On golden sands

Last September, ‘Eurobuild Poland’ published an analysis of the Bulgarian real estate market. Today, after Bulgaria’s accession to the European Union, we present a set of principles, prepared by an international team of experts, explaining how to invest in this country

More and more foreign investors are buying real estate in Bulgaria. The strong economy and low prices in comparison with European Union states favour new investments. In comparison with 1996, when inflation was at 300 pct, many banks went bankrupt, loans were banned, real estate was losing its value and foreign investors were leaving the country in droves – the economic situation in Bulgaria nowadays is completely different. The economic growth rate is above 4 pct annually, the interest rate is falling, banks are expanding their loan policy, the unemployment rate is decreasing and salaries are rising. Direct foreign investments represent 10 pct of GDP. Bulgaria is attracting foreign investors with a clear revenue system, law tax thresholds (the commercial tax rate is 15 pct high), financial state aid for the investments from the government and a wide range of amortization opportunities. Therefore, real estate values are constantly increasing and a further increase is expected as a result of Bulgaria’s accession to the European Union.

 An intruder in the house

 According to the provisions of the Bulgarian constitution, foreigners are not allowed to acquire real estate in Bulgaria. The exception is statutory succession, but even in such cases, the inheritor has to sell off the acquired real estate within 3 years. This situation is not going to be changed immediately after the accession of Bulgaria to the EU because of the established transition periods – 5 years for built up real estate, 7 years for agricultural and forest real estate. Only those EU citizens who have their main residence in Bulgaria will be treated on equal terms with Bulgarian citizens. Therefore, the situation is different from that in Poland, where the transitional period applies solely to agricultural and forest real estate, as well as to the so called ‘second house’.

After January 1st, Bulgaria will maintain restrictions for EU investors willing to purchase built up real estate or that which is assigned for industrial, commercial or residential purposes. The problem is that there is not even a requirement to apply for a permit to purchase such real estate by foreigners  but there is an absolute ban on purchasing them.

So what possibilities do foreign investors have right now and after Bulgaria’s accession to the EU? First of all, according to the applicable provisions of law, which won’t be changed after the Bulgaria’s accession to the EU,  the limited real rights may be established in favour of foreign investors without any restrictions. One of the above mentioned rights is “hereditary/perpetual build right”. This is a limited real right, which allows for the building up of property and gives ownership rights for the buildings that will be raised on it. This right is similar to the Polish perpetual usufruct right, however in Bulgaria this right may be established to favour foreign investors without any restrictions. In Poland, the possibility of purchasing perpetual usufruct rights or property rights by foreigners are the same. The other possibility is to set up a limited liability company or a joint stock company in Bulgaria. In Poland limited liability companies or joint stock companies, in which foreigners own more than 50 pct of the votes, when acquiring the real estate are treated as foreign companies.

However, such a company with headquarters in Bulgaria is treated as a Bulgarian legal person, even if 100 pct of its capital is owned by the foreigners, and the management board/supervisory board members also consists entirely of foreigners. The entry of such firms into the companies’ register underlies the absence of limitations.

Paperwork

 The real estate purchase and limited real rights purchase contracts must be concluded, as in Poland, in the form of a notary deed, only in the Bulgarian language. Foreigners may conclude such contracts by proxy or in the presence of a sworn interpreter at the notary. The proper power of attorney may be granted in the form of a notary deed in Poland, provided with an apostil and translated by a sworn translator. Practically it is worthwhile using the possibility of granting a bilingual power of attorney in the Bulgarian embassy or consulate (the apostil and translation by a sworn translator is not needed).

Before the conclusion of the contract, the parties have to present to the notary several documents. Besides those for which the presentation is required at the conclusion of the real estate purchase and limited real rights purchase contracts in Poland (excerpts from the commercial register, powers of attorneys, the documents confirming the ownership rights and the other rights to the real estate) the following documents also have to be presented: the confirmation from the Agency for Entries stating that there are no burdens on the property, a map from the land registry, a statement of the Tax Office regarding the value of the property and confirming that all tax duties connected to the property were paid, and a number of statements made under penal responsibility, i.e. that there are no obligations towards the inland revenue.

The preparation of all the necessary documents is very time-consuming. In practice there is often a preliminary contract concluded – which may be made in written form – abroad and in foreign language. Such contracts – as in Poland – result only in an obligation. However, on the basis of such contract it is possible to accept the conclusion of the final contract in the court’s proceedings (even if the preliminary contract was concluded in regular written form). In such a preliminary contract, apart from the price and the term for the conclusion of the final contract, it is worth including the terms and conditions in regard to such issues as the division of costs related to the acquisition of the property and the obligations of parties in regard to providing the proper documents.

The ownership of the property/limited real right is transferred merely through the conclusion of the relevant contract in the form of a notary deed. Register entry, similar to that in Poland, is performed just for information purposes (with the exception of the establishing of the building rights for the first time – this right arises at the moment of registration). But if one and the same property is transferred several times by the same person, the one becomes the owner who was first entered into the register, and this differs from Poland, where the person who first issued the application becomes the owner. Similar to Poland, the application is to be submitted by the notary on the day of concluding of the contract. However, unlike in Poland, the Bulgarian Agency for Entries performs the entry on the same day.

Because it often happens that the same property is being transferred several times it is not advisable to pay the price for the property in advance. The safest but also most expensive solution is a bank letter of credit, escrow account or bank guarantee.

Not-everlasting registers

 One should be aware that Bulgarian real estate registers use the French personal system for registration, according to who the purchaser is. This contrasts with the German system used in Poland, whereby all real estate has its own land and mortgage register book. Thanks to the identification numbers of real estates and the electronic registration system set up in Bulgaria in the nineties, all information concerning specific real estate can be easily found. However, it does not mean that it is possible to determine every circumstance concerning the legal situation of the real estate in the register. Many of issues influencing the legal status of the real state do not fall in Bulgaria under the obligation of being entered into the register, i.e. the acquiring of property on the basis of inheritance or the existence of the statutory joint property of spouses.

One can also not rely on the entries into the Bulgarian real estates register to such an extent as is the case in Poland. In Bulgarian law there is no ‘register public faith warranty’ principle. Even after entering the purchaser into the register, his ownership rights may be challenged by questioning the previous ownership transfer agreements. It is possible particularly in cases when the previous contracts were concluded gratuitously or between relatives or affiliated persons. In this way the previous contracts have been challenged for the past 10 years.

Small is not beautiful

 The significant fragmentation of real estate is a grave problem for investors, because it is hard to find a plot of a land which is sufficient for a bigger investment or even several neighbouring plots of land. Co-ownership of the real estate is an additional problem for the investors because it is often a difficulty to find all the co-owners.

Stela Ivanova, attorney at law, bnt Rechtsanwälte law office in Nürnberg Małgorzata Zamorska, solicitor, bnt Neupert Zamorska & Partnerzy law office in WarsawDominika Wągrodzka, attorney at law, bnt Neupert Zamorska & Partnerzy law office in Warsaw