Contributed by Bancila, Diaconu si Asociatii.
1. REAL ESTATE OWNERSHIP
1.1 Legal framework
This introductory section describes the general legislative framework and the principles governing private property in Romania.
Private ownership protection and its main principles are regulated by the Constitution (Article 44) and by the Civil Code (Article 555 and the following), together with Law No. 71/2011 on the implementation of the Civil Code. Other main sources of regulation on this matter are:
- Law No. 7/1996 on cadastral works and real estate publicity;
- Law No. 10/1991 on construction quality;
- Law No. 50/1991 on the permitting of construction works;
- Law No. 350/2001 on urban development and land use planning;
- Law No 18/1991 on land patrimony;
- Law No. 1/2000 on the reinstatement of ownership rights over agricultural and forest lands;
- Law No. 10/2001 on the regime of the real estate illegally seized between 6 March 1945 and 22 December 1989;
- Law No. 165/2013 on certain measures for finalizing the restitution process for the real estate illegally seized by the state during the communist regime;
- Law No. 247/2005 on property and justice reform;
- Law No. 312/2005 on the acquisition of private ownership rights over land by foreign citizens, stateless persons, and legal entities;
- Law No. 17/2014 on the sale of extra muros agricultural lands;
- Law No. 46/2008 regarding the Forestry Code, etc.
The Constitution has the greatest degree of stability in the Romanian law system. Also, the current Civil Code, which entered into force on October 1, 2011, was subject to few amendments ever since, thus we may reasonably expect a high level of stability regarding private property regulations. The other abovementioned laws have been subject to frequent amendments.
Please note that for specific issues or situations which originated before October 2011 (the entering into force of the current Civil Code), the former Civil Code of 1864, and other laws in force at the given time apply (e.g. in the case of an acquisitive prescription).
Many of the Romanian laws governing real estate properties have been enacted as a result of the nationalization of private property during the communist regime and their main purpose is either to restore the properties to their rightful owners or to compensate them.
Before acquiring real estate properties in Romania, investors should first research if any claim based on the special restitution laws has been filed in relation thereof.
Types of property
As per Romanian law, there are two forms of property, namely public and private property.
Public property is mostly regulated through separate legislation and is inalienable and imprescriptible, meaning that it cannot be freely bought, donated, or otherwise transmitted to third parties. Also, public property cannot be seized, and it can bear no securities.
Public property belongs to the State or to the territorial-administrative units, while private property may be owned by the State, the territorial-administrative units, as well as by any natural and legal persons.
The main attributes of the private ownership right are possession, usage, and disposal, which can be cumulated or dismembered between several persons (e.g., one having the usufruct, or the right of use and fructus, while the other having the bare ownership). If all the above-mentioned attributes belong to the same owner, we are in the presence of a full ownership right.
One of the most used dismemberments in Romania is the superficies right (the right which entitles its owner to build or to own construction on a third party's land), which may be constituted for a period of maximum 99 years.
Restrictions for foreigners in acquiring real estate
According to the Constitution, private ownership protection is equal for all. Foreign citizens and stateless persons can acquire ownership rights over lands (i) according to the conditions resulting from Romania’s accession to the European Union and to other international treaties to which Romania is party, (ii) on the basis of reciprocity, or (iii) if the land is acquired by legal succession (as opposed to testamentary succession).
The general rule for citizens of the European Union and European Economic Area (Member States), for stateless persons domiciled in Member States, and for legal entities established according to the legislation of a Member State, stipulates that they can acquire ownership rights over real estate (including land) in the same conditions as Romanian citizens and Romanian legal entities, under the conditions provided for in Article 3 of the Law No. 312/2005.
As per Article 4 of the Law No. 312/2005, starting from January 1, 2012, the above-mentioned persons, which are not residents in Romania, are allowed to directly purchase real estate properties (lands) in Romania for the purpose of establishing a secondary residence in case of natural persons or a secondary registered office for legal entities.
Starting January 1, 2014, such persons are also entitled to directly purchase agricultural lands, forests, and forest lands, as stipulated under Article 5 of Law No. 312/2005. Nonetheless, specific restrictions for such foreigners are provided by the Romanian law in case of extra muros agricultural lands (i.e. agricultural lands located outside the city limits). Such lands can be acquired only by Romanian citizens or by foreign persons who resided for a certain amount of time in Romania.
Citizens of a non-Member State, stateless persons domiciled outside a Member State and legal entities registered in a non-Member State can only acquire land in accordance with applicable international treaties and on the basis of reciprocity. However, the conditions for acquiring ownership rights for these categories cannot be more favorable than those applicable to Member States citizens and/or to legal persons established in a Member State.
Expropriation of ownership
Expropriation of private property is regulated through the Romanian Constitution and subsequent legislation. However, expropriations may only be performed for public utility reasons established by the law, with the payment of a preliminary and fair compensation.
The compensation is computed to reflect both the effective value of the expropriated real estate and the damages caused to the owner by the expropriation (i.e. in case of a partial expropriation, the diminishing of the value of the remaining of the real estate should also be considered).
Even if the compensation should reflect the market value of the expropriated real estate, in practice, expropriators usually offer only the amount calculated according to the pricing studies performed for and adopted by the Chambers of Public Notaries (Notaries Price Chart), whereas it is to be noted that such studies contain only the minimum indicative values for real estate properties in a specific locality, not always reflecting the market price. Moreover, the initial main purpose of such studies was to combat tax evasion, as irrespective of the price agreed in a sale purchase agreement (if lower than the minimum value provided for in the study adopted by the Chamber of Public Notaries in a city for a specific year), the notarial fees and Land Registry expenses are computed based on these minimum values.
The expropriating authority must first attempt to negotiate a settlement with the owner being expropriated. Should a settlement not be reached, or should there be a disagreement regarding the compensation, the dispute shall be resolved by the competent courts of law, whereas an independent expert may be appointed to evaluate the asset.
The basic legislation on expropriation was amended in August 2018 in respect of the categories of public utility works triggering the expropriation and of the deadline granted to owners for submitting the relevant documents for the fair compensation to be calculated.
Most recently, on November 15, 2021, the Supreme Court stated in a mandatory decision that the courts are bound to consider all the criteria established by the specific legislation when establishing the compensation due for expropriation.
1.2 Registration of ownership
In Romania, real estate properties are registered with the Land Register, which is a publicity system of all legal agreements and deeds regarding real estate and it is administered by the National Agency for Cadaster and Real Estate Publicity. The legal framework is the Civil Code and Law No. 7/1996, mentioned in section 1.1.
The registrations are performed in separate land books, opened for each individual land plot. Each land book contains the cadastral number of the real estate, its postal address, a description of the real estate (land plot with or without buildings erected thereupon, dimensions of the real estate, its use categories, such as agricultural or constructible land), the name/s of the owner/s and other persons which have rights over the real estate, such as usufructuaries, as well as any encumbrances registered with the respective property (e.g. mortgage, rights-of-way, and/or any other third party rights, etc.). It also contains the number and date of the agreements or deeds based on which the registered rights were established.
Currently, not all real estate properties are registered in the Land Register or have cadaster documentation in place, this being the reason why the registration with the Land Register still has only an opposability effect. According to the Civil Code and its enforcement law, the registration with the Land Register shall have a constitutive effect once the cadastral works for a particular administrative-territorial unit are fully completed (i.e. all real estate properties belonging to an administrative-territorial unit are being measured, and their cadastral documentation are officially registered in the electronic integrated information system for cadastre and land register in Romania, e-terra). Whereas such cadastral works were finalized for an insignificant number of smaller localities (communes, but mostly villages), it remains uncertain when those works will be completed at the city or county level, not to mention nationwide.
Once the right over a real estate property is registered with the Land Register, any modification of its legal or material structure must also be registered with the Land Register, otherwise, such amendment is not opposable to third parties. For example, if a land plot is being partitioned, each new lot resulting from such partition will represent a new real estate, which is to be separately registered in its own (new) land book.
Several registrations with the Land Register are not mandatory but are required for the same opposability purpose in relation to third parties, such as:
- placing an individual under judicial interdiction, and the lifting of such measure;
- requests for declaring the death of an individual, the court decision on the death of an individual, and the annulment/modification thereof;
- lease agreements in respect of the real estate property;
- the so-called lex commissoria (unilateral termination clauses) inserted into an agreement, and the respective executed declaration of termination;
- conventional pre-emption rights;
- the court files relating to the registered real estate property.
This requirement is not absolute, meaning that one can prove that third parties had gained knowledge about such agreements and deeds by other means, except when the law states that such external knowledge is not sufficient to replace the registration.
Registration with the Land Register is not required when the real estate property is obtained by way of succession, natural accession (i.e. an addition to property by natural forces), seizure, expropriation, and in other cases provided by the law. However, land book registration is still necessary, should the owner wish to transfer the real estate, prior to such transfer.
1.3 Publicity of real estate register
Any person can obtain a land book excerpt about a certain real estate (in Romanian: extras de carte funciara) from the National Agency for Cadaster and Real Estate Publicity, including online/electronically. The cost is RON 20 (approximately EUR 4) per excerpt, and it is not necessary to justify an interest for such a request, as one of the main purposes of the land book is to inform third parties about land book registrations.
Also, any person can request information from the integrated information system for cadastre and land register and may consult the cadastral and legal regime of the documents registered therein.
1.4 Protection of ownership
Currently, as mentioned in section 1.2., the registration in the Land Register has an opposability effect and it only creates a presumption of ownership, not an absolute proof of ownership. Therefore, the registrations provided in the Land Register may be challenged by any interested party in a court of law.
However, the current Civil Code strengthens the position of subsequent buyers registered with the Land Register, and who acquired the real estate property in good faith by time baring the claims for rectification of the Land Register filed by any interested party. Thus, the Civil Code provides for a three-year term in case of onerous transfers, whereas in the case of real estate acquired by donation or testament the statute of limitation for filing such rectification claims is of five years.
We note that no real estate may be sold without it first being integrated into the cadaster and Land Register. In case of unlawfully used or occupied property, the owner may initiate an eviction claim, following the procedure provided by law.
2. REAL ESTATE ACQUISTION
2.1 Share deal or asset deal?
Under Romanian law, a share deal involves the transfer of ownership over shares in a company (i.e. the special purpose vehicle (SPV) in which the physical real estate asset is held), which leads to the indirect transfer of ownership over the real estate belonging to such company, whereas an asset deal involves the transfer of ownership over one or more real estate assets owned by a company (or by a natural person).
Whereas a share deal is preferred by sellers, especially when the assets/portfolios are being held by one or several SPV/s, as it will allow the seller to avoid latent capital gains tax and transfer taxes, and thus command higher net proceeds, whilst extinguishing any ongoing involvement with the SPV owning the real estate assets, asset deals are straightforward and preferred by buyers as it will allow them to avoid buying a company with a long tax, financial and possibly also employment history, and to reset the tax base of the property for local tax purposes.
In case of a share deal, the operational permits obtained in view of the company’s activity performed in relation to the real estate will maintain their validity (for example, in case of a company operating a hotel, the certifications issued from the Ministry of Tourism remain available), while in case of an asset deal, such operating permits will have to be obtained again.
For the validity of a share deal, a document under private signature is sufficient, while an asset deal implies the conclusion of a notarized document and the payment of notarial expenses and fees for registration with the Land Register amounting to approximately 1% of the purchase price.
The asset deal structures are more predominant in daily transactions on the Romanian market (single assets transactions involving mostly housing units or residential assets, as well as land plots with no constructions). However, in the case of acquisitions of real estate portfolios and income-producing real estate assets, there is a clear preference of sellers to opt for share deals.
Due to the new approach of remote work triggered by the Covid pandemic, the surface and configuration of the sold residential units weighted heavily in most acquisition decisions during the last two years.
The agribusiness sector was affected by the legislative uncertainty caused by Law No.175/2020, which brought fundamental changes to Law No. 17/2014 on the sale and purchase of agricultural lands in Romania located outside the city limits (extra muros).
One of the major amendments brought by the abovementioned law is the obligation of the seller of agricultural land to pay an 80% tax applied to the difference between the sale price and the purchase price (based on the applicable Notaries' Price Chart mentioned in section 1.1. above, valid for that time) if the sale of the extra muros agricultural land takes place in the first eight years from the acquisition date by the seller.
This tax also applies in case of a direct or indirect sale of the controlling interest in the companies owning extra muros agricultural lands, if such assets represent more than 25% of the company’s assets, and again if such a sale of the controlling interest occurs within eight years as of the acquisition of the respective lands by such company. In such a case, the seller will have to pay a tax of 80% computed on the difference between the value of the lands (calculated based on the Notaries' Price Chart) from their acquisition date by the company, and the sale date of the majority of shares/the controlling interest in the company. Also, in order to avoid double taxation, the corporate income tax for the value difference of the sold shares shall be applied to a base proportionally reduced by the percentage of the extra muros agricultural lands in the total fixed assets of that company.
Even though more than a year has passed since this tax was implemented, the applicability of such legal provision, namely the nature of this tax, to which state/local budget account the tax is to be paid, what are the notaries’ attributions and/or obligations in respect thereof when authenticating such sale purchase agreements (in case of asset deals), are still unclear.
2.2 Share deal
In Romania, the incorporation, activity, and organization of companies are mainly regulated by Companies Law No. 31/1990 and the provisions of the Romanian Civil Code.
Usually, share deals contain conditions precedent which are to be fulfilled by the sellers and are structured into two phases: signing and closing. After closing, the transfer of the ownership over the shares of the target company is registered with the Romanian Commercial Registry.
In the case of share deals, the following key factors should be considered by a potential investor:
- the purchaser of shares in a company shall acquire all the historical obligations of the transferring business (including tax obligations), as well as the bad or good faith of the seller when he acquired the property;
- the due diligence process in case of a share deal is a lengthier one, as along with a full scope legal and technical due diligence exercise, also a tax and a financial one are needed to properly assess the potential risks of the entire company, not only of the immovable assets;
- a share deal does not imply the conclusion of authentic deeds and no notarial fees and land registration expenses are to be paid;
- in case of a share deal, all permits obtained by the target company remain valid (in some specific cases, a notification to the issuing authority might be needed in respect of the ownership transfer over the shares), as well as all the agreements entered into by the target company (except for the ones containing change of control clauses);
- any environmental liability, if the case, should be clearly regulated between the parties of the share sale purchase agreement by means of warranties and specific indemnities.
It is customary for the parties to a share sale purchase contract to agree upon specific representations and warranties to customarily cover: () valid ownership history of the company, (ii) compliance with applicable laws, (iii) completeness and accuracy of the disclosed information, (iv) protection against third-party claims, (v) lack of encumbrances, (vi) status of on-going contracts, especially of lease agreements, (vi) no tax liabilities, (vii) provisions related to the processing of personal data, etc.
2.3 Asset deal
In Romania, an asset deal is commonly structured as a one-step transaction and requires the conclusion of an authenticated sale purchase agreement before a public notary. The registration with the relevant Land Register of the change of ownership over the sold real estate property is performed by the public notary following the conclusion/authentication of the sale purchase agreement and payment of the notarial expenses and land book registration fees.
When concluding an asset deal, an in-depth legal due diligence analysis over the full title chain over the property is to be performed in order to determine if the seller is the legal owner of the respective real estate and that no title flaws are to be found in the previous title deeds with respect to that property, i.e. that such title deeds comply with all legal provisions in force at the moment when the respective title deed has been issued/concluded. As part of the legal due diligence procedure, drafting and submitting of customary inquiry letters to the public authorities related to the legal status of the real estate (including the existence of any potential restitution claims on the land), reviewing of the answers, and performing of checks in available public registers and of public information sources in relation to the land and the seller are usually performed.
Also, zoning/town planning certificates and various confirmations from the competent authorities are usually requested to acknowledge both the legal status of the real estate and its applicable zoning and construction regulations and parameters, especially when the investor intends to erect constructions on the respective land plot. Moreover, in the case of specific regulated real estate properties (depending on their location in the vicinity of the country border, near military sites or airports, to name just a few), specific endorsements from other public authorities may be required.
In the case of high-profile transactions, technical and environmental due diligence investigations are common.
Most of the risks associated with the real estate properties in Romania arise as a result of the lack of private ownership during the communist regime, which rendered cadastral and land book operations unnecessary. Therefore, no cadastral measurements and land book registrations were performed in an institutionalized manner before 1990. These aspects, in conjunction with the inconsistent organization and implementation of the restitution process after 1990 for the real estate properties that had been abusively confiscated during the communist regime, generated most of the risks currently associated with real estate transactions in Romania.
As such, boundary conflicts are a common issue that mainly appeared due to the implementation mechanism of land ownership restoration, which implied that the ownership right was recognized through an ownership certificate that was used instead of the ownership title, which was issued afterward. Subsequently, the technical formalities for the identification, establishment of location, and effective land appropriation were not fulfilled. This mechanism resulted in several inconsistencies between the situations provided in the registries and the reality in the field, which led to the overlapping of the properties’ boundaries.
Other notable risks usually emerge from hidden defects, third-party claims against the ownership title of the current owner, potential mandatory legal provisions that were not followed in the previous processes of change of ownership, etc.
Generally, the parties agree on specific guarantees related to the ownership title, hidden defects, protection against third-party claims, encumbrances, the status of ongoing agreements, tax payments, as well as any defects existing when the sale takes place. It is possible and even customary in the case of high-profile transactions for the purchaser to obtain title insurance with respect to certain title flaws related to the real estate asset acquired which were identified during the legal due diligence exercise.
For information on the fees and taxes associated with an asset deal, please see sections 2.5. and 4.1.
2.4 Disposal process
In Romania, agreements having as an object the transfer of ownership over real estate must be concluded in writing and authenticated by a public notary in order to be valid. When executing the agreement, the parties should be present in person or should be represented by attorneys-in-fact that are empowered by means of authenticated powers of attorney. Should any of the parties be a legal person, the public notary is obliged to verify if its representative is entitled to sign the sale and purchase agreement having as object the real estate.
Moreover, the notarial expenses and the land book registration fees should be paid on the signing date. For more information on the fees and taxes associated with an asset deal, please see sections 2.5 and 4.1.
In case the sold real estate property is comprised of land and buildings with a net area of more than 50 square meters, energy performance certificates must be obtained by the seller and presented to the notary when authenticating the sale purchase agreement, otherwise, the sanction of relative nullity of the sale purchase agreement applies. Law 372/2005 on the energy performance of buildings regulates some exemptions from this obligation, in case of (i) protected buildings and monuments that are either part of protected constructed areas, or have a special architectural or historical value; (ii) buildings used as places of worship or for other religious activities; (iii) temporary buildings intended to be used for periods of up to 2 years and located in industrial areas, workshops and non-residential buildings in the agricultural segment that require low energy consumption; (iv) residential buildings that are intended to be used for less than 4 months per year, and (v) independent buildings, with a net area of less than 50 square meters.
Also, it is customarily for the seller to hand over to the purchaser (in original counterparts or certified copies) the entire title chain documentation related to the sold property and the technical deeds related to the constructions (if applicable, such as building permits, commissioning protocols and land book registration proofs). The tax certificate attesting the full payment of the local property taxes related to the immovable asset is preserved by the public notary in the notarial archive of the notarized deed, whereas the lack hereof or a tax certificate attesting outstanding taxes is sanctioned with the absolute nullity of the sale purchase agreement.
2.5 Registration of change of ownership
The public notary who authenticated a sale purchase agreement with respect to a real estate property shall by default request the registration of the change of ownership to the relevant Land Register office. Registrations in the relevant land books are performed by the competent cadaster and real estate publicity offices subordinated to the National Agency for Cadaster and Real Estate Publicity.
For the purpose of executing the agreement having as object the constitution or the transfer of a real right onto a real estate property, a land book excerpt for notarial purposes is obtained by the respective public notary authenticating the respective deed.
When signing a sale purchase agreement, the following fees are usually paid by the purchaser: (i) the land book registration tax, computed usually at the declared value of the transaction (or at the minimum indicative value of the real estate as indicated in the Notaries’ Price Chart, if the declared price is lower than such minimum value), which ranges between 0.15% and 0.5% of the immovable asset’s price, (ii) as well as the public notary’s fees amounting from ca. 0.44% (in case of real estate properties sold for a price higher than RON 600,001 – where the notary fee is computed from a fixed amount of RON 5,080 lei plus 0.44% applied to the amount exceeding RON 600,001) up to 2.2% of the immovable asset’s price (yet not less than RON 150 in case of real estate properties with a value of up to RON 15,000). VAT will also apply to the public notary fees if the notary is registered for VAT purposes.
The registration with the Land Register of the change of ownership over real property is to be finalized in approximately seven business days as of the execution of the sale purchase agreement. An expedited procedure that shortens the deadline up to two business days is possible if an emergency fee is paid amounting to four times the normal fee, yet not higher than Ron 5,000, which is to be paid in addition to the normal fee.
2.6 Risks to be considered
The general principle under Romanian law is that privately-owned real estate properties are freely transferrable. Some specific restrictions are expressly regulated in the law, such as the legal pre-emptive rights regulated for agricultural lands located outside the city limits (under Law No. 17/2014 there are no less than 7 classes of pre-emptors), for properties classified as historical monuments (under Law No. 4421/2001 the Romanian State, respectively the territorial-administrative units benefit from a legal pre-emption right), for forest lands (under the Forestry Code the co-owners and the neighbors enjoy a legal pre-emption right), but also for agricultural lands located within the city limits (the land leaseholder (in Romanian arendas) holds such a legal pre-emption right under the Civil Code).
As mentioned, under Law 17/2014 the following 7 pre-emptors‘ classes are regulated: (i) first rank pre-emptors: co-owners, first degree relatives, spouses, relatives, and in-laws up to the third degree, included; (ii) second rank pre-emptors: owners of agricultural investments for the plantations of trees, vines, hops, exclusively private irrigations and/or agricultural tenants. If on the lands subject to sale there are located agricultural investments for plantations of trees, vines, hops, irrigations, the owners of such investments have priority for purchasing such land; (iii) third rank pre-emptors: owners and/or tenants of agricultural land adjacent to the land subject to sale, pursuant to paragraphs (2) and (4); (iv) fourth rank pre-emptors: young farmers; (v) fifth rank pre-emptors: the Academy of Agriculture and Forestry Sciences Gheorghe Ionescu-Sisesti and the research-development units in the agricultural, forestry and food sectors, regulated by Law No. 45/2009 on the organization and functioning of the Academy of Agriculture and Forestry Sciences Gheorghe Ionescu-Sisesti, and the research and development system in the agricultural, forestry and food sectors, and the education institutions with agricultural profile, for the purpose of purchasing agricultural lands located outside of built-up areas which have the destination strictly required for agricultural research and which are adjacent to the lands owned by them; (vi) sixth rank pre-emptors: natural persons domiciled/residing in the territorial and administrative division where the land is located or in the bordering territorial and administrative division; and (vii) seventh rank pre-emptors: the Romanian state, through the Agency of State Domains.
Contractual pre-emptive rights are also possible and, if properly constituted and publicized, should be duly considered when concluding a sale purchase agreement. However, a set of rules should be observed when constituting such contractual pre-emptive rights, as follows:
- contractual pre-emptive right must be registered with the relevant land book in order to be opposable to third parties;
- contractual pre-emptive rights may not be transferred to a third party, and such right may be exercised during an enforcement procedure;
- legal pre-emptive rights shall always prevail in case of conflict with a contractual pre-emptive right;
- contractual pre-emptive rights shall be terminated upon the death of the beneficiary, if no term or such a right was expressly specified in the agreement; however, should the parties agree on a term longer than five years for the duration of a contractual pre-emptive right, such term shall be reduced to five years ope legis.
Potential remedies in case of acquiring a real property with defects:
In the case of a regular sale procedure, the seller transfers the ownership right over the immovable asset free of any encumbrances, defects, or legal claims.
Should the real property be affected by visible defects, the purchaser is supposed to indicate such defects when concluding the sale agreement, under the sanction of losing the right to claim any remedies following such moment.
On the contrary, should the real property be affected by hidden defects, the purchaser may request the seller to repair such defects at his/her expense, reduce the purchase price, or, in some cases, even terminate the agreement.
3. REAL ESTATE FINANCING
3.1 Key sources of financing
The general legal framework in relation to financing is the Civil Code and the regulations issued by the National Bank of Romania, which encloses norms for different types of mortgages, liens, and personal guarantees.
The main type of security used in real estate transactions is the mortgage over the real estate itself. It is not excluded that the buyer provides another security, be it a mortgage over another real estate or a lien over movable assets, such as accounts receivables, bank accounts, stock, intellectual property rights, or insurance policies.
According to the applicable law, a mortgage may also be established over the bare property, over the usufructs or superficies rights, or over a share of the real estate ownership right, in case of co-ownership. However, in some cases, banks might be reluctant to accept mortgages over such rights, because of the difficulty to enforce them.
Some banks do not accept a mortgage over any kind of real estate. For example, mortgages over industrial facilities such as warehouses, production halls, etc. are not always accepted.
Personal guarantees can also be an option, and the most common is called “fideiusiune”, where a third party guarantees with his/her own personal patrimony to pay the credit in case of buyer’s default. The guarantor must prove that he owns sufficient assets or income to be able to pay and that he lives/resides in Romania. Also, the bank/creditor has the right to choose a specific guarantor, whereas the two above-mentioned conditions are no longer applicable in this particular case. Romanian law also provides some forms of credit enhancements, such as bank letters of guarantee or letters of comfort.
3.2 Protection of creditors
The most utilized type of security is the mortgage over the real estate object of the acquisition or over other real estate owned by the buyer or by a third party/debtor if accepted by the bank. The mortgage agreement is concluded and authenticated before a public notary and is registered in the Land Register. Other kinds of mortgages, the ones over movable assets (e.g. on receivables) must be registered in the Electronic Archive of Security Interests. The bank performs an analysis of the security, including an evaluation and due diligence about other securities over the asset and/or other securities provided by the buyer (e.g. on assets belonging to third parties).
A facility offered by law to creditors is that the mortgage agreement is an enforceable title (a writ of execution) if all its validity conditions are met, namely the contract must: (i) be authenticated by a public notary, (ii) mention the loaned amount, the identification information for the person who establishes the mortgage, and the creditor, (iii) show the cause of the obligation guaranteed with the mortgage (e.g. a loan/credit), and (iv) clearly describe the mortgaged property.
The guarantor (mortgagor) is forbidden to destroy, deteriorate the asset, or diminish its value in any way except for normal wear and tear or in case of necessity. The creditor can ask for damages from the guarantor in such a case.
4. REAL ESTATE TAXES
4.1 Transfer taxes
Under the applicable provisions of the Tax Code, an income tax is owed by the individual who obtains yield from the transfer of ownership rights (or of any dismemberments) over real property (i.e. land free of constructions/constructions of any kind and the relevant share quota of the affected land). Such income tax is computed and collected by the Notary Public authenticating the transfer deed, while the registration of the transfer deed with the Land Book is subject to the payment of the income tax.
The value of the taxable income is established by deducting the non-taxable amount of RON 450,000 (approximately EUR 91,000) from the final value of the transaction.
Additionally, for the transfer of any ownership rights (including its dismemberments) over constructions of any kind and their related land plots by means of inter vivos deeds, as well as over lands (free of constructions) of any kind, individuals owe a tax of 3%, which shall be computed on the taxable income, calculated as per the above.
The abovementioned tax shall not be due in the following cases:
- when the ownership transfer over the lands and constructions of any kind was acquired through the restoration of the ownership right under the special restitution laws;
- when the ownership transfer was completed by way of donation between relatives and in-laws (up to and including the third degree), as well as between spouses;
- in case of annulment with a retroactive effect of the transfer deeds having as object real estate properties.
4.2 Specific real estate taxes
Landowners are compelled to annually pay a land tax towards the local budget, computed considering the total surface of the land, its location, and use, as per the classification made by the local council.
Building owners have a legal duty to annually pay a building tax towards the local budget, which is computed based on certain percentages applied to a tax basis; both the percentages and the tax basis vary, mainly depending on the owner (individual or legal entity), use and location of the building. Exemptions may apply for both the tax related to the owned land and to the tax related to the owned building.
The issuance of building permits is subject to a tax in the value of:
- 1% of the estimated value of the construction works, including the value of the relevant installations (except for residential construction works);
- 0.5% of the estimated value of residential construction works or annexed buildings construction works;
- 3% of the estimated value of individually authorized site organization works.
4.3 VAT general provisions
As a rule, the income arising from lease agreements is exempted from VAT. However, the landlords have the option to apply the VAT of 19% on rent.
The following VAT rules apply to the sale of real estate:
- The standard VAT rate is 19 %;
- The 5% reduced VAT rate applies for supplies of social housing under the threshold of RON 450,000, exclusive of VAT, a maximum useful surface of 120 square meters;
- VAT exempt with option to tax can be applied in case of old buildings or non-building land (potentially subject to VAT adjustments);
- Reverse charge mechanism, namely no VAT is charged by the seller, while the beneficiary accounts for 19% VAT under reverse charge mechanism, in case of taxable transactions of real estate between taxable persons which are registered for VAT purposes in Romania).
5.1 Legal framework for condominiums
Pursuant to the provisions of Law No. 196/2018 on the incorporation, organization, and operation of owners' associations and the administration of condominiums, it is customary to incorporate an owners’ association for the administration of condominiums. A condominium is defined as a real estate property comprised of a land plot with one or more constructions, housing at least three individual properties consisting of both residential units and/or residential units and spaces with another use, and of the share quotas of the common property.
The owners’ association is comprised of: (i) the general assembly, (ii) the executive committee, (iii) the president; and (iv) the censor or censors’ commission. The owners’ association is operating similarly to a company.
5.2 Rights and duties of co-owners
The co-owners of real property have the following rights:
- to participate, to vote, and to candidate in the general assembly of the owners’ association;
- to be informed of all aspects regarding the activity of the owners’ association, and to receive copies of all related documentation;
- to receive input on their contribution to the owners’ association’s expenditures, and to challenge such contribution within 10 days as of its publication;
- to submit a written complaint to the owners’ association, should any co-owner consider himself aggrieved in relation with one of his rights;
- to address to the competent court of justice, should any co-owner consider himself aggrieved by the non-fulfillment or inadequate fulfillment of executive committee’s duties.
The co-owners of real property have the following duties:
- to use the common parts and the individual space as per their destination, without causing any hindrance to any other co-owner;
- to fully and duly pay his share to the owner’s association fund;
- to notify the president of the condominium association on any change in the structure and number of the family members/lessees/free-lessees/any other lodgers;
- to maintain the individual space in good and habitable condition, at his/her own expense;
- to repair the damage or to bear the repair costs, should the co-owner damage the common parts or the individual property of another co-owner;
- to allow the president/another member of the executive committee/the administrator of the apartment building and a qualified person to enter the individual premises, with a five days prior written notice (or, in case of emergency, 24 hours written notice), should it be necessary to inspect, repair or replace elements of the common property, which can be accessed only from that individual property;
- to modernize and consolidate the condominium, the equipment, facilities, and endowments, if necessary;
- developers of residential real estate are obliged to inform the purchaser/s at the transfer of ownership of the obligation to incorporate an owners’ association; they must hand over the technical book of the relevant constructions to the condominium associations, and they should provide the purchaser with the use of utilities’ services.
5.3 Liability of co-owners
Should any co-owner be in default with respect to his duties established under the applicable law, he might be subject to civil and/or criminal liability (in exceptional situations) in order to cover all damages caused to the other affected owners.
5.4 Rights and duties of condominium associations
As per the applicable law, the rights and duties of the owners’ associations representatives are the following:
- to adopt a statute establishing the organization, general rules of operation, and attributions of the owners' association, together with an internal building regulation;
- to manage all matters relating to the administration, operation, maintenance, repair, rehabilitation, and/or modernization of the common areas belonging to the building;
- to convene the general meeting of the owners' association at least once a year;
- to annually draft a budget of income and expenses;
- to open a sole bank account through which all the amounts (from tenants and not only) will be collected;
- to raise money for the establishment of a working capital and of a repair fund;
- as per the applicable GDPR regulation, the owners’ associations should display information on the notice board without disclosing the first and last name of the individuals, and also the individual should be informed about the data processing when surveillance cameras are installed.
6. COMMERCIAL LEASES
6.1 Form and contents of a lease agreement
The general legal framework for the lease agreement is the Civil Code, Art. 1.777-1.850. Commercial leases are regulated by Art. 1.777 - 1.824 and 1.828 - 1.831.
The maximum lease term provided by the Civil Code is of 49 years. If the parties provisioned a longer period, the lease agreement will be automatically reduced to 49 years. Commercial leases are usually concluded for a period of five up to 10-15 years, depending on the asset type and the leased areas, yet for longer periods than residential leases, which are typically concluded for one or two years.
The law does not require a certain form for the lease agreement, but lease agreements are customary concluded in writing. Nonetheless, lease agreements with respect to real estate assets belonging to either the public or the private domain of the Romanian State or of the territorial-administrative units must observe a special public tender procedure prior to their execution.
The main clauses in a lease agreement are about parties’ rights and obligations, rent, renewal, cases of termination, penalties for default. It is also customary for tenants to pay a security deposit amounting to up to several months' rent (depending on the type of property) or to grant the landlord a bank guarantee letter in the respective amount.
Landlord’s main obligations are:
- to hand over the leased premises in a good and proper condition for use;
- to maintain the leased property in a good condition for use according to its destination for the entire lease term, meaning that the landlord is bound to make all repairs necessary for keeping the destination envisaged by the parties when signing the lease (e.g., maintaining functional elevators, ventilation, etc. in an office building). On the other side, the tenant must usually carry on the so-called small/minor repairs, which result from the normal usage of the real estate;
- to provide for the undisturbed and effective use of the leased premises for the entire lease term;
- to guarantee the tenant against all defects of the leased premises which might hinder, or diminish its use by the tenant, even if the landlord did not know them when the agreement was concluded and irrespective of their existence prior to the execution of the lease or their occurrence afterward. An exception is regulated for visible defects, which the tenant did not claim when the handover of the leased premises took place. However, the landlord is still liable for damages caused to the tenant's life, health, or corporal integrity, even if such damages rest upon visible defects which were not claimed by the tenant when taking over the leased premises;
- to protect the tenant against any third party claiming a right over the real estate.
Tenant’s main obligations are:
- to take over the leased premises;
- to timely pay the rent;
- to use the leased premises prudently and diligently, according to the destination established in the agreement and, if no destination was established, according to its nature and previous destination (i.e., it is presumed that an office building was rented for office activity, even if this was not provided in the contract). If the tenant changes the destination of the leased premises, and thus causes damages to the landlord, the latter can ask for damages or even for the termination of the lease;
- to inform the landlord immediately about the leased premises’ need for important/urgent repairs;
- to execute the small/minor repairs;
- to allow the landlord to examine the leased premises at the agreed periods, or at a reasonable timeframe;
- to return the leased premises at the termination of the lease;
- to pay its share of expenses for the common areas.
As latest trends in lease agreements in Romania, we can mention heavy negotiation by the parties in respect to the obligations related to the obtaining and amending, if the case, of the fire safety permit (especially when tenants are performing their own fit-out works), as well as the Force Majeure clauses, which due to the COVID-19 pandemic gained totally new importance in lease agreements. Lately, so-called “COVID-19 clauses” are a new trend in lease agreements, causing a lot of divergencies, and negotiation efforts between tenants and landlords.
The last year showed that the best solution to re-balance lease agreements affected by the COVID-19 pandemic is direct negotiation between the parties. Solutions varied from a small number of landlords agreeing to reduce the rent (mostly in conjunction with a prolongation of the lease term) especially in a retail lease agreement, to suspending the lease agreements for a limited time, or providing alterations to the leased premises as to adapt to the new health and safety regulations, or – in some cases - diminishing the leased area.
6.2 Regulation of leases
The Civil Code regulates the generally applicable set of rules for all leases, irrespective of the type of property: retail, industrial, office, or residential. Nonetheless, specific legal provisions are to be found in the Civil Code for lease agreements related to residential units/dwellings, and for agricultural leasehold agreements (in Romanian: contracte de arendare) having as object agricultural lands, vineyards, orchards, platforms, and spaces designed for agricultural production or occupied by farms, animals, constructions, machinery, and equipment intended for agricultural use/exploitation.
The general rules for commercial leases were outlined in the previous section. Most of them can be modified and/or excluded by the parties.
Some of the legal rules in commercial leases cannot be contractually excluded, such as the landlord’s liability for damages caused to the tenant's life, health, or corporal integrity by unclaimed visible defects of the leased premises, and generally the main obligations of the parties as described in section 6.1. above.
6.3 Registration of leases
According to the Civil Code, it is not mandatory for lease agreements to be registered with the Land register. However, it is mandatory for landlords to pay taxes for the income represented by the rent. To this end, the lease agreement should be registered with the fiscal authorities. However, the registration of agricultural leasehold agreements with the local council is mandatory.
The Civil Code provides specific advantages for the owners who register their lease agreements with the fiscal authorities, as such registered contracts represent writs of execution allowing the landlords: (i) to evacuate the tenant at the expiry of the lease term without a court decision being necessary if the lease has a limited term; (ii) to forcefully execute the tenant for the rent. The above-mentioned advantages of an enforceable title are also conferred by law in case of a lease agreement authenticated by a public notary.
6.4 Termination of leases and renewals
The most common causes of termination of lease agreements are the following:
- expiry of the agreed lease term, unless the lease agreement contains express automatic renewal clauses;
- termination as per the mutual agreement of the parties;
- termination for non-performance, in case one of the parties does not fulfill its obligations assumed under the lease agreement;
- unilateral termination (without cause), if such right was expressly granted to any of the parties, applicable in case of lease agreements concluded for a specific period of time. Usually, such unilateral termination right is granted in favor of the tenant and consists of a break option that can be exercised by the tenant only once, after a specific period of the lease agreement has elapsed (several break options upon the anniversary of certain time periods may be expressly agreed by the parties, usually no more than two or three such break options in lease agreements concluded for more than 10 - 15 years);
- unilateral termination (without cause) by either party with prior notice given to the other party, in case of lease agreements concluded for an indefinite period of time;
- de jure termination if the leased premises is fully destroyed or may not be used according to its destination. In case of partial destruction, or a partial impediment in the proper use of the leased premises, the tenant may request either the termination of the lease agreement or a reduction of the rent;
- termination following the annulment or cancellation of the lessor's title. As an exception, if the tenant acted in good faith (i.e. not knowing about the defect affecting the lessor's title), the lease agreement will continue to produce effects for the term stipulated by the parties, but not longer than one year after the annulment or cancellation of the landlord's title.
The Civil Code provides for a tacit renewal of lease agreements, if, after the expiry of the lease term, the tenant keeps using the leased premises, and continues to fulfill its obligations without any objection from the landlord. In such case, a new lease agreement is deemed to have been concluded in the same conditions as the initial lease agreement, except for its term, which shall be an indefinite one. Landlords are usually keen to expressly exclude the tacit renewal in the lease agreements, and regulate instead that, if the parties will choose to prolong the lease agreement upon its expiry, new terms and conditions will be negotiated for the extended term.
Agricultural lease agreements are automatically renewed for the same period as the initial one if neither party informs the respective other party about its renewal refusal. Such refusal notice must be served within six months or one year (in the case of agricultural lands) prior to the expiry of the lease term. The notice periods are reduced to half in case the initial lease agreements were concluded for a lease term of one year or shorter.
Also, the Romanian law stipulates a right of first refusal for the tenant, in case the lease agreement expired and the landlord wishes to rent again the leased premises, yet only if the tenant fulfilled his obligations under the initial lease agreement. Such right of first refusal can also be contractually excluded, and landlords tend to impose such exclusion in commercial leases.
6.5 Rent regulations and rent reviews
The law does not provide for rent regulations or review clauses, as such clauses may be freely negotiated by the parties.
It is customary for commercial lease agreements to contain a yearly indexation clause, either with a specific percentage or based on objective indexes, such as the Harmonised Index of Consumer Prices.
Also, in case of retail lease agreements, apart from the base rent, the tenant may also owe a turnover rent, which represents a percentage of the tenant’s net income generated in, or from the leased premises, and which shall be due by the tenant only if such turnover rent exceeds the monthly base rent.
6.6 Services to be provided together with the lease
In cases of commercial lease agreements having as object leased premises located in buildings with more tenants, where the common areas are being maintained and managed by the landlord, in addition to the rent, the tenant shall also pay a service charge covering the expenses incurred in relation to such common areas (e.g. utilities), as well as the cost of the services provided by the landlord to the benefit of all tenants (i.e. cleaning services, security, property taxes, insurance policies, etc.).
Usually, the service charge is either estimated in advance, proportionally to the share of the leased premises applied to the entire building and adjusted each year according to the open book system or is established in a fixed amount (X EUR / square meters), which is indexed together with the rent.
The cost of the utilities used by the tenant in the leased premises is not included in the rent and is usually paid separately according to the effective consumption of the tenant. Utilities may be either contracted by the landlord and reinvoiced to the tenant based on effective consumption or may be directly negotiated and contracted by the tenant.
6.7 Fit-out works and their regulation
The initial fit-out works to be performed on the leased premises are divided between the landlord and the tenant. As a standard practice for commercial long term leases, the landlord performs, on its costs, the initial fit-out works in order to hand over the premises to be used as per the tenant’s envisaged destination or it incurs a part of the cost of the fit-out works requested by the tenant.
The tenant’s fit-out works are additional arrangements carried out by each tenant / or by the landlord at the request of each tenant and at the tenant’s expense, considering the fit-out contribution granted by the landlord (if any).
If the tenant executes works related to the leased premises without the landlord’s prior agreement, the landlord can either keep the works without any indemnification towards the tenant or request the tenant to remove such works at its own expense. In both situations, the tenant could be liable for damages for altering the initial form of the leased premises.
From a building tax perspective if, because of the fit-out works, the value of the real estate rises or decreases with more than 25% of the initial value, the owner must fill out a new declaration with the fiscal authority and pay the building tax accordingly.
From a VAT perspective, if during the VAT adjustment period of 20 years the lease agreement ends, the tenant would be liable to perform VAT adjustment for the fit-out works performed at its own cost and handed over free of charge to the landlord together with the space. This would trigger additional VAT costs for the tenant.
6.8 Transfer of leases and leased assets
As per Romanian law, unless otherwise provided by the lease agreement (i) the tenant may sublease or assign the lease agreement to third parties, and (ii) the landlord may assign its rights under the lease agreement.
In the event of non-payment of the rent due under the lease, the landlord may pursue the subtenant up to the amount of the rent due by the latter to the principal tenant. The anticipated payment of rent by the subtenant to the principal tenant cannot be opposed to the landlord.
If the sublease is forbidden under the lease agreement, this implies that the assignment of the lease agreement is also forbidden. However, the interdiction to assign the lease does not imply the interdiction to sublease.
The transfer of the leased real estate does not lead to the termination of the lease agreement unless the parties expressly agree thereupon.
In case the leased real estate property is being transferred (i.e. sold or otherwise disposed of), the lease agreement is opposable to the acquirer as follows:
- in case the leased real estate property is registered in the Land Register, if also the lease agreement was registered with the Land Register;
- in case the leased real estate property is not registered in the Land Register, only if the lease agreement cumulatively meets two conditions: it bears a certified date (which is granted either by the conclusion of the lease before a public notary or even before a lawyer, or by registration of the lease with the fiscal authorities), and such date is prior to the certified date of the transfer (in case of real estate transfers, the authentication date of the sale purchase agreement by the notary).
In the abovementioned situations, the acquirer shall subrogate in all the rights and obligations of the landlord arising from the lease agreement, including in relation to the guarantees provided by the tenant, as per the applicable legal provisions.