CMS Expert Guide on Private Rented Sector leases in Romania

Currently on the Romanian real estate market, institutional PRS deals are not commonly used, and most investors focus on the development and sale of individual housing units. 

However, there are a few developers that have started to look at the opportunity of PRS projects, generally structuring them either as residential projects in the vicinity of office areas or mixed projects: office building(s) next to a residential building for rent, servicing potentially the accommodation needs of office employees. 

Housing units are acquired via asset deals, whether they refer to individual units or, in the case of institutional investors, of more units in the same building. Given the increased need for new residential units, especially in large and medium-size cities, developers sell units individually and often “off-plan” so that by project completion, most of the units have already been sold. This practice has grown recently due to the State-guaranteed programme “First House/New House” (Prima Casa/Noua casa) that gave better financing conditions to buyers who acquire their first house/apartment. However, with the recent increase in the reference interest rate announced by the National Bank of Romania, which comes on top of a significant increase in the interest rate for loans in Romanian Lei used to finance Prima Casa acquisitions, it is very likely that the mentioned programme will become less popular and residential rental may gain ground in Romania. 

Conversely, portfolio transactions in Romania are done via share deals to avoid the significant property transfer tax applicable to asset deals (approximately 0.65-1% land registration fee and notary fee on the transaction value). 

The standard conditions precedent under preliminary agreements/SPAs typically include the issuance of a building permit, occupancy certificate and land registry registration of the individual units. In addition, the pre-agreement might include minimum occupancy rates departing from which the buyer would not be obliged close the deal.

Financing PRS deals generally follows the requirements for office financing. The specifics are that instead of a pre-letting quota, in residential-to-rent projects, a master lease agreement is put in place between the developer and, as we seen in practice, preferably an affiliate of the developer. Based on this master lease agreement, the affiliate actually subleases the units to third parties. In turn, the affiliate provides a guarantee (e.g. a letter of bank guarantee) covering, generally, a minimum 12 to 18 months of rent for the entire building.

Standard transactional instruments securing the financing include: 

• Mortgages 
• Parent company guarantees/sureties
• Bank/insurance guarantees 
• a right to “step-in” and “buy-out” the pending development.

Under Romanian law, the zoning of a given area can be changed (converted to residential) by a new zoning plan. This is possible if the zoning master plan does not expressly prohibit reconversion to such function. For example, many former industrial sites located in city boundaries have been converted to office or residential projects. Our reading of the law is that PRS projects would be allowed by both residential and services zoning functions. No other zoning categories are specifically designed for PRS projects and urban reconversion projects are based solely on such default zoning categories. 

After the above, the developer would have to apply and obtain a building permit. This procedure entails obtaining an urbanism certificate (that designates a term in which the permit has to be applied for and the various preliminary approvals that are needed for the building permit application), obtaining such preliminary approvals, and attaching the technical documentation at the final application of the building permit.

After the building is completed, the developer must seek a certificate of completion issued by the local city hall. For the purpose of this note, such certificate is the equivalent of an occupancy permit. 

For Airbnb-type operations, the lessor must also obtain a functioning permit, however the scrutiny for obtaining such permit is significantly below the similar document for, e.g. a hotel operation.

PRS projects can be developed on areas with residential and services designations. 

As a rule, PRS projects do not entail additional requirements than regular residential projects. The minimum number of parking spaces is determined by municipalities and included in local zoning plans. There are no provisions under Romanian law that require including special amenities for PRS projects due to the zoning designation, nor are there any restrictions or special provisions regarding lease agreements due to the zoning designation. As there is no specific PRS legislation, no special amenities are required under the Romanian construction law.

There are two main types of guarantees for hidden defects:

• the guarantee for hidden defects in the construction, which is valid for ten years from the acceptance of the works, where the parties involved in erecting the building are responsible for these defects; from the designer to the certified project verifier specialist, manufacturers and suppliers of construction materials and others;
• the guarantee for structural elements, which is for the lifetime of the building.
• In general, no guarantees specific exclusively to PRS schemes exist and relevant standards for PRS schemes have not yet been established on the market.

No such specific lease agreements are regulated. Residential leases are based on the general renting provisions of the Civil Code supplemented by the “Special rules on residential leases”, which are also included in the Civil Code.

Lease agreements can be concluded for a definite or indefinite period. Romanian law does not provide any minimum lease term, but only a maximum of 49 years, even if it’s a common lease or a residential lease. Any contract which is concluded for longer than 49 years will be decreased to this maximum term. 

Collateral is not regulated by Romanian law, but the parties may secure the tenant’s obligations according to their will. Although this is not a legal obligation, setting up a deposit has become a common practice in Romania, and, in big cities, it is almost impossible to rent a home without the tenant provding the owner with a guarantee. The amount of the guarantee ranges between one and three months’ rent. Other forms of security (such as a bank guarantee) are not prohibited by law, but are rarely used in residential leases.

A typical eviction takes one to two months, as Romanian law provides a special accelerated eviction procedure for rented immovables. The eviction procedure is effected by a bailiff, who sends an eviction notice to the tenant to clear the space within 30 days. In practice, however, the procedure can take more than six months with recalcitrant tenants that seek court protection. In this case, the court file will be ruled on in accelerated proceedings.

The landlord can mitigate this risk by rendering the lease a writ of execution. This is made either by registering the lease agreement with the fiscal authority or by concluding the contract in notarised form (which, however, incurs costs of approx. 0.5% calculated at the overall value of the lease). This way, landlord will be able to obtain the forced eviction of the tenant through the bailiff without the need for a court decision.

There are no statutory limitations regarding termination rights or rent increases.

Tenants who conclude an indefinite period lease agreement can unilaterally terminate the contract by sending a notice with a period of at least a quarter of the time interval for which the rent payment was established, while for definite period lease agreements the tenant offers a 60-day prior notice. In addition, the tenant cannot be evicted during the winter-months.

There is no specific procedure the landlord has to follow to terminate the lease.

Romanian law does not provide any rule on who pays service charges. The landlord and the tenant can decide that the landlord pays the utilities and property management costs, and then re-invoices them to the tenant, or the tenant pays all of these costs, or that the rent includes both the rent and management costs.

The legal separation of apartments is mandatory in Romania to assign to each apartment a different cadastral number. Thus, the apartment will constitute a separate legal object, with its own assigned land and its own share in the property’s common areas. Thereafter, the owner can rent the apartment individually. 

The establishment of a housing association in owners’ associations is not an obligation under Romanian law.

A block of flats, legally known as a condominium, is defined as a building consisting of land with one or more units, in which there are at least three individual properties represented by apartments or spaces with another purpose and quotas of undivided parts of common property.

The establishment decision of an association of owners is recorded in minutes signed by all the owners who have given their consent for this purpose. It is necessary to organise a meeting with the owners of the condominium, during which the status of the owners' association is presented. At the same time, the association must draw up a statute.

All owner members of the owners’ association are part of the general meeting by which they can adopt resolutions if a majority of members are present.

The obligations of the owners’ association involve solving all problems related to the administration, operation, rehabilitation, modernisation, maintenance, and repair of the common spaces related to the condominium. Some of the most important obligations, however, are those related to the financial fund.