Real estate finance law in Croatia

Yes.

Yes.

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

Generally, none.

However, if a building is built on the basis of a permission granted by the landowner (pravo građenja), it is possible to register that building as a legally separate real estate with its own topographical lot number. It is possible to take a mortgage over that building only, the land only, or both the building and the land.

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, the ranking of a mortgage is determined in order of the date of its submission for registration at the relevant Land Registry.

The ranking of mortgages can be altered by a Croatian deed of priority (ustup prvenstvenog reda hipoteka) which needs to be registered at the relevant Land Registry in order to be binding.

2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?

Yes.

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

Yes, the following are deducted from the real estate gross sale proceeds before the lender (as mortgagor) is paid:

• court enforcement fees
• notary public enforcement fees
• mortgagor’s unpaid property-related taxes accrued in the year prior to enforcement.

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?

Yes, a landlord’s right to receive rent can be assigned (ustup ili prijenos radi osiguranja) or pledged (založno pravo) to a lender. Such assignment or pledge agreement is generally executed as a notarial deed and registered with the Financial Agency (FINA) Registry. Notices of assignment or pledge are customarily also sent to the tenants.

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?

Yes, it is possible for lender to take a security over bank accounts by way of a pledge (založno pravo) or debenture (zadužnica).

Land plots and all rights in rem over land need to be registered with the relevant Land Registry. The same applies for the security, i.e. a mortgage over land needs to be registered with the relevant Land Registry.

3.1 Consequence of failure to register?

If the mortgage has not been registered with the respective Land Registry, then it has not been validly created and cannot be enforced.

3.2 Formalities for execution of security and costs?

A mortgage agreement may be executed with a signature notarisation (ovjera potpisa), but it is more commonly executed in the form of an enforceable notarial deed (ovršna javnobilježnička isprava) to achieve direct enforceability (i.e. enforcement without having to litigate beforehand). After the agreement is executed, it must be registered with the respective Land Registry for a mortgage to be validly constituted.

Costs

4. Can the lender use a Security Trustee to hold security on trust for Creditors?

The concept of a security trustee/agent is not a recognised legal concept under Croatian law, thus, concepts such as parallel debt and/or joint and several creditorship are typically used to mitigate such limitations. There is no published court practice testing and/or confirming this structure.

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

The default position is that all ancillary rights (e.g. interest, mortgage and other security) follow the secured claim being transferred to another lender. It is common to have the respective assignment/transfer agreement between the existing and the new lender registered with the Land Registry. Existing security documents generally need not be amended.

Generally, a tenant cannot transfer (prijenos ugovora) the lease without the consent of the landlord. The landlord may grant a consent in advance or following the request of the tenant.

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?

Parties to an agreement may, in accordance with Regulation (EU) No 1215/2012 (“Brussels I recast”), freely choose jurisdiction of a foreign court or foreign tribunal for settling any disputes on a contract if:

• there is a foreign element
• the subject matter of the contract does not fall within the exclusive jurisdiction of the Croatian courts or another Member State court.

The Croatian courts have exclusive jurisdiction in proceedings which have, as their object, rights in rem in immovable property located in Croatia.

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

Foreign arbitral award

Recognition and enforcement by the Croatian courts of an award of an arbitral tribunal seated outside the Republic of Croatia is subject to the recognition and enforcement procedure in line with the Croatian Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958.

Foreign judgement

EU Member State court judgements will be recognised and enforced by the courts of Croatia without review of merit in accordance with Brussels I recast, whereas third-country court judgements will be recognised and enforced in line with the Hague Convention on Choice of Courts Agreements dated 30 June 2005 and the Croatian International Private Act.

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?

A mortgage is enforced by court enforcement involving public auction arranged by the financial agency or private bargain (neposredna pogodba), provided that the parties to the proceeding, pledgees and holders of personal easement (osobna služnost) and rentcharge rights (stvarni teret), whose rights are to be extinguished by sale, have given their consent before the first public auction.

A reserve price will be set for the first auction (4/5 of an expert-determined market value). If the real estate is not sold, a second auction will take place with a reserve price of 3/5 of the expert-determined market value. If that reserve price is not reached the enforcement process stops and the real estate is not sold.

A security holder cannot appoint a receiver/liquidator. A bankruptcy receiver can only be appointed by the Croatian courts as a result of insolvency proceedings being raised by any creditor or the company itself. A bankruptcy receiver takes control over the management of the company and all its assets (whether unencumbered or encumbered by security).

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

No.

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?

No.

No.

Yes.

With limited liability companies (društvo s ograničenom odgovornošću), taking a second ranking security is possible; it is registered in a same way as a first ranking security, by registration with the FINA Registry and the company’s book of shares. It is not possible to take second ranking security over shares in joint-stock companies (dioničko društvo).

3.1 Consequences of failure to register?

If a pledge over shares in a joint-stock company or limited liability company (LLC) is not registered with the relevant registry, it has not been validly created.

3.2 Formalities for execution of security and costs?

Limited liability company

To pledge shares in an LLC, a pledge agreement in the form of an enforceable notarial deed should be executed and registered with the FINA Registry, and such pledge should be evidenced in the company’s book of shares and list of shareholders to be filed with the court registry.

Joint-stock company

To pledge shares in a joint-stock company, a pledge agreement may be executed with signature notarisation, but it is more commonly executed in the form of an enforceable notarial deed. After the agreement is executed, it must be registered with the Central Depository and Clearing company.

Costs

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?

Yes, the shares can be sold to a third party. The pledgee cannot appoint receivers/liquidators as explained above. The pledge over shares may be enforced by way of court enforcement by means of public auction or direct settlement, or by way of out-of-court settlement by private sale or as otherwise set out in the pledge agreement, but the shares cannot be automatically appropriated.

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 granted to a company in crisis are automatically subordinated in insolvency proceedings. Other loans from the shareholders or any third parties are not automatically subordinated but can be contractually subordinated with or without effect (as elected) in insolvency proceedings.

Shareholders can agree that repayment of their loans are waived/written off should default occur at the lender’s discretion, but even though it is becoming more common, this is not yet standard in the Republic of Croatia.

1.1 Typical lease length?

The length of the lease is determined by the parties in accordance with their economic needs.

For shopping centres, lease agreements with anchor tenants are usually concluded for the term of 10-15 years, and with other tenants for the term of up to 5 years.

In our experience, typical lease lengths for other commercial leases generally range between 3-10 years, with longer leases for anchor tenants and special-purpose premises.

1.2 Maximum/minimum lease length if any?

None. It is also possible to have a lease for an indefinite period of time. However, a lease agreement for a business premises concluded for an “indefinite” term cannot be terminated within the first year of the lease, unless expressly agreed between the landlord and the tenant in the lease agreement.

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?

There are no statutory controls as leases are governed by the terms of the lease agreement, meaning that renewals are agreed within such lease agreement. However, if a fixed term lease expires, the tenant continues to use the property and the landlord does not object to that, the lease is automatically converted into an indefinite term lease.

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)?

No, if there are no tenant break options, no destruction/disrepair of the premises (where the premises are unfit for the purpose let) and the landlord complies with its other obligations under the lease and statute, the tenant does not have the ability to terminate early (unless the landlord agrees).

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

If the property is not in the state agreed in the lease when the tenant takes entry (and the landlord was informed of the defects and failed to rectify them), the tenant may:

• terminate the agreement
• request proportional reduction of the rent, or
• take necessary actions for the property to be in the agreed state (at the landlord’s cost).

No rent is payable while the property is unavailable for use due to maintenance.

Additionally, the tenant shall be entitled to seek reduction of the rent via the Croatian courts if the property has certain legal/material defects.

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

The parties may freely agree on terms of rent payment, but generally it is agreed that rent is paid monthly or quarterly in advance. If not otherwise agreed or customary at the place of delivery of the property to the tenant, the rent is paid semi-annually when the property is leased for 1 or more years; and if leased for a shorter period, then after the expiration of that time. For business premises where the landlord is the Republic of Croatia or its local authorities, the tenant is obliged to pay the rent monthly in advance, by the tenth day of the month at the latest.

2.2 Periodicity of reviews?

Rent reviews are dependent on the agreement between the parties but are generally conducted annually.

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

Rent is usually adjusted in line with the Harmonised Index of Consumer Prices (“HICP”) published by Eurostat. In addition, the Annual Consumer Price Index (“CPI”) or HICP published by the Croatian National Bureau of Statistics is often used. Market rent is not generally used as a basis of review. Upwards-only indexation is usually a non-negotiable point for corporate landlords.

Retail tenants in shopping centres tend to have a fixed rent plus an additional variable rent (calculated according to a formula relating to turnover).

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

No, charging lower-than-market rent could have tax implications.

3.1 Internal maintenance, decoration and repair?

Generally, the landlord. Unless otherwise agreed, the costs of minor repairs caused by regular use of the property, as well as the costs of use itself, are borne by the tenant.

3.2 External maintenance, decoration and repair?

Generally, the landlord. The tenant is not entitled to make any structural changes or to change the exterior design without the landlord’s prior approval.

3.3 Structural repairs?

Generally, the landlord.

3.4 Insurance?

Insurance cover is not a legal requirement. Generally, tenants are required by the terms of their lease to insure the leased property and all their own assets on the property against all normal commercial risks.

3.5 VAT?

25% VAT is payable on rent and service charge.

3.6 Rates?

None.

3.7 Other typical outgoings?

Utility charges are generally paid by the tenant.

The tenant bears the whole (or its agreed proportion) of the costs of usual wear and tear of the property (tekuće održavanje), unless otherwise agreed.

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

Generally, yes.

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

Leases are recognised by the Croatian courts (unless such terms are contrary to Croatian mandatory rules). Case law in Croatia may be used as a guide but is not binding.

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?

The Croatian courts would appoint a surveyor/valuer from the court’s own list of local expert witnesses to act as an expert witness in relation to appraisal of Croatian real estate.

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

Environmental reports can be issued by government-authorised persons/entities. Before engaging a professional to provide such a report, their authorised status should be checked with the relevant government authority.

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.