Go East

A friendly corporate tax system with a flat rate of 16 pct, buoyant private business and acute demand for manufacturing, logistics, warehouse and retail facilities, have turned Romania into an ‘El Dorado of the East’ for real estate investors

Transactions on the Romanian market last year totalled EUR 5 bln, with the most intense activity taking place in the real estate sector, according to market sources. Poland still remains the CEE leader, however, with real estate investment worth EUR 2.83 bln in 2007. However, in order for any project to be successfully completed, the developer and the investor must be sure to sort out all the legal issues.

Securing the land

In Romania, the first challenge is the legal, technical and environmental due diligence. Prior to this, one would typically seek to enter into a call option or a pre-sale and purchase agreement with the owner. Under both of these the owner makes a legal commitment to sell. The difference is that under a call option the investor is not obliged to buy. However, a down payment of around 10 pct of the purchase price will be required in both cases, as the owner will withdraw the property from the market until the purchase is made (usually 30 to 90 days), and a commitment made on the price.

From the investor’s point of view, the preferred method of making this down payment would be through an escrow account, as this ensures the swift reimbursement of funds in the case of an unsatisfactory due diligence. Although Romanian landowners have been reluctant to accept escrows, recently they have become more familiar with this method of payment. However, in some cases it might not be possible to reach an agreement without advancing a cash amount, in which case a special clause would need to be included in the call option or agreement to mitigate the risk of losing the funds if the deal does not go ahead.

Any pre-agreement must be made in a notarized form. It is also highly advisable to record an alienation ban in the property’s land book. Otherwise there is a real risk that the owner will try to sell the land to more than one buyer. The land book gives notice to any third parties that a promise to sell the property has been made, and any subsequent agreement to sell would be void on the grounds of bad faith. Potential purchasers should be aware that in many cases there is no land book for a property.

Registration and due diligence on title

The real estate registration system introduced in Romania in 1999 resembles the German-inspired system used in Poland, whereby each property has its own land and encumbrance book. It replaced the a French-inspired system based on the title-holders’ identity.

Registration provides a legal presumption of ownership in Romania. However, it does not represent a title in itself, so anyone intending to acquire a property must first ensure that there is no inconsistency between the land book and the title of the registered owner. This requires due diligence of the validity of any previous transfer deeds that affected the property over the last 30 years. By way of comparison, under Polish law entries in the land and mortgage register are of major significance, because if there is a discrepancy between the legal status of real estate in the register and its actual legal status, then the status of the property in the register prevails over its actual legal status. However, the presumption in favour of entries in the land and mortgage register does not apply if the buyer acts in bad faith or if there is an annotation in the register stating that a motion has been submitted or an entry deleted.

In Romania no transfer of title is legally possible unless the property is registered in the land book. Hence, when the pre-agreement is signed it is advisable for this to be a condition precedent for the investor’s obligation to proceed with the purchase.

Some properties in Romania are owned on the basis of administrative titles issued after 1990 to return the land to its pre-1950 owners (or their successors). In such cases it is good practice, in addition to inspecting the title itself, to request the local authority to confirm that no restitution applications have been made and no titles have been issued for the same property.

Restitution claims are also a repercussion of the nationalisation processes in communist Poland. In Poland there is no re-privatization law that would generally solve this problem, and restitution takes place through individual claims. Any restitution claims should appear in the land and mortgage register for that property, and a purchaser will not be considered to have bought a property in good faith if he has failed to find out about them before buying. However, if a purchaser buys a property in good faith, he will acquire the property even if restitution claims are subsequently submitted.

Who’s the buyer?

With a view to signing the purchase agreement, a non-resident investor in Romania will be advised to set up a Romanian limited liability company to hold the asset. The jurisdiction of this company’s holding entity is important with regard to Romanian double taxation treaties. It will also determine the level of withholding tax payable in Romania on dividends, interest payments and capital gains.

Romanian law will deem a company established in Romania as a resident that can acquire and hold an ownership title to land, regardless of whether the company’s shares are totally held by a non-resident entity or if its directors are non-resident. However, the company will need to be based in Romania, as the law requires evidence of freehold or leasehold of real premises. Fortunately, there are service providers that offer domiciliation services of this sort locally. These regulations are more user-friendly than in Poland. Under the Polish Act on the Acquisition of Real Estate by Foreigners, the purchase of real estate by a foreigner (including Poland-based corporations controlled by foreigners) requires a permit from the minister of internal affairs and administration – unless the foreigner is an EU citizen or a company set up in the EEA. Permits will still be required for the acquisition of agricultural properties and forests for 12 years following Poland’s EU accession in 2004.

Other possible conditions precedent

Two additional conditions precedent must be considered in the pre-agreement. In order to build on the land, the plot must be removed from any agricultural zoning plan, and the formalities that will permit building to go ahead must be completed.

With regard to the first condition, plots of land might be included in ‘city boundaries’, usually by a decision of the relevant local council for a nominal fee. For land outside such an area, the fee for changing the agricultural status of the land is calculated per sqm depending on the fertility of the land – and this may be a significant amount.

Romanian zoning and planning formalities are rather time-consuming and the cooperation of a local architect is a must for a successful outcome. Investors would also be advised to make the purchase conditional upon obtaining a building permit.

Poland’s zoning and planning formalities can cause similar headaches for investors. In Poland, only around 12-15 pct of the country is covered by up-to-date zoning plans. This means that if a site is not so covered, a permit must be obtained to erect any structure. The law makes a distinction between planning permits for public and private projects. A ‘private’ planning permit can be obtained if the land is not agricultural and has secured media connections contracts and any building will be in architectural compliance with neighbouring developments. The local authority’s architecture department has to prepare a ‘zoning analysis’ in order to verify whether these conditions are met. In many cases these procedures can delay transactions in the real estate market. 

Dan Mares, partner, CMS Cameron McKenna, Bucharest

Tomasz Kurek, partner, CMS Cameron McKenna, Warsaw n