction? guarantee? If more than one please specify their differing rules and requirements. Yes, Article 16 of the constitution provides that the state guarantees the right to property, including land. There is one Land Registry with other provincial offices.

4.3 What rights in land are compulsory registrable? What 5.2 How do the owners of registered real estate prove (if any) is the consequence of non-registration? their title?

The rights which are compulsory registrable are: a) land ownership; Proof of ownership of registered real estate is done by production of b) lease of rights over one year; and c) easements. According to the a certificate of title. This position of the law is couched on section case of Premesh Patel and Rephidim Institute Limited Judgment No. 33 of the Lands and Deeds Registry Act which provides that “the 3 of 2011, rights not registered will be rendered null and void. certificate of title is conclusive proof of ownership of property”.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 307 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

create charges, debentures and execute mortgages with the purchaser 5.3 Can any transaction relating to registered real estate of the property to help finance the purchase of real property. be completed electronically? What documents need to be provided to the land registry for the registration of ownership right? Can information on ownership of 6.4 What is the appetite for investors and/or developers registered real estate be accessed electronically? to invest in your region compared to last year and what are the sectors/areas of most interest? Please No, any transaction relating to registered real estate must be give examples. completed in hard copies as provided by Section 92(6) of the Lands and Deeds Registry Regulations. Documents required for The appetite is still there despite the country facing economic challenges at the moment. There is a lot of development and Zambia registration of ownership rights and information on ownership of registered real estate cannot be accessed online but by physically investment in real estate, particularly from Turkey and China. checking with the Ministry of Lands. 6.5 Have you observed any trends in particular market 5.4 Can compensation be claimed from the registry/ sub sectors slowing down in your jurisdiction in registries if it/they make a mistake? terms of their attractiveness to investors/developers? Please give examples.

No; however, Section 11(1) of the Lands and Deeds Registry Act There are none. provides that where any person alleges that any error or omission has been made in the register or that any entry or omission therein has been made or procured by fraud or mistake, the registrar shall, if 7 Liabilities of Buyers and Sellers in Real he shall consider such allegation satisfactorily proved, correct such Estate Transactions error omission or entry as aforesaid.

7.1 What (if any) are the minimum formalities for the sale 5.5 Are there restrictions on public access to the and purchase of real estate? register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved The minimum formalities are that the vendor will avail a copy of the by a search of the register? If not, what additional Certificate of Title to the purchaser who will proceed to conduct a information/process is required? due diligence on the status of the property, pursuant to Section 22(1) and 23 of the Lands and Deeds Registry Act. Due diligence would There are no restrictions on public access to the register, a buyer consist of investigation of title and, if the land is not surveyed, the can obtain any information regarding real estate from the real estate vendor should have the land surveyed at his/her own cost. register at the Ministry of Lands as provided for by Section 23 of the Lands and Deeds Registry Act. 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? 6 Real Estate Market Pursuant to the Law Association of Zambia General Conditions of Sale 1997, the seller is under a duty to disclose to the purchaser 6.1 Which parties (in addition to the buyer and seller whether the property is free from encumbrances and in what and the buyer’s finance provider) would normally capacity the vendor is selling the property, whether as beneficial be involved in a real estate transaction in your owner or in any other capacity. jurisdiction? Please briefly describe their roles and/or duties. 7.3 Can the seller be liable to the buyer for The other parties who may be involved in a real estate transaction are misrepresentation? legal practitioners. According to Rule 5 of the Legal Practitioners Practice Rules 2002 and Section 45 of the Legal Practitioner Act Yes, the General Condition No. 19 of the Law Association of Zambia Chapter 30 of the Laws of Zambia, the role of legal practitioners is General Condition of Sale 1997 is instructive and provides that the to draw instruments for the transfer of land rights. vendor is liable to the purchaser for misrepresentation, especially where the same is in relation to the description of the property which gives the purchaser the right to rescind the contract and claim for 6.2 How and on what basis are these persons remunerated? compensation. Further, when there is fraudulent misrepresentation Section (1) The Legal Practitioners’ (Conveyancing and Non-Contentious of the Misrepresentation Act provides that a person has entered Matters) (Costs) Order, 2017 provides that fees are remunerable at into a contract after a misrepresentation has been made to him by 10% of the purchase price payable. another party thereto, and, as a result, thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made 6.3 Is there any change in the sources or the availability fraudulently, that person shall be so liable notwithstanding that the of capital to finance real estate transactions in your misrepresentation was not made fraudulently, unless he proves that jurisdiction, whether equity or debt? What are the main sources of capital you see active in your market? he had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts as represented were true. There are no changes; however, finance providers will normally

308 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

subject of the mortgage which under any law or instrument the 7.4 Do sellers usually give any form of title “guarantee” mortgagor is entitled to receive) as if the mortgage had so operated or contractual warranties to the buyer? What would as a transfer or lease of the estate or interest mortgaged.” be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or 8.3 What are the common proceedings for realisation of warranties act as a substitute for the buyer carrying mortgaged properties? Are there any options for a out his own diligence? mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the No, there are no title guarantees nor contractual warranties to a mortgagor? buyer in land transactions. Mortgaged property can only be realised through a court process Zambia via Originating Summons as provided pursuant to the provisions of 7.5 Does the seller retain any liabilities in respect of the Order XXX Rule 14 of the High Court Rules, High Court Act. property post sale? Please give details.

No, the seller will not retain any liabilities, once the transaction 8.4 What minimum formalities are required for real estate is completed and title has been transferred to the buyer, the buyer lending? inherits the liabilities (if any) post sale. One must have the ability to enter into a formal contract and be able to execute a mortgage deed in compliance with Section 3(3) of the 7.6 What (if any) are the liabilities of the buyer (in addition Lands Act. to paying the sale price)?

The other liabilities of the purchaser, in addition to paying the 8.5 How is a real estate lender protected from claims purchaser price, are that the purchaser is obliged to pay registration against the borrower or the real estate asset by other fees at 1% of the purchase price which triggers the change of creditors? ownership once the Assignment and Conveyance documents are lodged at the Land Registry. There is a statutory limit on the The lender may protect themselves from claims against the borrower registration fees payable the ceiling of which is ZMW 15,000.00 by putting a caveat on the property, pursuant to Section 76 of the in a transaction where the purchase price is over ZMW 500,000.00. Lands and Deeds Registry Act Chapter 185 of the Laws of Zambia.

8.6 Under what circumstances can security taken by a 8 Finance and Banking lender be avoided or rendered unenforceable?

8.1 Please briefly describe any regulations concerning Security taken by a lender can be avoided or rendered unenforceable the lending of money to finance real estate. Are the under circumstances provided in Sections 128 and 129 of the rules different as between resident and non-resident Corporate Insolvency Act No. 9 of 2017 which provides that where persons and/or between individual persons and a company has been wound up, any act relating to the property of a corporate entities? company, done by or against a company, would be void or voidable in bankruptcy law. And a floating charge on property of a company, Regulations in this regard can be derived from the Money Lenders created within one year before the commencement of the winding- Act and Banking and Financial Services Act. The difference in rules up, is void, unless it is proved that the company, immediately after between individuals and corporate entities will be with regards to the creation of the charge, was solvent. the KYC (know your customer) Guidelines. For example, corporate entities will be required to submit their Certificate of Incorporation, Certificate of Share Capital, Financial Records, Identity Cards for 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? Directors, projected cash flows; individuals will be required to provide fewer documents, such as their Identity Cards and payslip. The borrower can challenge the enforcement of taking over the property by claiming the defence of illegality, where the lender 8.2 What are the main methods by which a real estate is not a registered lender pursuant to the provisions of the Money lender seeks to protect itself from default by the Lenders Act and Banking and Financial Services Act. borrower?

The real estate lender may protect itself by way of holding real 8.8 What is the impact of an insolvency process or a property as security or collateral. Section 65 of the Lands and corporate rehabilitation process on the position of a real estate lender? Deeds Registry Act provides as follows: “A mortgage of any estate or interest in land shall have effect as As provided by the Corporate Insolvency Act, a real estate lender security and shall not operate as a transfer or lease of the estate or may, at any time after the adoption of a business rescue plan, apply interest thereby mortgaged, but the mortgagee shall have and shall to a Court for an order to set aside the resolution on the grounds be deemed always to have had the same protection powers and that: (i) there is no reasonable basis for believing that the company remedies (including a power of sale, the right to take proceedings is financially distressed; (ii) there is no reasonable prospect for to obtain possession from the occupiers and the persons in receipt rescuing the company; or (iii) the company has failed to satisfy the of rents and profits or any of them and, in the case of land held in procedural requirements. leasehold, the right to receive any notice relating to the land the

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 309 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

8.9 What is the process for enforcing security over 9.7 Are there any tax issues that a buyer of real estate shares? Does a lender have a right to appropriate should always take into consideration/conduct due shares in a borrower given as collateral? If so, diligence on? can shares be appropriated when a borrower is in administration or has entered another insolvency or No, there are no any other tax issues that a buyer of a real estate reorganisation procedure? should take into consideration, except for those provided in question 9.5 above. Collateral can be registered at the Patent and Company Registration Agency (PACRA) at their Collateral Registry. A secured creditor shall, prior to enforcing the secured creditor’s rights, register an Zambia 10 Leases of Business Premises enforcement notice in the Collateral Registry, in the prescribed manner which shall identify the debtor, the secured creditor and the collateral against which enforcement is sought. No, shares cannot 10.1 Please briefly describe the main laws that regulate be appropriated when a borrower is in administration or has entered leases of business premises. another insolvency or reorganisation procedure. The Landlord and Tenant (Business Premises) Act, Chapter 193 of the Laws of Zambia. 9 Tax This is an Act which provides security of tenure for tenants occupying property for business, professional and certain other purposes; to enable such tenants to obtain new tenancies in certain 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? cases; and to provide for matters connected therewith and incidental thereto. Yes, transfers of real estate are subject to a transfer tax which is referred to as Property Transfer Tax (PTT). The amount payable 10.2 What types of business lease exist? is rated at 5% of the value of the property pursuant to the Property Transfer Tax Act and the same is paid by the vendor. In Zambia we only have one type of business lease, and this is defined in Section 2 of the Landlord and Tenant (Business Premises) 9.2 When is the transfer tax paid? Act.

Property transfer tax is paid after the vendor obtains or is granted 10.3 What are the typical provisions for leases of business State Consent to assign by the Commissioner of Lands. Section 11 premises in your jurisdiction regarding: (a) length of of the Property Transfer Tax Act provides that tax shall become due term; (b) rent increases; (c) tenant’s right to sell or and payable within 14 days of the date of issue of the assessment in sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a respect thereof. corporate restructuring (e.g. merger); and (f) repairs?

9.3 Are transfers of real estate by individuals subject to (a) The Lands and Deeds Registry Act provides that the minimum income tax? length of term is one year and the maximum of a lease is 23 years. Yes, Section 19 of the Income Tax Act provides that income (b) Section 28 the Landlord and Tenant (Business Premises) Act received from any settlement in the form of Rental Income is subject provides that within three months of commencement of the to Income Tax. tenancy (if aggrieved) a tenant may apply to the court for determination of rent. (c) There are no rights for tenants to sell or sub lease. However, 9.4 Are transfers of real estate subject to VAT? How Section 5 of the Lands Act provides that a person shall not much? Who is liable? Are there any exemptions? sell, transfer or assign any land without the consent of the president and shall accordingly apply for that consent before Yes, transfers of real estate is subject to Value Added Tax (VAT) on doing so. commercial and industrial buildings and attracts VAT at a rate of (d) As regard to insurance, the landlord must insure his property. 16% of the contract or price. (e) This will also be governed by Section 5 of the Lands Act as mentioned above and Section 61 of the Lands and Deeds 9.5 What other tax or taxes (if any) are payable by the Registry Act, where it provides that the transfers should be seller on the disposal of a property? registered. (f) Repairs of any rented property is an obligation of the landlord Other taxes payable by the vendor on the disposal of property and not the tenant. are ground rent at the Ministry of Lands and Council Rates at the Local Authority and the same must to be paid before the transfer is 10.4 What taxes are payable on rent either by the landlord concluded. or tenant of a business lease?

9.6 Is taxation different if ownership of a company (or Taxes which are payable by the landlord are Withholding Tax which other entity) owning real estate is transferred? is 10% of the rent chargeable or receivable, the landlord is supposed to submit this tax to the Zambia Revenue Authority for all rent No, taxation remains the same. received.

310 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

10.5 In what circumstances are business leases usually 11.2 Do the laws differ if the premises are intended for terminated (e.g. at expiry, on default, by either party multiple different residential occupiers? etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party No, the laws do not differ even in places which are intended for to be compensated by the other for any reason on multiple residential occupiers. termination?

Section 5 of the Landlord and Tenant (Business premises) Act 11.3 What would typical provisions for a lease of provides for a business lease to be terminated by the landlord, residential premises be in your jurisdiction regarding: whereas Section 8 of the Act provides for such a lease to be (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of Zambia terminated by the tenant. the term; and (d) the tenant’s contribution/obligation However, with regards to the tenant extending or renewing the lease to the property “costs” e.g. insurance and repair? and one party being compensated by the other for any reason on termination; Section 7 & Section 19 of the Act provides for the (a) The Lands and Deeds Registry Act provides that the aforementioned. minimum length of term is one year and the maximum of a lease is 23 years. (b) Section 9 and 10 of the Rent Act provides a restriction on 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective increasing rent and a penalty for demanding or accepting obligations under the lease once they have sold their excess rent. interest? Can they be responsible after the sale in (c) Section 23 of the Rent Act provides for conditions of statutory respect of pre-sale non-compliance? tenancy where a tenant whose tenancy has expired has the right to continue occupation in the premises. The vendors’ and purchasers’ obligations cease immediately after (d) Section 24 of the Rent Act provides that it shall be deemed the parties have completed on the property. to be the obligation of the tenant of any premises to maintain the premises in the same state as that in which the premises were at the commencement of the tenancy, fair wear and tear, 10.7 Green leases seek to impose obligations on or damage arising from irresistible force. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 11.4 Would there be rights for a landlord to terminate a briefly describe any “green obligations” commonly residential lease and what steps would be needed found in leases stating whether these are clearly to achieve vacant possession if the circumstances defined, enforceable legal obligations or something existed for the right to be exercised? not amounting to enforceable legal obligations (for example aspirational objectives). Section 13 of the Rent Act provides for restrictions for recovery of possession of any premises or ejectment of a tenant from a house Green leases are none existence in the Zambian real estate market. without due course.

10.8 Are there any trends in your market towards more flexible space for occupiers, such as shared 12 Public Law Permits and Obligations short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/ activities for residents (co-living)? If so please provide 12.1 What are the main laws which govern zoning/ examples/details. permitting and related matters concerning the use, development and occupation of land? Please briefly describe them and include environmental laws. Shared working spaces and residential spaces are gradually entering the Zambian real estate market especially in places which (a) THE LAND SURVEY ACT CHAPTER 188 OF THE LAWS are located near a public institution such as universities and other OF ZAMBIA related schools. This Act provides for registration and licensing of surveyors and also provides protection of beacons and other survey marks. 11 Leases of Residential Premises (b) THE URBAN AND REGIONAL PLANNING ACT, No. 3 of 2015 This is an act to provide for development, planning and 11.1 Please briefly describe the main laws that regulate administration principles, standards and requirements for urban leases of residential premises. and regional planning processes and systems. It also provides for a planning framework, guidelines, systems and processes for urban The main law that regulates residential leases in Zambia is the Rent and regional planning for the Republic; establishes a democratic, Act Chapter 206 of the Laws of Zambia. accountable, transparent, participatory and inclusive process for This is an Act which provides for restricting the increase of rents, urban and regional planning that allows for the involvement of determining the standard rents, prohibiting the payment of premiums communities, private sector, interest groups and other stakeholders and restricting the right to possession of dwelling-houses, and for in the planning, implementation and operation of human settlement other purposes incidental to and connected with the relationship of development; ensures functional efficiency and socioeconomic landlord and tenant of a dwelling-house. integration by providing for integration of activities, uses and

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 311 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

facilities; establishes procedures for integrated urban and regional planning in a devolved system of governance so as to ensure multi- 12.5 Are building/use permits and licences commonly sector cooperation, coordination and involvement of different levels obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? of ministries, provincial administration, local authorities, traditional leaders and other stakeholders in urban and regional planning; ensures sustainable urban and rural development by promoting No, they are not. environmental, social and economic sustainability in development initiatives and controls at all levels of urban and regional planning; 12.6 What is the typical cost of building/use permits and and ensures uniformity of law and policy with respect to urban and the time involved in obtaining them? regional planning. Zambia (c) THE ENVIRONMENTAL MANAGEMENT ACT No. 12 of The typical costs of building/use permits are calculated at K 1.94 per 2011 square of the total area and the period which is involved in obtaining This Act provides for integrated environmental management and the such is approximately three (3) months. protection and conservation of the environment and the sustainable management and use of natural resources. Provides for the 12.7 Are there any regulations on the protection of historic preparation of the State of the Environmental Report, environmental monuments in your jurisdiction? If any, when and how management strategies and other plans for environmental are they likely to affect the transfer of rights in real management and sustainable development. estate or development/change of use? (d) THE ENVIRONMENTAL PROTECTION AND POLLUTION CONTROL ACT (repealed by Act No 11 of There are restrictions imposed on the historical monuments. 2012) Section 31 of the National Heritage Conversion Commission Act This Act provides for the protection of the environment and the Chapter 173 provides for restrictions on alienating, mortgaging, or control of pollution and provides for matters connected with or subdividing any land which is part of any National Monument or incidental to the foregoing. relic subject to the commissioner notification.

12.2 Can the state force land owners to sell land to 12.8 How can e.g. a potential buyer obtain reliable it? If so please briefly describe including price/ information on contamination and pollution of real compensation mechanism. estate? Is there a public register of contaminated land in your jurisdiction? The State cannot force land owners to sell their land to it; however, pursuant Section 3 of the Land Acquisition Act empowers the Yes, Section 86 of the Environmental Management Act provides that President to compulsorily acquire any property of any description ZEMA shall gather information on the environment and disseminate if in his opinion it is desirable or expedient in the interests of the information to private and public users. Republic to do so. The price and compensation mechanism is dealt with under Section 12.9 In what circumstances (if any) is environmental clean- 10 and 12 of the Land Acquisition Act. The value of property shall up ever mandatory? be the amount which the property might be expected to realise if sold on the open market by a willing seller at the time of publication Environmental clean-up is mandatory in circumstances where a under Section 7 of the notice to yield up possession. person’s right to a clean, safe and healthy environment is threatened. A persons rights to clean environment can compel the people The State may make deductions to the market price as provided for responsible for the environmental mess to conduct an environmental under Section 12 (b) of the Land Acquisition Act such as any returns clean-up under Section 4(3) and (4) of the Environmental and assessments of capital value for taxation made and any money Management Act. granted by the Government for the development of the property, etc.

12.10 Please briefly outline any regulatory requirements 12.3 Which bodies control land/building use and/or for the assessment and management of the energy occupation and environmental regulation? How do performance of buildings in your jurisdiction. buyers obtain reliable information on these matters?

The Energy Regulations provide that a person shall not establish or The Local Authorities have a department that deals with land/ operate an undertaking except in accordance with this Act and under building use and the Zambian Environmental Management the authority of a licence issued under this Act. An undertaking is Agency deals with environmental regulations and grants of permit. defined as any commercial undertaking, whether public or private, for: (a) the production, generation, transmission, distribution or 12.4 What main permits or licences are required for supply of energy; building works and/or the use of real estate? (b) the manufacture, refining, transportation, storage or supply of fuel; or An cccupancy licence pursuant to the provisions of the Urban and (c) the manufacture, distribution or supply of equipment used for Regional Planning Act in Section 30 and a Development Permit any activity mentioned in paragraph (a) or (b), other than any pursuant to the provisions of the Urban and Regional Planning Act such equipment: (i) designed for ordinary household use; (ii) in Section 52 are required for building works. of a design or type prescribed by the Minister by statutory instrument; or (iii) designed or used for a purpose, or in such circumstances, as may be so prescribed.

312 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia

affiliation to the Council of professional bodies or organisations 13 Climate Change whose members are engaged in activities related to the construction industry; to provide for the regulation of the construction industry; to 13.1 Please briefly explain the nature and extent of any provide for the establishment of the Construction School; to provide regulatory measures for reducing carbon dioxide for the training of persons engaged in construction or in activities emissions (including any mandatory emissions related to construction; and to provide for matters connected with or trading scheme). incidental to the foregoing.

Section 32 of the Environmental Management Act provides that there is prohibition of discharges into the environment. Section 33 of the Environmental Management Act provides for licensing of Zambia pollutant or contaminant into the environment. Joseph Alexander Jalasi, Jr. 13.2 Are there any national greenhouse gas emissions Eric Silwamba, Jalasi and Linyama reduction targets? Legal Practitioners Plot No. 12 at William Burton Place Chilekwa Mwamba Road Not yet; however, according to an article by USAID dated May 9, Off Lubu/Saise Roads, Longacres 2018, USAID is assisting in the development and implementation Lusaka of a national strategy to reduce greenhouse gas emissions from Zambia deforestation and forest degradation. Zambia is one of nine Tel: +260 211 256 530 developing countries worldwide that is piloting such a programme. Fax: +260 211 256 372 Our activities in this area will field test activities in Zambia’s Eastern Email: [email protected] Province designed to combat deforestation. Mr. Joseph Alexander Jalasi, Jr. is the Head of the Tax, Mining, Corporate, Banking and Finance Department. He spent several years in public litigation as Principal State Advocate in the Attorney General’s 13.3 Are there any other regulatory measures (not already Chambers. He is a former Registrar of the Tax Appeals Tribunal. He mentioned) which aim to improve the sustainability of has several reported cases to his credit in the Zambian Law Reports. both newly constructed and existing buildings? Mr. Jalasi served as Chief Policy Analyst Legal Affairs at State House under the late President Levy Mwanawasa and he served as legal The National Council for Construction Act, 2003 provides for the advisor to former President Rupiah Banda. He is a member of the Chartered Institute of Arbitrators of the United Kingdom and also a promotion and development of the construction industry in Zambia; qualified legal draftsperson. to provide for the registration of contractors; to provide for the

Eric Silwamba, Jalasi and Linyama Legal Practitioners is a Zambian law firm. The firm has been in existence for over 30 years as Eric Silwamba and Company. In 2013, it was rebranded to Eric Silwamba, Jalasi and Linyama Legal Practitioners following the admission to partnership of Joseph Jalasi and Lubinda Linyama. It has over the years developed to the level of being among the top law firms in Zambia. The renownedChambers and Partners (www.chamberandpartners.com) describes the firm as follows: “This well-known team maintains a solid foothold in the Zambian market, and continues to be a popular choice for dispute resolution. Key areas of focus include public law litigation, IP matters, commercial agreements and shareholder agreements. It has experience in advising clients from the mining, construction, agricultural and retail sectors. Sources say: ‘It’s a very professional firm with gravitas in the market’.” “This firm enjoys a highly regarded reputation in public law litigation. Other key areas of expertise include intellectual property, commercial agreements and shareholder agreements. Market observers say: ‘They have a solid practice and represent several multinational clients’.” The World Legal 500 describes the firm as follows: “‘Heavyweight litigation’ firm Eric Silwamba, Jalasi and Linyama Legal Practitioners is strong in administrative, constitutional and tax-related matters. ‘Noted practitioner’ Eric Silwamba is ‘well known for his court skills’. The firm also has expertise in commercial, mining, banking and finance work.”

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 313 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 32

Zimbabwe Cordellia Nyasha Midzi

Wintertons Legal Practitioners Peter Moor

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to The property rights which are recognised by our law may be question 12.1. Those relating to tax should be listed in response to questions in Section 9. categorised as real rights and personal rights. Personal rights are contractual and are only binding between the parties involved, whereas real rights are binding on everyone. Generally speaking, The right to ownership is enshrined in the Constitution of registration is required to convey ownership of land from one person Zimbabwe. The Bill of Rights, in particular sections 71 and 72, to another but in certain rare cases the courts will recognise the right provides for property rights in general and rights to agricultural of beneficial ownership without registration. land. Every person has the right, in Zimbabwe, to acquire, hold, occupy, use, transfer, lease, hypothecate, or dispose of all forms of property. The Deeds Registries Act [Chapter 20:05] establishes the 3.2 Are there any scenarios where the right to land country’s two deeds registries and provides for the registration of diverges from the right to a building constructed deeds and conventional hypothecations such as mortgage bonds and thereon? notarial bonds. It also establishes rights to immovable property, the creation of servitudes and leases and other limited rights to property. Generally, the owner of land is also the owner of all structures There are various other statutes that regulate real estate law but the integrated with or affixed to the land, including crops, buildings, aforementioned are the key statutes. machinery, wells, dams, ponds, mines, canals and roads, among other things. These are commonly termed “improvements”. This accession stems from the legal “Quicquid plantatur solo, solo 1.2 What is the impact (if any) on real estate of local cedit: whatever is affixed to the soil belongs to the soil”. There common law in your jurisdiction? are instances where parties may conclude a contract to the effect that whatever improvements are made on the property remain The common law in Zimbabwe is Roman Dutch law and it, naturally, the property of one party while another owns the land. In other applies to real estate. There is nothing unusual in Roman Dutch law, scenarios an agreement might provide that the landowner will retain with regard to real estate. the improvements subject to compensation being paid. There is no separate procedure for the registration of a right to a building but 1.3 Are international laws relevant to real estate in your the law relating to sectional title allows co-owners of a piece of land jurisdiction? Please ignore EU legislation enacted to have exclusive rights of occupation of that piece of land and any locally in EU countries. buildings thereon.

International laws are not relevant to real estate in Zimbabwe unless they have been adopted locally. 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration consequences of any split? Are there any proposals 2 Ownership to change this?

Yes. A common example is in the case of a holder of a lease which 2.1 Are there legal restrictions on ownership of real estate when entered into was for a period of not less than 10 years. Sections by particular classes of persons (e.g. non-resident 65 to 70 of the Deeds Registries Act [Chapter 20:05] provide for the persons)? registration of leases at the Deeds Office. Section 69 provides for the hypothecation of leases and sub-leases by means of a mortgage Currently, there are no restrictions on foreign ownership or bond. Where the land leased is mortgaged or subject to the rights occupation in Zimbabwe. Section 71 (2) of the Constitution provides of any other person, the consent of the mortgagee is required prior that every person shall have the right to own all forms of property.

314 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

to registration of the lease. The consequences of this split are best expressed by the maxim “huur gaat voor koop”, where every 4.6 On a land sale, when is title (or ownership) transferred successor of a lessor will be bound by the lease, irrespective of to the buyer? whether or not the successor was aware of the lease. The lessor may not need the consent of the lessee to sell, and in the event of a sale Ownership is transferred to a buyer on the date that the relevant deed the lessee’s rights are protected. There are currently no proposals to is registered. change this position. 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later 4 System of Registration rights? Zimbabwe 4.1 Is all land in your jurisdiction required to be Real rights take priority from the date that they are registered. registered? What land (or rights) are unregistered? Common examples where some rights obtain priority over others are found in the case of mortgage bonds and registered leasees. Land in Zimbabwe is classified into various groups; namely, communal land, agricultural land, residential land and land which 5 The Registry / Registries vests in the State. In terms of section 4 of the Communal Lands Act [Chapter 20:04], all communal land is vested in the President and requires no registration. Occupants may use this land, in accordance 5.1 How many land registries operate in your jurisdiction? with the Act. Rights to that land are limited to occupation and If more than one please specify their differing rules use for agricultural and residential purposes. These rights are and requirements. determined by customary law and, in some cases, where a permit has been obtained. Communal land is not registrable. State land There are two deeds registries in Zimbabwe. One is in the capital is registrable at the Deeds Registry. It is governed by the Rural city Harare, and the second is in the second-largest city, Bulawayo. Lands Act [Chapter 20:18]. The relevant Minster, acting in terms Each office has jurisdiction over a specified area, meaning that a of the Act, may acquire any land and direct the Registrar of Deeds piece of land may be recorded in one of the two registries. to cancel title deeds in respect of that land. Upon cancellation, the land will vest in the State. Agricultural land is governed by various 5.2 How do the owners of registered real estate prove statutes and, more importantly, by the Constitution of Zimbabwe. their title? Section 72 (1) provides that only “pieces of agricultural land” are registrable in the Deeds Registry. Residential land is registrable in A land owner proves title by means of a deed of transfer. A mortgagee the Deeds Registry. Upon registration, a Title Deed is issued, which will prove title by means of a bond. Where a lease is registered, the confirms a person’s real right to the immovable property. lease-holder will prove title by means of a notarial deed.

4.2 Is there a state guarantee of title? What does it 5.3 Can any transaction relating to registered real estate guarantee? be completed electronically? What documents need to be provided to the land registry for the registration There is no guarantee of title by the State. of ownership right? Can information on ownership of registered real estate be accessed electronically?

4.3 What rights in land are compulsory registrable? What (if any) is the consequence of non-registration? The deeds registries in Bulawayo and Harare operate manual systems. Electronic registrations are not yet in place and information cannot Real rights and limited real rights are compulsorily registrable. be accessed electronically. The documents required for registration Common examples are ownership and mortgages. of title include the identity documents of the seller and purchaser, a power of attorney (where necessary), company resolutions (where necessary), an agreement of sale and documentation showing that 4.4 What rights in land are not required to be registered? all relevant government taxes have been paid. The system, though manual, is efficient and organised. Personal rights are not registrable. An example is found in short- term leases. Section 2 of the Deeds Registries Act [Chapter 20:05] 5.4 Can compensation be claimed from the registry/ provides that a short-term lease is any lease that is subject to a tenure registries if it/they make a mistake? of less than 10 years. No. Section 84 of the Act provides that no act or omission by any 4.5 Where there are both unregistered and registered land registrar or any officer employed in the deed registry shall render the or rights is there a probationary period following first State or such registrar liable for damage sustained by any person in registration or are there perhaps different classes consequence of an act or omission. or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered in the registries.

There is no probationary period following first registration. The right takes effect from the date of registration of the deed in the Deeds Registry.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 315 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

economy, these sectors are proving less attractive to investors and 5.5 Are there restrictions on public access to the developers. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved 7 Liabilities of Buyers and Sellers in Real by a search of the register? If not, what additional information/process is required? Estate Transactions

Information at the Deeds Registry is accessible and available 7.1 What (if any) are the minimum formalities for the sale for public viewing and inspection. A search fee is not required. and purchase of real estate? However, should the enquirer wish to obtain a copy of any

Zimbabwe document kept at the registry, a fee is charged. A buyer may obtain There must be an agreement of sale, preferably (but not necessarily) any information that is reasonably required. reduced to writing, which identifies the parties and the property and specifies the price and the terms of payment. 6 Real Estate Market 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally Yes. The seller has a duty to disclose defects on the property. The be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duty extends to defects that are within the seller’s knowledge but duties. which may not be obvious to the eye.

Conveyancers, estate agents and legal practitioners are normally 7.3 Can the seller be liable to the buyer for involved in a real estate transaction, and in some instances notaries misrepresentation? public too. Yes, if the purchaser acted on the untrue statement and, as a result of 6.2 How and on what basis are these persons it, entered into the sale agreement. The purchaser must have suffered remunerated? loss as a result of the untrue statement. The recourse available to a purchaser is to institute an action for damages. Estates agents charge commission, which is prescribed at 5% of the value of the property being sold. This may be varied by agreement. 7.4 Do sellers usually give any form of title “guarantee” Conveyancers charge percentages (e.g. 4%), in terms of the or contractual warranties to the buyer? What would Conveyancing Tariff provided for in Statutory Instrument 24/2013. be the scope of these? What is the function of any Value Added Tax is due on commissions and fees. Where a general such guarantee or warranties (e.g. to apportion risk, practitioner is needed, (for instance, in the drafting of the agreement), to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying the fee is regulated by the General Tariff of the Law Society of out his own diligence? Zimbabwe. The Law Society of Zimbabwe regulates the fees payable by conveyancers, notaries and general legal practitioners. Yes. Sellers may give warranties and representations and these must be expressly stated in their sale agreements. Examples of warranties 6.3 Is there any change in the sources or the availability are: of capital to finance real estate transactions in your a) That the buildings on the land (if any) are built in compliance jurisdiction, whether equity or debt? What are the with relevant statutory requirements and building laws. main sources of capital you see active in your market? b) That the property is free from defects. The main source of capital is mortgage bond loans. There has been c) That vacant and undisturbed possession of the property will no real change in recent years. be granted to the purchaser, upon transfer. Warranties are designed to allocate risk between parties, as well as to provide information. They are not considered a substitute for 6.4 What is the appetite for investors and/or developers the purchaser’s carrying out his or her own diligence. The law will to invest in your region compared to last year and what are the sectors/areas of most interest? Please enquire whether the aggrieved took measures to mitigate risk. There give examples. is a need for an independent enquiry by the purchaser.

The appetite for investors to invest in Zimbabwe has improved, 7.5 Does the seller retain any liabilities in respect of the following the new political dispensation. Developments are awaited property post sale? Please give details. on the political front. The residential sector is the area of most interest, given the decline in the economic and industrial sectors. Under the common law the seller warrants only that the purchaser will have undisturbed possession of the property. 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in 7.6 What (if any) are the liabilities of the buyer (in addition terms of their attractiveness to investors/developers? to paying the sale price)? Please give examples. The purchaser is required to pay the relevant transfer fees to the Following the decline in the economic and industrial sectors of the conveyancer, who will prepare the necessary documents and

316 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

facilitate the transfer of the property to the purchaser. The purchaser property. The bond needs to be registered with the deeds registry is required to pay rates due to the City of Harare for the advance where the immovable property is registered. To signify consent to period of three months. In addition, the purchaser is required to registration of a mortgage bond, the owner of the property must sign pay stamp duty to Government, which is prescribed in terms of the a power of attorney and instruct conveyancers to register a mortgage Finance Act [Chapter 23:04]. In some instances, the purchaser and bond over the property. seller may agree that each will contribute to the commission payable to an estate agent, where one is involved, as opposed to the more 8.5 How is a real estate lender protected from claims usual position where the seller is solely responsible. against the borrower or the real estate asset by other creditors? 8 Finance and Banking

A real estate lender can be protected from claims against the Zimbabwe borrower by reason of his or her mortgage bond. The first mortgage 8.1 Please briefly describe any regulations concerning bond registered over the real estate asset takes precedence over the lending of money to finance real estate. Are the subsequent bonds. If another mortgage bond has already been rules different as between resident and non-resident registered over the property, the real estate lender can seek to persons and/or between individual persons and arrange that the mortgage bond ranks pari passu (on a par) with corporate entities? the first bond for the purposes of enforcement. The lender may even request a waiver of preference from the first mortgagee so that The Deeds Registries Act provides for the registration of a mortgage the new mortgage bond ranks first. The risk may also be averted bond over the property to secure the payment of a debt. There are no through placing a caveat on the asset in question with the result that differences in the rules relating to residents and non-residents, nor in if the borrower wishes to sell, transfer cannot go through until the those relating to individual persons and corporate entities. caveat is uplifted.

8.2 What are the main methods by which a real estate 8.6 Under what circumstances can security taken by a lender seeks to protect itself from default by the lender be avoided or rendered unenforceable? borrower?

Security taken by a lender may be difficult to enforce in cases where The main methods by which lenders may protect themselves are as the company is placed under judicial management or liquidation and follows: it is deemed as an undue preference. In that scenario, the leave of a) Mortgage bonds which are registered over immovable the court is mandatory if the lender needs to proceed with execution. property. b) Notarial bonds, which are registered over movable property. 8.7 What actions, if any, can a borrower take to frustrate c) Suretyship agreements entered into by the lender and the enforcement action by a lender? directors, shareholders or other third parties. d) Hypothecations of leases. A corporate borrower may apply for the liquidation or judicial e) Cessions of income generated by the property. management of a corporate borrower. If it is an individual it will f) Pledges. find it impossible to frustrate enforcement.

8.3 What are the common proceedings for realisation of 8.8 What is the impact of an insolvency process or a mortgaged properties? Are there any options for a corporate rehabilitation process on the position of a mortgagee to realise a mortgaged property without real estate lender? involving court proceedings or the contribution of the mortgagor? Insolvency may have the effect of delaying enforcement, as all due processes will need the leave of the court. Insolvency will normally A lender cannot realise a mortgaged property without first have no practical impact unless the real estate lender received an approaching the court and obtaining a court order. Thereafter, the undue preference by registering a mortgage bond over the property lender will proceed to have a writ of execution issued by the relevant at a time when the debtor is in insolvent circumstances. court and only then may the lender proceed with a sale in execution. There are no other options. 8.9 What is the process for enforcing security over shares? Does a lender have a right to appropriate 8.4 What minimum formalities are required for real estate shares in a borrower given as collateral? If so, lending? can shares be appropriated when a borrower is in administration or has entered another insolvency or The parties involved must have the capacity to enter into the legal reorganisation procedure? contract. The mortgage bond must be registered at the deeds registry. The owner of the immovable property must consent to the Shares can be delivered to the lender as a pledge for payment of the mortgaging of his or her property. There are no legal formalities debt. The debtor can object to the appropriation of those shares and per se, but the practice is that lenders usually record the terms of if the appropriation is unfair, where the debtor is made insolvent the the loan in a written contract which is signed by both parties and creditor would have to agree with the trustee of the insolvent estate they usually require security in form of a mortgage bond over the for the shares to be taken over. Otherwise, the shares will be sold by the trustee, with the creditor being a secured or preferred creditor.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 317 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

9 Tax 10.2 What types of business lease exist?

9.1 Are transfers of real estate subject to a transfer tax? There are no different types of business leases. How much? Who is liable? 10.3 What are the typical provisions for leases of business Yes, the transfer of real estate is subject to transfer duty, which is premises in your jurisdiction regarding: (a) length of payable by the purchaser. The amount payable is governed by the term; (b) rent increases; (c) tenant’s right to sell or Finance Act [Chapter 24:04]. sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? Zimbabwe 9.2 When is the transfer tax paid? Commercial leases are usually long-term leases, where the lessee Transfer duty is paid on registration of transfer. has an option to renew. The situation in Zimbabwe is currently volatile and highly inflationary, and there is an increased risk of rent defaulters. This has forced commercial property owners to enter 9.3 Are transfers of real estate by individuals subject to income tax? into shorter lease agreements, without renewal options. Lease agreements will almost always contain provisions that deal Transfers of real estate are not normally subject to income tax, with rent increases. Usually, rentals are reviewed biannually or unless the owner is a dealer in real estate. yearly. The past two years have seen rentals fluctuating, depending on the economic climate. The introduction of the multi-currency system and the current “rating system” of currency have led to the frequent 9.4 Are transfers of real estate subject to VAT? How review of rentals. Property owners now demand payment of rentals much? Who is liable? Are there any exemptions? in United States dollars, because local currency quickly loses value.

Transfers of real estate are subject to VAT if the transfer of the property A tenant who wishes to sublet must have the landlord’s express is regarded as being in the ordinary course of business of the owner. permission. Where the agreement is silent on the issue, it is The Value Added Tax Act, however, provides that a disposal of land by presumed that sub-letting is prohibited. a VAT operator is deemed to be a disposal in the course of his business. Matters relating to the transfer of rights in a lease are regulated by A registered operator who sells real estate as a going concern can make the lease agreement. Usually, a lease agreement will require the application for the transaction to be zero-rated for VAT purposes. consent of the landlord before there can be a transfer. Issues of insurance and some basic repairs are generally the 9.5 What other tax or taxes (if any) are payable by the responsibility of the landlord. Most lease agreements provide that seller on the disposal of a property? the landlord is responsible for basic structural work and the tenant is responsible for all other work needed to keep the property in good The seller is required to pay capital gains tax on the disposal of condition. The rent payable usually factors in the likely cost of property. maintenance and repair work.

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

The liability remains the same, whether the transaction involves a There are no taxes payable, save for income tax and possibly VAT. company or an individual: there is no distinction. 10.5 In what circumstances are business leases usually 9.7 Are there any tax issues that a buyer of real estate terminated (e.g. at expiry, on default, by either party should always take into consideration/conduct due etc.)? Are there any special provisions allowing a diligence on? tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination? The buyer of real estate should ascertain whether or not the seller is VAT-registered. In terms of section 22 of the Commercial Premises (Rent) Regulations, termination of a lease over commercial property takes 10 Leases of Business Premises place by effluxion of time or where notice has been given by either the lessor or lessee, according to the time-lines agreed upon in the lease agreement, or by a court order where the lessor has established 10.1 Please briefly describe the main laws that regulate good and sufficient grounds. leases of business premises. There are no common law provisions allowing a tenant to renew and extend the lease. Statutory tenancies may, however, be created, and The Commercial Premises (Rent) Regulations, SI 676/1983, regulate their effect is the inadvertent extension and renewal of the lease, in the letting of business premises. They define and distinguish instances where the tenant continues to pay its rentals and performs commercial premises from residential, and set out the procedure other obligations of the lease, after the fixed lease period has terminated. relating to the determination of fair rent and statutory tenancies in respect of commercial premises. The particular lease agreement Compensation by the lessor may be claimed by the lessee for under consideration will also prescribe the rights and obligations improvements effected on the property, depending upon the terms of each party. of the lease agreement.

318 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

The tenant has an obligation to meet some or all of the costs incurred 10.6 Does the landlord and/or the tenant of a business in respect of the property. The basis on which these costs are paid lease cease to be liable for their respective is determined by whether the lease is a net lease or gross lease. obligations under the lease once they have sold their In a gross lease, the rent payable to the lessor by the lessee will interest? Can they be responsible after the sale in respect of pre-sale non-compliance? include the estimated costs of repair and the lessor will have the responsibility of ensuring repairs are done. In a net lease, the rent payable will not include any allocation towards costs and the lessee If a property is sold, the new owner steps into the shoes of the will be responsible for ensuring all costs are met and repairs are previous owner. done to the requisite standard. At the end of the term of lease, the tenant is required to vacate 10.7 Green leases seek to impose obligations on

the property. The tenant will not have any right to remain on the Zimbabwe landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of premises, unless the tenant is deemed a statutory tenant. the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly 11.4 Would there be rights for a landlord to terminate a found in leases stating whether these are clearly residential lease and what steps would be needed defined, enforceable legal obligations or something to achieve vacant possession if the circumstances not amounting to enforceable legal obligations (for existed for the right to be exercised? example aspirational objectives).

A lease agreement will contain breach and cancellation provisions. There are no green obligations commonly found in lease agreements. If there is a statutory tenancy, a landlord may terminate a lease where it is proved that the lessee has done or is doing material damage 10.8 Are there any trends in your market towards more to the dwelling, or if the lessee has been guilty of conduct likely flexible space for occupiers, such as shared to cause material damage to the property or material or substantial short-term working spaces (co-working) or shared inconvenience to occupiers of neighbouring or adjoining property. residential spaces with greater levels of facilities/ The lease may also be terminated where the landlord has given not activities for residents (co-living)? If so please provide examples/details. less than three calendar months’ written notice for the lessee to vacate and where the Rent Board issues a certificate to the effect that the requirement that the lessee vacates the property is fair and Meaningful trends are yet to develop. reasonable. The lessor would need to bring an application before the Rent Board or a court. 11 Leases of Residential Premises 12 Public Law Permits and Obligations 11.1 Please briefly describe the main laws that regulate leases of residential premises. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use, Apart from the common law, the Rent Regulations, Statutory Instrument development and occupation of land? Please briefly 32/2007, regulate leases of residential premises. The regulations describe them and include environmental laws. make use of the term “dwelling” to refer to residential premises. The definition of a dwelling includes a room, a flat, apartment, house and The main legislation that governs zoning and permits is the Regional, any other immovable property occupied as human habitation, under Town and Country Planning Act [Chapter 29:19]. The Act provides a lease. This further includes the grounds, parking space, garages, for the planning of regions, districts and local areas with the object outside rooms, workers quarters and other improvements. of conserving and improving the physical environment and in particular promoting health, safety, order, amenity, convenience and 11.2 Do the laws differ if the premises are intended for general welfare, as well as efficiency and economy in the process of multiple different residential occupiers? development and the improvement of communications. Further, it regulates the making of regional, master and local plans, provides No, the laws do not differ. Section 3 of the Rent Regulations for the control of development and the regulation of subdivisions and offers a wide definition of a dwelling/residential premises, with the consolidation of land. Its objectives also extend to the protection of result that premises for multiple different residential occupiers are urban and rural amenities and the preservation of buildings and trees regulated by the same laws. and generally the regulation of the appearance of the townscape and landscape. Section 31 of the Act authorises the relevant local planning authority to issue a preservation order in respect of any 11.3 What would typical provisions for a lease of natural forest, woodland and any tree on the land. residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the The Environmental Management Act [Chapter 20: 27] established the tenant’s rights to remain in the premises at the end of Environmental Management Agency (EMA), whose sole objective is the term; and (d) the tenant’s contribution/obligation to enforce the Act. The First Schedule of the Act lists all projects to the property “costs” e.g. insurance and repair? that require environmental impact assessment. The list is exhaustive and all-encompassing, and, inter alia, covers, housing developments, Residential leases vary in length of term. Generally, the term will dams and lakes, petroleum production, storage and distribution, range from one year to three years. power generation, road works, mining and quarrying, and industry. In volatile economic circumstances, rentals are increased biannually The EMA demands strict compliance with the provisions of the or quarterly. In more stable circumstances, rentals are reviewed Environmental Management Act and the Regional Town and Country yearly. Planning Act. Heavy fines are imposed where there is non-compliance

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 319 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

with these laws. Criminal sanction is also available where offences Any rights which ordinarily accrue to a land owner are affected at are committed and these include imprisonment for up to 12 months. the time that notice is given to the property owner of the intended declaration or acquisition, once the Board identifies a property as having historic interest. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price/ compensation mechanism. 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real Sections 71 and 72 of the Constitution of Zimbabwe empower estate? Is there a public register of contaminated land the State to compulsorily acquire immovable property. Section in your jurisdiction? 71(3) provides the circumstances where deprivation of property

Zimbabwe is justifiable. Compensation is payable: the claimant must apply The Environmental Management Act establishes the Board, which to a competent court for the determination of the amount of manages the operations of the Agency. The Board consists of compensation. members who must be experts, inter alia, in ecology, pollution, waste There is no compensation where the State compulsorily acquires management, soil science, hazardous substances, water, and sanitation. agricultural land, as provided for in section 72 of the Constitution. Section 58 of the Environmental Management Act provides that all owners or operators of irrigation projects, sewerage systems, industrial production workshops or any other undertaking which 12.3 Which bodies control land/building use and/or may discharge effluents or other pollutants must submit to the occupation and environmental regulation? How do buyers obtain reliable information on these matters? Board accurate information regarding the quantity of the pollutant and the quality of such effluent or pollutant. The Board has a duty to maintain all data submitted by persons. A potential buyer can The local municipalities and town councils control land, building therefore approach the EMA for the purpose of obtaining information use and occupation. The Environmental Management Agency on contamination and pollution. This information is readily available (EMA) regulates environmental issues and concerns. Buyers should and accessible. There is, however, no public register. consult these bodies.

12.9 In what circumstances (if any) is environmental clean- 12.4 What main permits or licences are required for up ever mandatory? building works and/or the use of real estate?

The Environmental Management Act governs the position generally. Building plans must be approved by the town planning authorities. Section 83 of the Act provides that no person shall discard, dump or leave any litter on any land or water surface, street, road or site. The 12.5 Are building/use permits and licences commonly section places a duty on every person or authority responsible for the obtained in your jurisdiction? Can implied permission maintenance of any place, to at all times ensure that containers are be obtained in any way (e.g. by long use)? provided which are suitable for the discarding of litter. Environmental clean-up is, by deduction, mandatory for every person. Yes. Building permits are readily obtainable from the relevant local authority or municipality. A permit must precede any development but in suitable cases one can apply to regularise any development, 12.10 Please briefly outline any regulatory requirements change of land use, where prior permission had not been obtained. for the assessment and management of the energy performance of buildings in your jurisdiction.

12.6 What is the typical cost of building/use permits and There are no regulatory requirements for the assessment of the the time involved in obtaining them? energy performance of buildings.

The cost and time-frames vary considerably, depending on the particular development concerned. 13 Climate Change

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

The Regional Town and Country Act provides for orders for the In 2001 the government of Zimbabwe introduced a carbon tax, preservation of buildings of special architectural merit or historic being a levy on carbon dioxide-emitting, oil-based energies. The interest. The relevant local authority is empowered by the Act tax enforces compliance on motorists against carbon emissions. to issue preservation orders to owners of buildings which, in the The purpose of the tax is to enable government to deliver climate- opinion of the local planning authority, are special. The order will sensitive interventions. The tax is collected by the Zimbabwe restrict the demolition, alteration or extension of that building. Revenue Authority (ZIMRA). Further, the National Museums and Monuments Act [Chapter 25:11] empowers the relevant Minister, in consultation with the Board of 13.2 Are there any national greenhouse gas emissions Trustees of the National Museums and Monuments, to declare and reduction targets? to compulsorily acquire any building that is deems to be a national monument. The Act further empowers the Board to acquire, any As early as the 1990s, Zimbabwe crafted methods for climate change relic, fossil, or any land relating to the relic or national monument. mitigation through climate sensitive agriculture and sustainable

320 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Wintertons Legal Practitioners Zimbabwe

management of its natural resources. A study conducted by USAID Council is to advocate for sustainability of buildings. The council has shows that between 1990 and 2011 greenhouse emissions reduced by engaged with various accredited professionals with a view to setting 10%. The study revealed that land-use change and the forestry sector up regulations that will help drive the Council’s objectives. The were the primary emitters, contributing 59% to overall emissions, Council has created a system of “rating” of buildings, to determine followed by agriculture at 18, industrial processes at 2% and waste their sustainability. The Council, working with EMA, aims to carry at 1%. The Environmental Management Agency continues to pursue out outreach programmes to raise awareness of the various building new strategies and projects, aimed at reducing emissions. products and the effects these have on the environment.

13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of

both newly constructed and existing buildings? Zimbabwe

Zimbabwe launched the Green Building Council of Zimbabwe (GBCZW) on the 30th September 2016. The main objective of the

Cordellia Nyasha Midzi Peter Moor Wintertons Legal Practitioners Wintertons Legal Practitioners Beverley Corner, 11 Selous Avenue Beverley Corner, 11 Selous Avenue Harare Harare Zimbabwe Zimbabwe

Tel: +263 242 250 112-129 Tel: +263 242 250 113 Email: [email protected] Email: [email protected] URL: www.wintertons.co.zw URL: www.wintertons.co.zw

Cordellia is an Associate who joined the firm on the 1st November Peter is the Senior Partner of the Firm. He joined the firm on the 2014. She holds a Bachelor of Laws Degree from the University of 1st December 1973 and became partner on the 1st January 1980. Zimbabwe. She is a member of the Conveyancing and Property Law He is a conveyancing specialist and is head of our large Property Departments. Her practice involves Landlord and Tenant disputes. and Estate Department. He is one of the leading Conveyancers for Cordellia holds a Diploma in Real Estate from the Real Estate Institute the country’s largest Building Society and the largest Commercial of Zimbabwe (REIZ) and is qualified to practise as an estate agent Bank. He has been involved as Conveyancer in major property and valuer, dealing in sales, letting and management. She holds a developments that have taken place in Harare since Independence, Bachelor of Laws Degree from the University of South Africa (UNISA), including the Dandaro Retirement Village Scheme, the Borrowdale where she specialised in Intellectual Property Law. Apart from her Brooke Housing Development, the Brooke Ridge Scheme, the Sun practice in Real Estate and Intellectual Property, she has a keen River Manors Development and Chishawasha Phase 1. He has been interest in Family Law. a long-standing steward of the Mashonaland Turf Club and Chairman of the Thoroughbred Breeders Association of Zimbabwe. He has a team of experienced conveyancing clerks who work under him in the Conveyancing Department.

Wintertons Legal Practitioners has a wide range of experience, owing to its diverse and highly talented personnel. In engaging us, a client will be able to leverage on the legal skills of an established brand that has stood the test of time in the legal profession in Zimbabwe. We are a one-stop legal services firm with practitioners experienced in the major areas of legal practice in Zimbabwe and in cross-border transactions. We set out below our areas of practice and experience. We offer advisory services in banking and finance (i.e. acquisition finance, asset finance, bilateral & syndicated finance, trade finance, private placements, project finance, real estate finance), litigation & alternative dispute resolution, corporate & commercial (i.e. commercial contracts, commercial, industrial and residential leases, franchising, insurance & pensions, IPOs, securities law & exchange compliance, mergers & acquisitions, corporate restructuring and investments in Zimbabwe) energy, infrastructure & natural resources (general due diligence, project structuring & documentation, power purchase agreements, financing security agreements, infrastructure sharing agreements, regulatory approvals, implementation & direct agreements, tribute agreements and mining transactions) and property law. We also prepare contracts of all types, have considerable experience of criminal defence work, act in all types of litigation matters before all courts, advise on family law and generally practise in all fields open to legal practitioners.

ICLG TO: REAL ESTATE 2019 WWW.ICLG.COM 321 © Published and reproduced with kind permission by Global Legal Group Ltd, London NOTES

322 WWW.ICLG.COM ICLG TO: REAL ESTATE 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London Current titles in the ICLG series include:

■ Alternative Investment Funds ■ Insurance & Reinsurance ■ Anti-Money Laundering ■ International Arbitration ■ Aviation Law ■ Investor-State Arbitration ■ Business Crime ■ Lending & Secured Finance ■ Cartels & Leniency ■ Litigation & Dispute Resolution ■ Class & Group Actions ■ Merger Control ■ Competition Litigation ■ Mergers & Acquisitions ■ Construction & Engineering Law ■ Mining Law ■ Copyright ■ Oil & Gas Regulation ■ Corporate Governance ■ Outsourcing ■ Corporate Immigration ■ Patents ■ Corporate Investigations ■ Pharmaceutical Advertising ■ Corporate Recovery & Insolvency ■ Private Client ■ Corporate Tax ■ Private Equity ■ Cybersecurity ■ Product Liability ■ Data Protection ■ Project Finance ■ Employment & Labour Law ■ Public Investment Funds ■ Enforcement of Foreign Judgments ■ Public Procurement ■ Environment & Climate Change Law ■ Real Estate ■ Family Law ■ Securitisation ■ Financial Services Disputes ■ Shipping ■ Fintech ■ Telecoms, Media & Internet ■ Franchise ■ Trade Marks ■ Gambling ■ Vertical Agreements and Dominant Firms

59 Tanner Street, London SE1 3PL, United Kingdom Tel: +44 20 7367 0720 / Fax: +44 20 7407 5255 Email: [email protected]

www.iclg.co.uk