Commercial real estate law and rules in Bosnia and Herzegovina

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

Parties

Any natural person or legal entity may own real estate. This will include individuals, companies, associations and other entities having legal standing, units of local and regional government and Bosnia and Herzegovina.

Foreign persons acquire right to ownership in the Federation under the condition of reciprocity, except when the ownership right is acquired by inheritance unless the law or international agreement specify otherwise, it is assumed that there is reciprocity.

Persons who do not have citizenship of Bosnia and Herzegovina are not considered as foreign persons under this law if they or their descendants were born in Bosnia and Herzegovina.

Ownership

There is only one type of ownership.

Ownership is the most comprehensive right a person/legal entity can hold in relation to property. The right of ownership is defined as a property right (right) on a particular object, authorising the holder to use the object and any benefits arising from it as he sees fit, and to exclude any other person from it, unless that is contrary to such other person’s right or limitations imposed by the law. The owner`s rights include possession, use, utilisation and free and unlimited disposal.

Acquisition of ownership over real estate is subject to registration of ownership at the Land Registry.

Where more than one person has ownership over a single property, they will hold their interest as follows:

  • Co-ownership (“suvlasništvo”) – each of the owners has a defined or fixed share in the property. Each co-owner is entitled to dispose freely his co-ownership share.
  • Joint ownership (“zajedničko vlasništvo”) – the shares of the joint owners are not fixed. All owners can only dispose the property (being jointly owned) together.
  • Condominium (“etažno vlasništvo”) – this is a specific type of ownership used for apartments. Co-owners of a property may agree to limit their co-owner’s rights by connecting the ownership of a particular part of the property (apartment) to their co-ownership share of the co-owned real property.

Co-owners of one of the flats, business premises or independent facilities have pre-emption rights where a sale is intended by another co-owner.

A co-owner who sells his condominium is obliged to first offer to sell to the other co-owners.

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

The BiH law recognizes following types of property rights (rights):

  • Right of ownership – such ownership extends to buildings/structures on or beneath the land, unless limitations are created.
  • Easements: personal and property.
  • Pledge/Mortgage/Land debt
  • Property Encumbrance (“stvarni teret”)
  • Construction Right – a right to build over somebody else’s property. The constructed building is legally from the land on which it is built. The owner of the building will be the holder of the Construction Right and may not necessarily be the same person as the owner of the land encumbered by the Construction Right.

Property rights have to be registered at the Land Registry in order to come into existence, except when acquisition occurs by virtue of the law. The acquisition of such rights therefore requires a legal basis (a valid and binding agreement concluded in the form of a notary deed) and registration at the Land Registry.

A lease does not create a property interest, but merely a contractual right to use the property. The period for which a lease can be entered into is not limited by law, and depends on the agreement of the parties. Lease agreements can also beregistered at the Land Registry.

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

Typical employment issues which may be relevant to real estate transactions include the transfer of undertaking or business or a part thereof to another employer.

Pursuant to the labour legislation, in the case when an undertaking, business or part thereof is transferred (possibly as the part of the real estate acquisitions) to another employer, but retains its economic integrity, all employment contracts of employees working in such undertaking, business or part thereof, shall be transferred to the new employer as well. For example, this might occur in the sale of a hotel or a shopping centre.

The broad effects of such a transfer are:

  • with effect from completion of the transfer, the purchaser assumes responsibility for employees working in the transferred undertaking, business or part.
  • accrued continuity of employment is preserved (the employees whose employment contracts have been transferred retain all rights arising from the employment acquired before the date of the transfer).
  • both employers are severally liable to the employees for obligations arising before completion of the transfer.
  • collective agreements applied to employees before the transfer continue to be applied until the conclusion of a new collective agreement, but for no longer than one year.
  • if employees elected their representatives prior to the transfer, such persons continue their activities, until the expiry of the term for which they were elected.
  • employees/employees’ elected representatives must be informed/consulted about the transfer.

The above cannot be avoided. The parties to the transfer may contractually agree on different apportionments of liabilities as between them, but this will not affect the employees’ rights.

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

Use of heads of terms (memorandum of understanding/letter of intent) is customary for more complex projects.

The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the agreement will vary depending on whether the property is unbuilt land, under construction or already built, and the extent to which property rights have already been granted to third parties.

The buyer’s lawyers will undertake thorough due diligence of all legal documents relating to the property and will provide their own comments on the draft sale and purchase agreement. If the purchase is made with borrowed finance, the lender may instruct its own lawyers to carry out property due diligence.

If financing is not in place or there are identified issues with the property that the seller has to remedy before the transfer occurs, the parties may first enter into a pre-agreement, undertaking an obligation to enter into a final sale and purchase agreement once the identified issues have been cleared/financing has been approved. In such a case, it is usual for the buyer to provide a 5–10% deposit to the seller as a sign that the buyer is serious about the transaction and as “security” that the buyer will enter into the final sale and purchase agreement.

After all of the sale and purchase terms /conditions have been agreed and there are no further issues between the parties, the execution of the agreement can occur. A sale and purchase agreement with reference to real property has to be executed in writing – usually it is a single document signed by both parties. Additionally, the signature of the seller has to be certified before a Notary Public so that the agreement may be registered at the Land Registry.

Following the execution of the sale and purchase agreement, the buyer’s lawyers are required to register the transfer at the Land Registry. Real estate transfer tax needs to be paid.

The request for registration of title is to be filed immediately after the execution of the underlying sale and purchase agreement. In order to protect the buyer’s interest between the execution of the sale and purchase agreement and the registration of title, it is usual to use the services of an Escrow Agent. Alternatively, the buyer may decide to request first the pre-registration of title (conditional registration of title) – this allows the buyer to “reserve” a priority registration spot in the Land Registry and once the purchase price is paid and the request for registration filed, the registration takes place under the reserved spot.

Title is transferred to the buyer upon its registration in the Land Registry.

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

Provisions of the contract

An agreement for sale and purchase of a property must be in writing and must contain all main terms and conditions as specified by the law. The agreement must be signed by both the seller and the buyer – usually it is a single document. Additionally, the signature of the seller has to be certified before a Notary Public so that the agreement may be registered at the Land Registry (“Clausula intabulandi”)

Apart from the main terms of the sale and purchase agreement – definition of the property and price (including payment conditions), the agreement usually includes information about the following:

  • parties to the agreement (their full details),
  • all rights encumbering the property (mortgages, easements, pre-emptive rights, leases),
  • conditions for payment of the purchase price – possible payments in instalments,
  • the seller’s statement that it agrees with the registration of the buyer at the Land Registry (“clausula intabulandi” or “tabularna izjava”),
  • a date and conditions for the handover/takeover of possession of the property,
  • a provision indicating which of the parties will pay the real estate transfer tax (RETT),
  • additional warranties,
  • the conditions applicable to any termination rights,
  • if the property being sold is under construction or is an already constructed building, the agreement will also regulate the transfer of permits and rights against the design and construction team.

Terms implied by law

Some of the most significant are as follows:

  • The buyer is required to inspect the property and satisfy itself in all respects as to the nature of the property being acquired.
  • The seller is liable for material and legal defects of the property – unless such defects were known or should have been known to the buyer. In case defects are ascertained, the buyer has a statutory right to seek remedy and damages. The right to seek remedy and damages is subject to specific deadlines. However, such liability can be contractually limited, unless the seller was familiar with a certain defect and did not disclose the relevant information to the buyer.
  • The acquisition of title requires registration of title for the benefit of the buyer at the Land Registry. The principle of trust in the Land Registry applies in relation to certain property in BiH. This means that it is deemed that the Land Registry reflects truthfully and completely the factual and legal position of the property, and that any person who in good faith relies on the information in the Land Registry, not knowing that what is entered in the Land Registry is not complete or is different from the situation outside of the Land Registry, enjoys protection regarding such acquisition in accordance with law. This is important in the case of unregistered interests.

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

Pre-exchange of agreements

Buyers should conduct extensive due diligence of the property. Usually the buyer will perform legal and technical due diligence; and if the seller is a legal entity, also full corporate, commercial, tax and financial due diligence. The usual procedure is for the buyer’s lawyers to prepare a list of documents which they would like to review to the seller’s lawyers.

First, the buyer’s lawyers will conduct a thorough investigation of the ownership title of the property held by the seller. This will include an extensive investigation at the Land Registry, as well as, if necessary, historical documents and deeds that will provide more information regarding the property. This documentation will act as a confirmation of the seller’s registered ownership, and provide important information such as whether the property is subject to encumbrances, which can have a significant impact on the buyer’s final decision to purchase the property. This documentation will also reveal whether there are registered lease agreements, limited property rights established in favour of third parties, court rulings and complaints before the court in regard to the ownership.

Pre-emption rights need to be checked. If they exist, the seller has to offer the property to the holder of the pre-emption right prior to concluding a sale and purchase agreement with a third party.

Additionally, the Cadastre Registry records will be reviewed to confirm that there are no discrepancies between the two registries. (With the entry into force of the new legislation in Republika Srpska (“RS”) land registers and cadastre are now together under the jurisdiction of the Republican administration.)

If the property being sold is under construction or already constructed, the buyer’s lawyer will request from the seller relevant permits and planning and construction consents.

Where the seller is a company, the buyer’s lawyers will perform corporate due diligence, including corporate searches of the seller at the Companies Registry (in BiH referred to as Court Registry attached to relevant Courts) to ascertain whether or not the company is duly registered or solvent and therefore able to dispose of its assets freely. The seller will also be asked to disclose information on material agreements and disputes. Full financial and tax due diligence is usual.

Where the information and documentation provided is not complete or is inconclusive, the buyer’s lawyers will usually ask additional specific questions of the seller’s lawyers, including in relation to practical matters, which may affect the property. The seller generally gives replies, which may be actionable if wrong or misleading. Usually the answers, as well as the general information obligation of the seller, are subject to a negotiated liability limit in the sale and purchase agreement.

During the due diligence process the buyer will often arrange technical surveys of the property.

Reporting to the client

Before execution of the sale and purchase agreement, the buyer’s lawyers report their due diligence findings to their client, raising any matter of particular importance or concern. Their findings are often indirectly included in the sale and purchase agreement – either an issue has been identified that the seller has to remedy before payment of the purchase price, or the seller is asked to deal with specific items or accept/retain identified liabilities.

After the execution

The request for registration of title is filed immediately after the execution of the underlying sale and purchase agreement. In order to protect the buyer’s interest between the execution of the sale and purchase agreement and the registration of title, it is usual to use the services of an Escrow Agent. Alternatively, the buyer may request pre-registration of title (conditional registration of title) – this allows the buyer to “reserve” a priority registration spot at the Land Registry and once the purchase price is paid and the request for registration filed, the registration occurs under the reserved spot.

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

All property rights (rights) over real estate (and some obligations, e.g. pre-emption right, lease, concession) are registered at the Land Registry. The registration of property rights (rights ) is material.

The Land Registry is a public registry available for inspection. It includes information about the property, persons having rights over the property and any encumbrances. Maps detailing the location of the property are kept with a separate registry – the so called Cadastre registry. Despite its name, the Land Registry is not a single registry but a common reference to land registry departments of Municipality courts around BiH. The jurisdiction of a department is determined by the location of the real estate.

The registration procedure is initiated by means of a written request for registration. Together with the request, it is necessary to submit to the competent Land Registry the original documentation on the basis of which the request for registration is based (e.g. (i) public deed or (ii) private deed on which the signature of the transferor has been certified before a Notary Public; and under which documents the transferor explicitly consents to the transfer/registration of rights). If the request is complete, the registration occurs on the basis of a decree on registration, which is issued by the competent Land Registry.

Other forms of registration with the Land Registry are pre-registration (in order to have the same effect as registration, pre-registration has to be subsequently justified and remarked).

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

In BiH, the construction of a building requires a location permit, a construction permit and a usage permit.

The location permit is actually a “planning permit confirming what the owner may build on its land. It is issued in accordance with spatial planning documents.

The construction permit is more of a technical permit confirming how the owner may construct the approved object. At the time this permit is issued, the petitioner has to prove its interest in the property (usually by providing a Land Registry excerpt as proof of registered ownership, but it also suffices to prove future acquisition of ownership by providing a binding preliminary agreement (”predugovor”) or agreement under certain condition precedents (“ugovor sklopljen pod “).

The issuing authority is subject to statutory time periods within which a decision must be made. There are various statutory rights in relation to appeals, which can be made if an application is refused or not determined.

Use of the building requires a separate use permit. The permit is issued after a technical inspection of the constructed building has been performed. It is a confirmation that the building has been constructed pursuant to the issued permits and applicable building and other regulations.

Additional consents for operation of the property will be required, depending on the nature of activities and operations to be performed. For example, sale of goods will require an additional consent by the Ministry of Commerce.

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

Before completing the sale of the property, insurance is generally the responsibility of the seller.

Insurance can be acquired for buildings and fixtures and fittings in the event of damage or destruction by any of a comprehensive list of insured risks, which will mostly depend on the requirements of the party seeking insurance and the insurance company.

Once the buyer has acquired the property it can acquire insurance over that property.

Under the terms of the law, risk passes to the buyer of the property. To avoid any issues with reference to this point, it is usual to contractually regulate handover/takeover of possession in detail.

10. Environmental – What are the common environmental issues?

Environmental Law has become very important over the last few years.

Traditionally, the primary environmental consideration has been potential soil and groundwater contamination as a result of current and former uses. In recent years, the consideration has been broadened to include air, nature life and mineral resources research.

There is a statutory obligation to remedy contamination and to undertake measures to prevent harm to occur to people and nature.

In principle, legal responsibility follows the “polluter pays” principle (i.e. the person who spilled, released or discharged the offending substance will normally be liable). In case the owner of a property fails to comply with this statutory obligation, the local or regional authorities may sequestrate the property in order to comply with the respective obligations.

In case the “polluter” is not known, the contamination may be remedied by using funds from the local, regional or state budget. Additionally, under certain conditions, the contamination remedy obligation may pass to the owners and occupiers of the affected property.

Due to the nature of the issue, environmental due diligence is usual. It is important to identify potential problems early on, so that there can be negotiation on terms and/or price and the need for and scope of any remediation.

Additionally, certain construction projects will require the owner and future investor to prepare an environmental impact study before they will be permitted to proceed with the planned development.

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

BiH Law does not determine a fixed method of assessing the real estate price. The valuers use different standards to assess the value of the real estate – market value is the pre-dominant method.

In the market system the factors and their influences on the value of the real estate are assessed on the basis of the real estate market analysis. The subject system is based on three approaches:

  1. cost approach in which the costs of construction of the same (reproduction value) or similar (replacement value) building taking account of physical deterioration, functional and economic superannuation;
  2. income or cash flow approach in which the income and expenses of the operation of the real estate are assessed and the current value of the future cash flow is assessed;
  3. comparative approach in which recent executed transactions are analysed and the results applied to the specific property.

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

In case of sale and purchase of real estate, two taxes can apply: real estate transfer tax (RETT) and value added tax (VAT).

Current situation:

RETT at the rate of 5% is payable on the transfer of the land (including contributions). The taxpayer is the party acquiring the real estate. In case of an exchange of real estate between two parties, each party is considered a taxpayer, and in case of a gift of real estate, tax is paid by the beneficiary. The base position to assess RETT is the property’s market value at the time of execution of the underlying agreement. The tax authority is authorized to assess the market value of the property if the total price is lower than the market price at the time of acquisition/signing of the underlying sale and purchase agreement.

The application for taxation must be submitted to the competent tax authority (the tax authority where the real estate is situated) within 30 days as of execution of the underlying agreement. The payment of RETT is due within 15 days of receipt of the tax decree (assessment). Default in payment triggers statutory penalty interest.

The payment of RETT is independent of registration of title at the Land Registry.

VAT – currently at 17% – is payable on the sale of “new” buildings (“newly constructed buildings).

Due to the prohibition of double taxation when VAT is paid, RETT is not payable.

In addition, in RS an annual property tax is payable at a rate of 0.05% to 0.5% of the estimated value of the property.

VAT is paid by the party acquiring the real estate simultaneously with the purchase price.

Generally each party pays its own expenses and costs. The buyer will usually be responsible for the payment of the Land Registry fees associated with registration of the transfer.