Real estate finance law in Bulgaria

Yes.

Yes. Mortgages can also be taken over the right to build a building on land (but not over the land itself). The owner of the land grants the right to a developer. This right converts by operation of law to a full ownership right in the building at the end of construction. In some circumstances, a fresh mortgage is not required over of the building (once the building is constructed) but advice should be sought.

2.1 The distinction between mortgages on land and buildings on the land?

A building can be owned by someone who does not own the land upon which the building is built.

A mortgage can be granted over a building only, land only or the building and land. Also, premises within the building (e.g. an apartment) can be mortgaged where those premises form a separate real estate. Registration and enforcement procedures for all these mortgages are the same.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

No.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Yes. Priority is established by the date (and, if on the same date, the time) of registration and priorities cannot be varied by entering into a priority deed.

Yes. Registered security will be enforceable against new owners of real estate.

2.5 Are there any preferred creditors (other than prior ranking mortgage holders)?

Yes. The following items are deducted from the real estate gross sale proceeds before the lender (as mortgagor) is paid: (i) enforcement costs (ii) costs incurred by creditors obtaining a court order to stop the sale / disposal of the real estate (injuction); and (iii) unpaid real estate taxes.

In bankruptcy proceedings, the first ranking mortgagee has priority over all other creditors.

2.6 Can “all monies” mortgages be taken?

No.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

The right of the landlord to receive rent can be pledged under a receivables special pledge agreement.

The pledge agreement is signed, registered with the Central Pledges Registry and the tenant(s) is / are notified of the pledge by the lender or the landlord.

2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Security over bank accounts can be taken by a pledge over receivables (see A2.7 for mechanics). Collateral over bank accounts can be also taken under the Financial Collateral Arrangement Act.

It is possible and usual for lenders to contractually restrict the right of the pledgor to dispose of the funds in accounts (without lender consent) until the scheduled interest and capital repayments are made.

There are two kinds of mortgages: a contractual mortgage and a statutory mortgage.

Contractual mortgage 
A contractual mortgage is created by (i) execution of a mortgage agreement as a notary deed followed by (ii) its registration with the Real Estate Registry.

Statutory mortgage 
A statutory mortgage is registered at the request of an entitled creditor (by application to the Real Estate Registry). It can only be registered in favour of (i) a seller of real estate (for the consideration payable for the real estate) (ii) by a joint owner of the real estate (iii) banks (securing real estate / property rights acquired entirely or partially with the proceeds of a loan)

A statutory mortgage is usually taken by lenders as (i) the borrower does not need to be a party / agree and (ii) registration fees are lower.

3.1 Consequences of failure to register?

If the mortgage has not been registered with the Real Estate Registry then it has not been validly created and cannot be enforced.

The registration is valid for 10 years. It can be extended before or after the expiry of the previous registration term for a period of 10 years. It is recommended that the registration is renewed before expiry to preserve the security and its ranking position. If renewed after expiry the mortgage will rank as of the date of the renewed registration. If other mortgages / rights are registered against the same real estate before that date those other mortgages / rights would have a prior ranking position.

3.2 Formalities for execution of security and costs?

A proper description of the secured obligations in the mortgage is important. Their amount, maturity and interest rate is included in the mortgage and registered with the Real Estate Registry.

It is important that legal advice is taken before making any amendment, increase, transfer, novation, substitution or other change to the secured obligation. Most changes need to be made in writing with notary certification of the signatures so the obligations (as varied) remain secured. In certain situations a new mortgage might need to be taken (e.g. if the loan itself is increased). Variations and new mortgages need to be registered with the Real Estate Registry.

Notary Fee 
Calculated on the amount of the secured obligations with a current maximum of BGN 6,000.

Registration Fee 
0.1% of the secured obligations (all mortgages).

Please note that additional likely costs include translation costs and costs of certification of documents such as powers of attorney.

All security constituted by attending a Notary requires the lender to be represented. Usually the lender grants local Bulgarian lawyers a power of attorney (limited in scope and duly legalised in the lender’s own jurisdiction) to enable the lender to be represented before the Notary. It is recommended the power of attorney is put in place ahead of completion.

Generally, no. Where a syndicate is lending the security is granted in favour of the lenders (not in favour of any agent) so each lender can exercise its own security / enforcement rights. For administrative convenience one of the syndicate banks or other person can be authorised to act / sign / enforce on behalf of the syndicate lenders, although such authorisation can be revoked at any time by the grantor (as a matter of law).

Security agent arrangements are recognised for bondholders and holders of other debt securities under financial collateral arrangements.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

Transfers (assignments) need to be registered at the relevant security registry, but there is no need to take fresh security. Novations need the consent of the borrower / guarantor / mortgagor / pledgor and (in a syndicate) all lenders.

The tenant may sub-let the premises to a third party, unless it is expressly forbidden in the lease.

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

If the dispute is not within the exclusive jurisdiction of Bulgarian courts and the dispute is with regard to Bulgarian property rights, any such dispute may be submitted to a foreign court by an agreement in writing between the parties.

Bulgarian property rights stem from assets located in Bulgaria, rights governed by the laws of Bulgaria and assets whose creation or security enforcement is governed by the laws of Bulgaria.

The parties to a dispute over Bulgarian property rights may also agree that the dispute should be settled by an arbitration tribunal, unless the dispute is with regard to real estate rights or employment rights.

Bulgarian courts have exclusive jurisdiction to resolve, among others, claims regarding real estate rights in property situated in Bulgaria, and disputes related to mortgages must be submitted to a Bulgarian court.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Bulgaria is subject to the Brussels Regulation (EC44 / 2001) on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters so qualifying judgments will be recognised and enforced by the Bulgarian courts assuming the limited grounds for refusal do not apply. For recognition and enforcement the lender would need to initiate proceedings in the Bulgarian courts.

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

Mortgage

(a) A writ of execution is needed (allowing the mortgagor to enforce the mortgage). This writ is issued by the court.

(b) The mortgagee engages a court officer (called an “execution officer”) to sell the mortgaged real estate by silent public auction (for a period of 1 month) to the highest bidder. Other mortgagees / creditors can join in this process.

(c) The court officer gives the borrower 2 weeks written notice to pay the amounts owed to the mortgagee and at the same time he applies to the Registration Agency for an “injunction” over the mortgaged real estate (which prevents the borrower / mortgagor disposing of the real estate from that date).

(d) When the highest bid is announced all other bidders are entitled to make higher bids and the highest bidder is declared as owner of the mortgaged assets. Payment in cash is due within one week. If the mortgagee is the highest bidder it need only pay sale price less the amount of the secured obligations.

(e) The court officer makes the distribution in accordance with the priority rules.

There are detailed rules on subsequent auctions if the first auction is not successful.

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

No. If the debtor fails to manage the real estate properly / obstructs its inspection, the court officer may arrange for an agent to manage the property.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

The mortgagor and the mortgagee cannot agree, before an event of default has been declared, that the mortgagee can take title to the real estate in a default situation. However, the mortgagee can buy the real estate at public auction (see A6.3 for mechanics) and, after default, a voluntary agreement to sell is possible.

If enforcement action for public liabilities starts and / or injunctions are put in place for them before bankruptcy proceedings start, their enforcement / effect is not stayed by the bankruptcy proceedings. Public liabilities are claims by the Bulgarian revenue authorities and, in case of injunction, have equal ranking to secured claims. After satisfaction of such claims and secured obligations (on a rateable basis) any remaining net proceeds are transferred to the bankruptcy estate.

The Bulgarian court sets the date when a debtor was insolvent and this date could be months or even years in the past. Insolvency claw-backs (un-doing transactions at undervalue and transactions preferring one or more creditors over the general body of creditor) apply in some cases. In marginal cases, obtaining evidence of solvency when taking security would be recommended.

The general prohibition on Bulgarian joint stock companies giving financial assistance (including security) for their own shares should be considered when structuring a transaction requiring acquisition finance. Bulgarian limited liability companies are not subject to the prohibition.

Yes.

Yes.

Pledges on one asset rank the order in which the pledges were created (or registered, where registration is required).

3.1 Consequences of failure to register?

If a pledge is not registered in the appropriate register (and registration is required) valid security has been created but third parties could acquire a prior ranking security over the shares by registering their security first.

3.2 Formalities for execution of security and costs?

(a) Possessory pledge (bearer certificated shares) – delivery to the pledgee.

(b) Possessory pledge (registered certificated shares) – certificates are endorsed indicating they are pledged, are delivered to the pledgee and the pledge is noted in the company’s shareholders’ book.

(c) Pledge of de-materalised shares – registration with the Bulgarian Central Depository and the pledge is registered in the company’s book of “book-entry” shares.

(d) Pledge of quota (equity participation in a limited liability company) – a written pledge with notarial certification of signatures is registered with the Commercial Register with the Bulgarian Registry Agency. Highly illiquid.

(e) Pledge of dividends – receivables pledge registered in the Central Pledges Register and notified to the company in which shares / quota are pledged.

(f) Floating charge (“pledge of going concern”) – a written pledge with notarial certification of signatures is registered with the Commercial Register. To create effective security against third parties the pledge also needs to be registered against assets which are registered with a specialist registry (e.g. Central Depository for de-materialised shares, Real Estate Registry for real estate etc).

No.

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

(a) Possessory pledge of shares (commercial transaction) – if certain conditions are met, out-of-court sale by private bargain at market value / stock exchange value is permitted. If not a court enforcement procedure is available and a professional or state enforcement agent is required to carry out a public auction of the shares. These shares can also be sold via the mechanism in B 5.1. 

(b) Registered pledges – a simplified out-of-court procedure by filing a notice with the Central Pledges Register and notifying the pledgor. The pledgee can sell two weeks after the filing. The sale proceeds are distributed by an accountant (appointed by the pledgee) according to priority rules. Complications can arise if procedure is challenged. Method depends on the nature of the pledged asset:

Shares – the pledgee can transfer the pledged shares in the appropriate manner (e.g. by endorsing them). Stock exchange shares are sold at the previous day announced value.

Quotas – the pledgee cannot freely sell the quotas. The pledgee can request payment from the company of the net assets value of the quotas in the most recent balance sheet which is not usually realistic and the final resort is to apply to the court to either put the company into liquidation or for removal of the quota-holder as a member. Voluntary sale to existing quota-holders on terms to be agreed between the parties is likely to be the only commercially realistic means of promptly realising sale proceeds.

“Floating charge” – the pledgee may sell some or all the assets. There is an onus on the pledgee to sell the assets least core to the pledgor’s business first. If all assets are to be sold the pledgor appoints a manager who controls the management of the company pending sale.

Dividends – the pledgee can sell the right to receive or can collect the cash.

The pledgee is not entitled to have the ownership of shares / quotas transferred directly to him.

Enforcement sales are not exempt from merger control.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur?

Shareholder loans can be subordinated on a contractual basis between creditors (it is not binding on the company or insolvency officers).

In insolvency proceedings, shareholder loans are generally paid only after the full satisfaction of the other creditors. However shareholder loans are paid prior to (i) transactions without consideration and (ii) creditor expenses incurred in those insolvency proceedings.

Is it not customary for shareholder loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur, but it is possible.

1.1 Typical lease length?

The parties to a lease can agree the term of the lease subject to C1.2 below. Generally, commercial leases are for a fixed term. Typical lease lengths for normal commercial leases we see generally range between 3 to 10 years, with longer leases for anchor tenants and special-purpose premises.

1.2 Maximum / minimum lease length if any?

Commercial leases can have a term over 10 years. Otherwise, the term cannot be longer than 10 years.

1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

The parties to the lease agree termination / renewal terms, failing which:

(a) Fixed term – if after expiry of the term, the tenant continues to occupy the premises with the knowledge and without the objection of the landlord, the agreement shall be deemed extended for an undefined term but capable of being terminated by either party by giving 1 month’s prior written notice.

(b) Undefined term – each party can terminate the agreement by giving 1 month’s prior written notice. If the rent is payable daily only 1 day’s prior written notice is needed.

1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)?

The tenant can unilaterally terminate the lease upon (i) non-performance of the landlord, (ii) destruction of the property or (iii) the landlord’s right to use the property being terminated.

The parties to the lease can agree to terminate the lease before its expiry.

1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

If the leased premises are not fit for purpose, the tenant is entitled a rent reduction or to terminate the agreement.

2.1 Rental income receivable quarterly / monthly in-advance / in-arrears?

Generally, paid monthly in advance on the 5th to 10th day of the month. However any other arrangements are possible.

2.2 Periodicity of reviews?

There are no statutory provisions for rent reviews. It is common practice to agree an annual rent indexation.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

The indexation is usually in accordance with the Harmonized Index of Consumer Prices of EUROSTAT or of the Bulgarian National Statistical Institute. Review on a market rent basis is not customary.

2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

Unfair lease terms may become invalid under consumer protection law if the tenant is a natural person acting in a non-business capacity.

3.1 Internal maintenance, decoration and repair?

For negotiation. If no agreement is recorded, non-material internal and external repairs due to normal wear and tear are a tenant expense. All other repairs (if they are not the tenant’s fault) are a landlord expense.

Common area maintenance costs, in a shared building, (e.g. the costs for electricity, cleaning, elevator, etc.) are usually paid by the tenant.

3.2 External maintenance, decoration and repair?

See C3.1.

3.3 Structural repairs?

Landlord.

3.4 Insurance?

Insurance cover is not required by law. Parties can agree who is responsible for insuring the premises. If the landlord insures the premises, the landlord will generally aim to pass that cost on to the tenant under the lease terms.

3.5 VAT?

Residential lease (to natural persons) are generally VAT exempt. Accommodation provided by a hotelier – 9% VAT. All other leases, 20% VAT.

3.6 Rates?

Usually the landlord is responsible for the payment of the state fees or taxes. The landlord will generally aim to pass those costs onto the tenant under the lease terms.

3.7 Other typical outgoings?

Fixed-term leases typically provide that where the tenant terminates the lease before its expiry the tenant is liable to pay (under an indemnity provision) the total amount which would have been payable under the lease for the duration of the term.

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

Normally, the tenant pays all service charges (water, heat, power etc). The parties generally agree that management costs shall be paid by the tenant.

4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction?

The terms of the leases are recognised and supported by court practice in the jurisdiction. However, if a specific clause is deemed invalid this does not render the lease agreement invalid itself.

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction?

No. However, whenever an expert appraisal is required by the court, such expert is chosen from the list of appointed qualified experts, which every regional or district court maintains.

5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

Only the Ministry of Environment and Water and the Regional Inspectorate of Environment and Water is authorised to make environmental impact assessments.

5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

No.