Commercial real estate law and rules in Bulgaria

1. Parties and Ownership – Who can own real estate and what types of ownership are there?

Parties

There are no specific limitations as regards ownership of property. Any legal person, individual, the Bulgarian State and the municipalities may own real estate.

Foreign nationals and companies can own buildings, but under the current law there are some limitations for owning land.

Foreign natural and legal persons may acquire the title to land under the terms of an international agreement which has been ratified, published and has come into force. Foreign individuals may also inherit titles to land.

After 1 January 2014, in compliance with the Treaty concerning the Accession of the Republic of Bulgaria to the European Union, there are no more restrictions in Bulgaria for the acquisition of title to land (including agricultural and forest land) with respect to citizens and legal entities from EU Member States or from Member States under the Agreement on the European Economic Area (“EEA”).

A foreign country or an inter-governmental organization may acquire title to land, buildings and limited real rights in Bulgaria pursuant to an international agreement, law or act of the Council of Ministers. A foreign country cannot acquire the right of ownership to real estate in Bulgaria by inheritance.

In order to avoid restrictions on direct ownership of real estate, it was common practice for foreign nationals and entities that are not from EU Member States or from Member States under the Agreement on the EEA, to acquire property through a Bulgarian company (normally limited liability companies or joint stock companies).

There are some additional restrictions with respect to ownership rights over agricultural land, as it is subject to special legislative protection. Foreign nationals who acquire rights of ownership over agricultural land by means of inheritance by law, but are not from EU Member States or from Member States under the Agreement on the EEA or the contrary is not explicitly provided for in a ratified, published and international agreement in force, are obliged, within a three year period to transfer the ownership to persons who have a right to acquire such estates. If the three year period is not complied with, the Bulgarian state has the right to buy-out the respective agricultural lands at prices determined by an Ordinance of the Council of Ministers. Further, foreign states do not have rights to acquire ownership of agricultural land in Bulgaria.

Under the Agricultural Land Ownership and Use Act three groups of legal entities are denied the right to acquire ownership of agricultural land.

Commercial companies, in which partners and shareholders (directly or indirectly) are companies registered in jurisdictions with preferential tax regimes (offshore zones). Any State or territory with whom the Republic of Bulgaria does not have an effective convention for the avoidance of double taxation and where income tax or corporate tax due is more than 60 per cent lower than the income tax or corporate tax on the income in the Republic of Bulgaria, is deemed to be a jurisdiction with a preferential tax regime.

Commercial companies, where partners and shareholders are foreign nationals who are not form EU Member States or from Member States under the Agreement on the EEA or from a country which is not a party to a ratified, published and international agreement in force permitting the acquisition of agricultural land in Bulgaria, as well as sole proprietor commercial companies, established by such foreign nationals.

Joint-stock companies that have emitted bearer shares.

All legal entities falling under the above three groups were obliged to transfer all agricultural land owned by them by 1 May 2015. If they do not comply with this provision, they will be subject to a monetary sanction in the amount of BGN 100 for each decare (1,000 sq. m.) of land owned in violation of the law. If the transgressor does not transfer the ownership over the agricultural lands within three months after the date of the first sanction, it will be subject to a fine amounting to three times the initial sanction. If the transgressor continues to hold the land in contravention of the provisions of the law, it is subject to a sanction in the amount of BGN 300 for each decare of land after each subsequent period of three months.

Amendments to the Agricultural Land Ownership and Use Act envisage that only natural persons and legal entities which have been resident or established in the Republic of Bulgaria for more than five years are eligible to acquire rights of ownership over agricultural land in Bulgaria, whereas companies registered under Bulgarian law for less than five years may acquire right of ownership over agricultural land, if the partners in the company, respectively the members of the association or the founders of the joint-stock company, would meet the requirements of more than five years of residency or establishment.

Ownership

Ownership of property in Bulgaria is either public or private. Only the Bulgarian State and the municipalities may own public property. Public State and Municipal property is not subject to disposal and may not be acquired by prescription. Private State and Municipal property may not be acquired by prescription until 31 December 2017. Natural and legal persons may own any private property.

Ownership can be acquired by legal transaction (a purchase, donation, legacy, etc.), restitution, legal prescription, construction or annexation of objects or inheritance.

The most common way to acquire property is by the execution of a sale and purchase agreement in the form of a notary deed. Ownership in Bulgaria can be transferred freely, except in case of co-ownership, where the co-owner has pre-emptive rights. Voluntary partition, executed between co-owners who wish to terminate their joint ownership, can also be used to acquire real estate.

People who had their land nationalised by the State during the political regime in Bulgaria prior to 1989 were able to make a restitution claim in to restore their title. To make a claim, an application had to be filed with the Municipal Office of Agriculture by August 1992. If the application was not filed within this time, claims could be brought before a court prior to August 2007, which required written evidence of the right to the land. The Municipal Office had the authority to restore titles to agricultural land with the grant of a fully valid title document. Where the title was restored to descendants of landowners, the Municipal Office would not determine or allot the inheritors’ shares of ownership. In certain cases, instead of restoring the land that had been nationalised, the Municipal Office could grant title to a different area of land which was equal in size and quality.

Acquisition of real estate by legal prescription can be either upon ten years continuous possession or upon five years possession in good faith.

Under Bulgarian law, a person will automatically acquire full legal title to a property if that person has possessed the property continuously (without interruptions) for at least ten years. It is irrelevant whether the possessor has been holding the property in good or bad faith if the possession has been continuous for a period of ten years.

Possession means the exercise of an actual power over a property that the person holds, personally or through a third party, as their own. If someone does not have a title document but state that they hold the property as their own (e.g. live there, pay the related tax, maintain the property, let it to a tenant, do not act on behalf of a third party owner), that person will be deemed to be in possession of the property. A loss of possession for more than six months is classified as an interruption; the period of possession should then be re-started. A successful court claim over a title has the same effect. During the court proceedings the prescription period is deemed to be suspended.

Title to a property may be acquired if a person has possession in good faith of the property for five years without interruption. In order to establish a good faith possession, the owner has to prove that they have valid legal grounds for their title (a notary deed of purchase; inheritance; donation, etc), they believed that the person that transferred the title to them was a legitimate owner and that these conditions have been present from at least the date of acquisition of title to the property. If the conditions are met, the owner gains the full legal title to the property.

Ownership can also be exclusive or joint. The title may belong jointly to two or more persons – the State, municipalities or other legal or natural persons. The shares of the co-owners will be deemed equal until proven otherwise. Each owner will participate in the benefits and burdens of the common property in proportion with their share. The common property will be used and managed in accordance with the majority decision of the co-owners. A co-owner may only sell their share of the property to a third party after presenting written evidence to a notary public that they have made an offer to the other joint owner(s) to purchase the share under the same conditions and declaring in writing that none of the joint owners have accepted the offer.

2. Interests – What types of interest in real estate are sold?

Under Bulgarian law interests in property include:

  • Ownership
  • Limited property rights (right of use, right to construct and easement rights)
  • Contractual rights of use (lease)

Ownership is an absolute title to the property, containing the right of possession, the right of use and the right of disposal. Private property is an inviolable right, protected by the Constitution of the Republic of Bulgaria.

A person with a right of use (a user) may use the property in accordance with its purpose. They have the right to the benefits of the property without causing any essential changes to it, but cannot transfer their right. The user must pay the relevant expenses (including taxes and other charges), maintain the property in the state in which it was received and return the property to the owner after termination of the right. If a term is not agreed, the right of use is terminated with the death of the user, the wind-up of the legal entity of the user, or upon the right not being exercised for five years.

A transfer of the right to construct a building, given to a third party by the land owner, makes the third party an owner of the building constructed on the basis of this right. The land owner may also transfer the ownership of an existing building separately from the land. Ownership of a building independently from the underlying land may also be created through voluntary partition. When the right to construct is created with a fixed time period, after the expiration of the period ownership of the building will pass to the owner of the land free of charge. If the building is destroyed, the person holding the right to construct may construct it again, unless the notary deed granting the right states differently. The landowner has pre-emptive rights in a transfer of the right to construct.

Easements can be established by law (e.g. under the Water Act for access to underground reservoirs or under the Energy Act for running of cables) or by a legal transaction.

Leases under Bulgarian law do not create a property interest, but merely create a contractual right to use property. A private lease can only be signed for a period of up to ten years. Commercial leases can be longer. The lessee is responsible for any repairs related to normal use. The lessor is responsible for all other repairs, unless they are the fault of the lessee. Unless the lease agreement expressly states to the contrary, the lessee may sub-let parts of the leased property without the consent of the lessor. However, the lessee remains liable under the lease agreement. If the use of the property continues after the expiration of the lease with the knowledge of the lessor and without objection, the agreement is deemed extended for an indefinite term.

There is a specific type of agreement relating to the leasing of agricultural land. This is the so-called “arrenda agreement” whereby a party (most commonly the owner) grants to the other party the right to use the agricultural land and to own the crops produced. Payment under those agreements may be in cash or in kind (by means of agricultural production). Arrenda agreements may be signed for a minimum term of five years. If the agreement is signed for an indefinite period or for a period exceeding ten years, arrenda agreements may only be terminated through court proceedings. Arrenda agreements must have notarial certification of the parties’ signatures. They are subject to registration with the Property Register and with a specific register kept by the Municipal Office of Agriculture.

3. Employees – What employment issues affect real estate acquisitions?

Typical employment issues which may be relevant to real estate transactions arise in relation to the acquisition of real estate through a company asset sale or a share sale of a company.

The acquisition of real estate through the transfer of a business enterprise of the company that owns the real estate rarely happens in Bulgaria. However, in these cases, employment relationships with the employees of the business enterprise pass from the seller to the buyer.

In a transfer of shares of the company that owns real estate, the employer and employment relationships remain unchanged.

In both cases, Bulgarian labour legislation protects the employees and the employer cannot terminate employment contracts without justified reasons. Such reasons could be the downsizing of personnel, a reduction in the volume of work, or the employee not possessing the educational or professional qualification required for the work. In some cases the employer must obtain the prior approval of the Bulgarian Labour Inspectorate.

Transfers of stand-alone real estate which does not include a related business or other company assets do not have any employment implications.

4. Procedure – What are the steps in a sale and purchase transaction?

Normal steps in a sale and purchase transaction are:

  • Signing an agreement with a broker
  • Signing a preliminary sale and purchase agreement
  • Negotiations with a bank for financing the purchase
  • Execution of the real estate transaction before a notary public
  • Registration in the Real Estate Register

Most sellers and buyers in Bulgaria use the services of a real estate agency or a broker who can facilitate the transaction. Usually the buyer and the broker sign an agency agreement. Once the buyer has provided a small deposit for the chosen real estate, he can be granted an exclusivity period during which the broker will not offer the real estate to other potential buyers. This gives the buyer time to carry out due diligence on the property.

After the buyer has conducted satisfactory due diligence the preliminary sale and purchase agreement (a simple contract) is signed with the seller. In Bulgaria, the buyer usually pays 10% of the purchase price as a deposit upon signing of the preliminary agreement. If the purchase falls through due to the fault of the buyer, the seller keeps the deposit. If the purchase falls through due to the fault of the seller, the seller must pay the buyer double the amount of the deposit. Either party to a preliminary agreement may file a claim with the relevant court for execution of the final agreement; the agreement is deemed executed as of the date the court ruling comes into force.

In order to sign a bank credit agreement with the financing bank, copies of the preliminary sale and purchase agreement and the relevant title document must be provided to the bank.

The buyer and the seller then proceed to sign a sale and purchase agreement in the form of a notary deed before a notary public. If the buyer has a mortgage, a mortgage deed in favour of the bank also needs to be signed. Before signing the notary deed, the notary must review all title documents, the certificate for tax assessment of the real estate, the Cadastral plan of the real estate, and any declarations that there are no outstanding local taxes or fees, etc.

The notary deed must be registered on the Real Estate Register on the same day as the deed is signed. This is done by the notary public. After registration of the notary deed, the registered owner may argue his/her rights against any third party who has subsequently acquired a right over the same property.

Depending on the nature of the transaction not all of the above steps will be applicable. However, the last two steps – execution before a notary public and registration – are obligatory.

5. Contract terms – What provisions does a real estate contract contain and what is implied by law?

The preliminary contract must contain all material provisions of the final contract including a definition of the property, the purchase price, the method of payment, any conditions precedent and the timing of execution.

The final agreement in the form of a notary deed for sale and purchase of real estate contains the following obligatory provisions:

  • Date and place of issue of the deed
  • Personal details of the buyer and the seller
  • A detailed description of the property
  • All encumbrances burdening the property (mortgages, easements, etc.)
  • The purchase price
  • The method of payment
  • A list of any attached documents to the deed
  • Terms implied by law

Some of the most significant implied terms are as follows:

  • Title guarantee – in a transfer of property there are various statutory obligations on the part of the seller in relation to the parameters and the quality of the title and the property being sold. The seller is fully liable to the buyer if the property (entirely or partially) is owned by a third party (unless the buyer was aware of this circumstance). For example, if the property is not owned by the seller, the buyer may rescind the agreement in court proceedings and claim back the price, the costs for the execution of the sale and purchase agreement, the necessary and justified costs incurred in respect of the property and compensation for any other damages
  • Misrepresentation and defects – in the event of discrepancies in the area of the property specified in the notarial deed (except if the property is sold in enforcement proceedings), the following would apply:
    • If the price has been agreed by unit size (for example by square metre), it is subject to adjustment according to the actual size. The buyer may rescind the agreement if the discrepancy exceeds 10% of the size specified in the deed
    • If the price is specified as a total amount, and the area is smaller by 10% or more, the buyer may rescind the agreement or seek a reduction in the price; if it is larger by 10% or more, the seller may claim an increase in the price, but the buyer has the right to reject the claim and avoid the agreement
  • The seller is liable if there are any defects in the property which substantially reduce its price or its fitness for regular, or designated, use. In such circumstances, the buyer may either rescind the agreement and claim back the price and expenses of the sale or keep the property and claim a price reduction or remediation of the defects at the seller’s cost. In any event, the buyer has the right to claim compensation for all damages incurred.
  • Change of Landlord – on the sale of a property which is subject to a lease, the new owner will be bound by the lease agreement vis-à-vis the tenant if it has been registered with the Property Register (registration is possible for lease agreements of terms exceeding one year). If the lease agreement is not registered but has an authentic date (i.e. it has been certified by a notary public), it will be binding on the new owner for up to one year from the date of the sale. If the lease agreement is not registered or certified, the buyer may terminate the lease by giving one month’s notice. The seller is liable to the tenant if the latter is deprived of the right to use the leased property within the agreed term as a result of the sale.

6. Due Diligence – What investigations does the buyer normally make?

The buyer will first need to check whether the seller has a valid and unburdened title to the real estate. A title to a property in Bulgaria can only be verified through a chronological review of the rights over the property. Such a review should cover a period of ten years at least. The buyer will need to check all title documents including the title documents for the land from which the real estate in question has been formed. In addition, the buyer should review the encumbrance certificates issued by the Bulgarian Real Estate Register in order to confirm that there are no mortgages, third party claims or easement rights burdening the property.

Where the real estate is former agricultural land, the buyer must also review the planning and status procedures and, if the land is developed, the development procedure. The planning and construction authorisation process must be followed, the main steps being approvals of the construction site (relevant to the change of status of the land), of the territory development plans, of the change of the land status to non-agricultural and of the project design and obtaining the construction permit.

The due diligence must also cover the construction process, so that it is clear that the building works have been carried out and completed in accordance with the applicable legislation, the construction permit and the project design. The buyer will need to review all acts, protocols and permits, especially the final one – the permit for operation or certificate for setting into operation, issued at completion of the construction stage.

7. Registration and Notarisation of real estate – What are the basic requirements?

Bulgaria has a Cadastre and a Property Register, which are run by the regional district land registries. Both systems are linked. The Cadastre provides the basic property data (location, boundaries and size) to the Property Register. The Property Register provides data regarding the right of ownership and other property rights to the Cadastre.

The following must be registered in the Property Register:

  • Title deeds
  • Other documents whereby the right of ownership is attested to or transferred
  • Other real estate rights
  • The creation, amendment, transfer or termination of mortgages and foreclosures
  • Any other actions, circumstances and legal facts subject to registration as stipulated by law

Once registration is complete, the owner acquires a priority and may argue his/her right against any third parties who have subsequently acquired a right over the same property. If a property which has a lease in place is sold, the lease remains valid with respect to the transferee if it has been entered into the Property Register.

Registration in the Property Register is performed by the public notary ex officio or upon the request of the parties concerned. Where a transfer of property ownership occurs, the registration is normally conducted ex officio. For a partition, creation of a mortgage or a lease, the registration is performed by the notary upon the parties’ request.

The Property Register holds the definitive record of who owns the land and any rights or encumbrances established over the property. The Register may also contain special entries that restrict the registered owner’s ability to deal with its title without obtaining the consent of another person.

Under Bulgarian law, contracts for the transfer of ownership or the establishment of property rights (the creation of a mortgage in particular) must be executed through notary deeds. However, the notary public is not obliged to review the ownership title history. As a general rule the title of the current owner depends on the rights of the predecessor, while the right of the predecessor, in turn, depends on the title of their predecessor. If one of the previous owners did not have undisputable title, this may allow an entitled third party to make a claim against the current owner. The possibility of third party property claims is precluded by a prescribed period of possession (10 years maximum). It is therefore highly recommended that the buyer undertakes a full review of the current and historic titles before purchasing real estate.

8. Permits – What permits are required for the use and occupation of real estate and are they personal?

An effective detailed development plan (“DDP”) is the first stage of the project development process. The existence of a proper DDP is a prerequisite for drawing up the project design, changing the purpose of the land (where necessary), signing preliminary agreements with utility companies, executing the investment design, obtaining a construction permit and starting construction work. A DDP transforms the unregulated land into regulated land by fixing its borders and providing access (in the form of a road, street or other access). The DDP also determines the requirements for construction such as the general and specific designation of the land, and the building indices (e.g. density, intensity, green yard area and height of the buildings).

The completion and approval of a project design is a precondition for a construction permit to be issued. The completed project design is subject to evaluation by a licensed consultant or by the municipal council responsible for spatial development, depending on the type of construction.

The chief architect of the municipality where the real estate is located approves or rejects the project design within one month of submission of all required documents. For investors who have received an investment class certificate under the Bulgarian Investment Promotion Act, a decision should be issued within 14 days. In case the compliance evaluation is performed by a consultant, the approval period is 14 days (five days for investors with an investment class certificate). The investor may simultaneously apply for a construction permit when submitting the project design. The project design approval will expire within one year if the investor does not apply for a construction permit during this time. If the project design is rejected, an appeal can be made to the National Construction Supervision Directorate (“NCSD”) within 14 days after the decision.

To obtain a construction permit the investor must submit an application to the relevant authority, along with the following documents:

  • The ownership title/construction right documents
  • The visa (if applicable)
  • Preliminary agreements with utility companies
  • Three copies of the valuated project design
  • The environmental assessment (if necessary)
  • Approvals from the controlling authorities (if applicable)

Pursuant to the Territorial Development Act (“TDA”), the permit should be issued within seven days after the application is submitted. The permit expires if construction has not started within three years of permit being issued or if the core-and-shell construction has not been completed within five years. However, it can be re-validated within one year after its expiration by paying a fee (50% of the cost of a new permit).

Buildings can only be used if the conditions stipulated by the TDA on the construction permit have been met. Permits for the use and occupation relate to the real estate and are not personal. Acceptance trials may also have to be successfully completed for the construction of manufacturing facilities or other buildings with specific uses to be deemed complete. For example, an energy project will be subject to operational tests for a minimum of 72 hours before starting operation.

Any projects of national, regional or local significance (such as motorways, municipal roads, etc) must have an operational permit issued by the NCSD to operate. A special committee is appointed by the Director of NCSD upon the investor requesting the permit. All costs related to the committee’s work are borne by the investor. The permit application must be accompanied by the:

  • Final report of the project supervisor
  • Major acts and protocols that have come into force during the construction
  • Certificate of registration from the Cadastral Agency
  • Signed contracts with the utility companies for connecting the completed facility to the infrastructure network

Once the construction has been inspected and the relevant documents reviewed, the committee follows Protocol 16 for accepting or rejecting the works (the so called “Act 16”). Based on their decision, the Director of the NCSD issues the permit for operation and/or occupancy. This procedure should take about 40 business days. The procedure for projects in lower categories (such as private roads or multi-purpose buildings) is simplified and involves a desktop review of the construction documents and registration to start operating. This review is performed by the chief architect of the municipality and is completed once all necessary documents have been submitted by the investor. Projects such as temporary structures erected for the purpose of construction and other minor works can be used without a permit or certificate for operation being issued.

9. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?

Before a sale is contemplated, insurance is generally the responsibility of the property owner. However, where a property is the subject of a lease, the terms of the lease could prescribe which party has the responsibility for insuring it. A landlord commonly holds accident insurance against damage caused by force majeure on the leased property. A lessee could have a third party liability insurance policy, particularly if business/manufacturing activities are undertaken at the property.

Pursuant to the Bulgarian Insurance Code, when an insured property is transferred to a third party, the transferee will step into the rights stipulated in the insurance contract unless otherwise agreed. Either the transferor or transferee must inform the insurer about the transfer in writing within seven days. The transferee is also jointly liable for any unpaid part of the premium until subrogation. The insurer has the right to demand a premium from the transferor until the insurer is notified about the transfer. The insurer and the transferee may terminate the policy within 30 days of the date of notification by giving the advance notice specified in the policy to the other party.

Under Bulgarian construction law, the designer, lead structural technician, consultant, developer and construction supervisor must be insured against professional liability for any detriment inflicted on the other parties involved in the construction and/or third parties as a result of wrongful acts or omissions in the course of, or in connection with, the performance of their duties.

10. Environmental – What are the common environmental issues?

Under Bulgarian environmental law, environmental impact assessments are required for real estate projects which are presumed to affect the environment (such as chemical factories, oil refineries, thermal power plants, etc) and for those impacting protected areas (such as reserves or national parks) or existing/potential protected zones (Natura 2000).

Real estate may be contaminated as a result of current and/or former use. The “polluter pays” principle is one of the fundamental tenets underlying the Bulgarian environmental protection legislation and policy. Environmental legislation generally provides for administrative liability (fines in the amount of BGN 1,000–20,000 with respect to legal entities) for violation of environmental protection legislation and ecological requirements. The individual/entity that has committed the violation (i.e. breaches the legislation/requirements) is liable for these fines. The legislation also provides for general civil law liability for damages by referring to the rules of tort.

Case law operates to the same effect. It holds that the actual polluter – individual or legal entity – is the one responsible for damage caused by contaminated real estate. The liability follows the polluter even if it undergoes corporate transformations. Actual polluters are also the ones held responsible in cases of environmental damage caused to agricultural land.

Legislation also envisages actions for the prevention and remedying of environmental damage to earth (soil) as well. The polluter, as a result of whose activity an imminent threat of environmental damage has occurred, is obliged to take immediate preventive measures at its own cost. A polluter who fails to take such measures without delay is liable for a fine of BGN 10,000–30,000. The remedial costs are not borne by the polluter where he can prove that the imminent threat of environmental damage or the environmental damage were caused either by a third party and occurred despite the fact that the polluter took all appropriate safety measures or as a result of compliance with a mandatory requirement issued by an executive authority other than a requirement issued as result of an emission or incident caused by the polluter’s own activities.

These principles of liability allocation do not release an owner of the property from his general fiduciary duties to act in a way that averts any further damage to the environment and/or third parties. The Bulgarian environmental protection legation does not seek to impose full liability on the current owner of a property who is not the actual wrongdoer (polluter), but has acquired land after its alleged contamination and holds and operates activities on this land in a manner that does not result in further pollution. However, there is an important exception to the “polluter pays” principle if the environmental damage is caused by private assets. In this case the liability follows the private assets, i.e. falls with their current owner.

Under Bulgarian tort regulations and settled case-law, the owner of a property is responsible for damages caused by it only to the extent that these damages result from objectively inherent characteristics, features or defects in the property. If the damages arise from atypical use of the property or from (past or current) use in breach of statutory requirements, then the liability lies with the actual wrongdoer (and not the owner of the property).

Due diligence for acquisition of a property may involve the appointment of environment consultants to consider documentary information and to carry out a site visit (Phase I). If necessary, further investigations (Phase II) may then be undertaken. It is important to identify potential problems at an early stage in order to include the scope of any remediation in the negotiation of terms and/or price of the property. Negotiation of terms may take many forms, including contractual allocation of risks, obligations to remediate (contamination discovered pre or post-acquisition), indemnities in respect of first party loss or third party claims, or purchasing specialist historic liabilities environment insurance to cover any of these risks. If any development is proposed, then planning permission may be made conditional upon the proper investigation and remediation, if necessary, of potential historic contamination.

11. Pricing/Valuation – What sets the price/valuation of real estate?

Generally, the market value of real estate will be determined by a number of factors including the market trends, the characteristics of the property (location and transportation accessibility), the size of the property and its facilities, the infrastructure, the level of yielded and comparable gross income from rents and the relative total value of the market (the general economic situation in the region in particular).

As a standard, the term “fair market value” is commonly applied, the definition of which is laid down according to the Standards for Business Valuation published in the Government Gazette: “The value interpreted as a money equivalent, for which a certain property would have exchanged hands, passing from the hands of a willing and well informed seller to a willing and well informed buyer in an arm’s-length transaction, in the open market, where the parties had each acted knowledgably, prudently, and were familiar with all relevant facts.”

The valuation might usually be calculated in one of the following ways:

  • Residual method – this is applicable when all construction parameters of the site are in place and there is an effective development plan. This method is a combination of the expense and profit approaches for determining the market value of real estate. This method can also be used for determining the market value of the right of construction on established terrain. It may give valuable information to a future investor who needs to estimate the efficiency of his investment
  • Comparative method – the valuation is based on a comparison with the realised prices of recent property sales with similar characteristics. This method looks at the characteristics and location of comparable properties and the sources of information for these sales

The valuation could also determine the liquidation value of the property, which represents the value of the property under accelerated sale conditions (based on the market value, but timing considerations are taken into account).

12. Taxes and Costs – What are they and who pays them?

The transfer of ownership and in rem rights over real estate is subject to a tax which varies from 0.1% to 3.0% depending on the location of the real estate (determined by the respective municipal council) based on the value of the real estate or the assessment, whichever is higher.

The tax is due by the buyer, but this can be changed by agreement between the buyer and seller (for example, both buyer and seller could agree to be jointly liable). If the parties agree that the seller will pay the transfer tax the buyer would be held to be guarantor.

The transfer of real estate must be registered with the Property Registry which is subject to a registration fee of 0.1% of the property’s price. Who pays this fee is subject to agreement between the parties.

Most property sales are subject to VAT. However, this is dependent on the current state and condition of the building or land. The transfer of “new” buildings (permit of use issued less than five years ago) are subject to VAT. For unregulated land, transfers of ownership, creation or transfer of in rem rights and leasing of the land is exempt from VAT. The seller of “old” land or buildings is entitled to opt in to VAT.

The transfer of real estate or the transfer/creation of an in rem right must be by a notary deed (notary fees apply). The liability for the notary fees could be on the seller, the buyer or both depending on the agreement between the parties.

The seller and/or buyer could also be liable for other fees such as consultancy and brokerage fees.

Regulated real estate is also subject to local taxes. These are paid by the legal owner of the real estate at a rate of 0.1% to 4.5% of the tax assessment of the property. The relevant municipality determines the tax rate. Properties that are classified as the main residence of a taxable person can obtain a reduction of 50% of the tax due.