Real estate finance law in Serbia

Yes. Security over real estate can be granted to a foreign lender.

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

Lenders can take a mortgage over the buildings and the land provided that the land and buildings are privately owned.

Most of the construction land in Serbia is still state-owned and therefore this can not be the subject of a mortgage.

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

Serbian law does not provide for the issuing of mortgage certificates.

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

Serbian law provides for the possibility of establishing multiple mortgages over the same real estate. It also provides for the ranking of such mortgages, whereby a mortgage which is registered first has the priority over any mortgage which is registered later.

The registration procedure requires submission of the mortgage registration request to the Land Registry. The mortgage is perfected upon registration at the Land Registry.

The same registration procedure applies to all mortgages irrespective of their ranking.

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

Yes. Real estate that is subject to a mortgage can be transferred to a third party without the lender’s consent.

Under the Serbian Mortgage Act the mortgage attaches to the property rather than being personal to the owner of the property and specifically provides for the right of the mortgagee to enforce the mortgage irrespective of any subsequent transfer(s) of title to the mortgaged property to a third party.

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

The costs incurred in the sale of the real estate and third party costs (e.g. costs of the official appraiser) will rank before the claims of the other preferred creditors.

2.6 Can “all monies” mortgages be taken?

No. An “all monies mortgage” cannot be taken; mortgage over real estate must secure a specific claim of the lender.

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?

Serbian law allows for the assignment and pledge of the rent in favour of the lender as security under a loan agreement.

In order to assign the rent to the lender, it is necessary that the landlord as the assignor and lender as assignee enter into an assignment agreement.

Also, a landlord may grant a pledge over the rent in favour of the lenders as security under a loan agreement by concluding a pledge agreement. A pledge agreement should be registered with the Serbian Pledge Registry pursuant to the procedure described below.

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?

It is customary for a lender to take a pledge over the borrower’s bank accounts. In order to grant a pledge over the accounts, it is necessary for the lender as pledgee and the borrower as pledgor to enter into an account pledge agreement. In addition, Serbian law allows the borrower to grant a lender authority for account withdrawal which enables the lender to debit the borrower’s accounts in case of non payment or default.

It is possible to contractually restrict the borrower’s rights to withdraw funds in its accounts until the scheduled interest and capital repayments are made. In such case the account bank should be party to an account agreement/escrow agreement which will set out restrictions on the borrower’s withdrawal rights.

3.1 Consequences of failure to register?

Under Serbian law, a mortgage over real estate is created on registration in the respective public registry and the registration has constitutive effect. Proper registration is generally taken as prima facie evidence of a mortgage over the real estate.

A mortgage over real estate does not exist unless it is registered with the Land Registry.

3.2 Formalities for execution of security and costs?

Under Serbian law, a mortgage deed must be notarized by the court.

Notarization charges are up to approx. EUR 300.

The charges for registering the mortgage in the Land Registry are up to EUR 100. Certified translations of underlying agreements are required for the registration of the mortgage in the Land Registry. Translation costs are approx. EUR 10 per page.

Serbian law does not recognised any concept of security agent or security trustee for a mortgage over the real estate.

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

Where a loan is being transferred, the agreement for the transfer of the mortgage to a new lender must be concluded between the existing lender and the new lender. Please refer to points 2.3 and 3.2 for details regarding the registration procedure and formalities for execution of security.

A tenant requires the consent of the landlord/borrower for any transfer of the lease to a new tenant.

If the landlord/borrower consent to the transfer of the lease agreement to a new tenant, the original tenant will no longer be bound by the lease agreement.

Serbian law prescribes the following enforcement procedure in respect of a mortgage over real estate:

(a) upon the mortgagor’s default, the secured lender must notify the mortgagor prior to commencing a forced sale of the mortgaged property;

(b) the borrower is then allowed a further period of 30 days to repay the secured debt;

(c) in the event that the mortgagor fails to repay the secured debt within that 30 day period, the secured lender shall register a note of the forced sale at the Land Registry; and

(d) following a further 30 day period after the registration of the note at the Land Registry the secured lender may then proceed to a forced sale of the mortgaged property (note that the registering of the note may be challenged, but Serbian law sets an aggregate limit of 30 days for filing an appeal and obtaining a second instance decision).

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?

Generally, a dispute may be subject to a foreign jurisdiction if at least one of the parties to the dispute is domiciled outside the Republic of Serbia. If one party to the agreement is domiciled outside the Republic of Serbia, a choice of foreign jurisdiction would be upheld by the Serbian courts.

However, disputes relating to real estate and mortgages are subject to the exclusive jurisdiction of the local Serbian courts.

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

Foreign arbitral award
Enforcement of a foreign arbitration award against a party within the territory of the Republic of Serbia is subject to the recognition procedure carried out before a Serbian court.

Once recognised, a foreign arbitration award will be treated as a Serbian arbitration award and can be enforced.

A foreign arbitration award may not be recognized and enforced in the following circumstances:

(a) where the arbitration clause is invalid;

(b) where the party against whom the arbitration ruled has not been properly informed of the appointment of the arbitrators or commencement of the arbitration proceedings, or was otherwise impeded in the exercise of its procedural rights;

(c) where the arbitration tribunal exceeded the powers granted by the arbitration clause;

(d) where the arbitration award has been awarded in contravention of the arbitration clause or without an arbitration clause;

(e) where the arbitration award has not become binding upon the parties or the competent court has suspended or cancelled the arbitration award;

(f) where the matter in which the judgment has been awarded is not suitable for arbitration; or

(g) where the effects of the arbitration award are in contravention of public order.

Foreign judgment 
Enforcement of a foreign judgment against a party within the territory of the Republic of Serbia is subject to the recognition procedure carried out before a Serbian court.

Once recognised, a foreign court judgment will be treated as a final and un-appealable Serbian court judgment and can be enforced.

A foreign judgment may not be recognised and enforced in the following circumstances:

(a) where the party against whom a recognition is sought has not been properly served with the summons, or was otherwise prevented from exercising its procedural rights;

(b) where the matter in which the judgment has been awarded is within the exclusive jurisdiction of the court of law or other state body of the Republic of Serbia;

(c) where the court of law or other state body of the Republic of Serbia has already awarded or recognised another judgment having the same subject-matter as the judgment for which the recognition/enforcement is sought;

(d) where the judgment is ‘in contravention of public order’ (as defined by the constitution of the Republic of Serbia); or

(e) where there is no reciprocity in recognition/enforcement of judgments with the country in which the judgment has been awarded.

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?

Contrary to the previous legislation, a secured lender does not need to turn to the court to procure a forced sale of the mortgaged property. The mortgagor and the secured lender may enter into an agreement allowing the secured lender to organise a private sale of the mortgaged property (thus avoiding the lengthy procedure of a court-ordered sale).

The secured lender may execute the forced sale of the property by way of either (i) a public auction or (ii) a direct deal.

It is not possible for a secured lender to appoint receivers/liquidators in an enforcement procedure.

In the event of a forced sale of the mortgaged property, Serbian law provides that the mortgagor must be able to off-set at least 75% of the appraised value of the mortgaged property against the total amount of the secured debt (i.e. in the event that the secured lender sells the mortgaged property for less than 75% of the appraised value thereof, it shall be deemed that the mortgaged property has been sold for 75% of the appraised value).

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

The borrower retains the title to the mortgaged asset until the sale.

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 secured lender may enter into an agreement with the mortgagor to take a transfer of the title to the mortgaged property from the mortgagor. However, this agreement may only be entered into upon maturity of the secured debt.

In the event of repossession of the mortgaged property by the secured lender, the secured debt is deemed to have been fully repaid.

In practice, the recognition procedure required for foreign arbitral awards and foreign judgement against Serbian entities tends to be extremely protracted.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Security over shares can be granted to a foreign lender.

Serbian law provides for the possible creation of multiple pledges over the same shares. It also provides for the ranking of such pledges, whereby the pledge which is registered first has the priority over any pledge which is registered later. However, the law does not provide any specific mechanism to enforce the rights of the holder of the first-ranking pledge over those holders of pledges that are subsequently registered. In practice the Central Registry of Securities (CRS), refuses to enforce a second-ranking pledge before the holder of the first-ranking pledge has requested the enforcement of his pledge. The only exceptions to this general practice are the cases in which a second-ranking pledge holder obtains a court decision entitling him to collect his receivable from the sale of the pledged shares before the first-ranking creditor.

A pledge over shares is established by the registration of the pledge with the CRS. The registration of the pledge is carried out by transferring the shares from the share account of the pledgor to the pledge sub-account of the pledgor’s share account.

The procedure for the registration of the pledge should be initiated by the pledgor who gives an instruction to the CRS, through his broker, to transfer the shares from his ownership account to his pledge sub-account. The written instruction should be signed and stamped by the pledgor, and forwarded to the CRS by his broker. Together with the signed instruction, the broker should also submit to the CRS the pledge agreement, or some other document evidencing the legal base for the establishment of the pledge.

3.1 Consequences of failure to register?

According to Serbian law, a pledge over securities is created on registration in the CRS and the registration has constitutive effect.

A pledge over shares does not exist unless it is registered with the CRS.

3.2 Formalities for execution of security and costs?

Serbian law does not prescribe any specific formalities for execution of a share pledge agreement between a pledgor and a pledgee.

The charges for the registration of a pledge over securities are EUR 5 for the registration of the pledge in CRS and brokerage fees. Certified translation of underlying agreements are required for registration of the shares in the CRS. Translation costs are around EUR 10 per page.

The pledge over the shares is created by the transfer of shares from the pledgor’s share account to the pledge sub-account. Therefore, the shares do not need to be transferred into the name of the lender or its nominee.

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?

The secured lender does not need to apply to the court to procure a forced sale of the pledged shares, since Serbian law allows the secured creditor to sell the pledged shares on the Belgrade stock exchange market. 
Serbian law requires the following activities for the enforcement of the pledged shares:

a) upon the pledgor’s default, the secured lender must give the pledgor 8 days prior notice before commencing a forced sale of the pledged shares;

b) the pledgor is allowed the 8 days to repay the secured debt;

c) if the pledgor fails to repay the secured debt within the 8 days, the secured lender, as pledgee shall notify the pledgor of the date and mode of sale of the pledged securities;

d) the secured lender may then proceed to a forced sale of the pledged shares on the Belgrade Stock Exchange market.

The secured lender has to engage a broker or licenced bank to organize the sale of the pledged shares on the Belgrade stock exchange market.

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?

Shareholders’ loans are not subordinated to the senior debt by operation of law.

The Serbian Companies Act is inconsistent in the application of the concept of “equity equivalent shareholder loan/subordinated debt”. It provides that a shareholder loan granted to a company at the time of financial crisis will be treated as “unsecured” instead of “subordinated” to the claims of other company’s creditors. According to the Serbian Companies Act, if a shareholder of a company has granted the company a loan at a time when the company was in a financial crisis, rather than increasing its equity in the company such shareholder shall be treated as an unsecured creditor in the bankruptcy proceedings.

The Serbian Companies Act prescribes an exception from the rules described above for shareholders who (i) do not hold more than 10% of the company’s registered capital and (ii) are not directors in the company.

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

Usually, the subordination of the shareholder loans to the senior debt is achieved by means of a subordination agreement entered into between the creditor, the borrower and its shareholder.

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective

1.1 Typical lease length?

The typical length for business leases is 5 years.

1.2 Maximum/minimum lease length if any?

Serbian law does not impose any maximum/minimum duration of lease. In practice however, leases exceeding 10 years are still rare.

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?

A tenant does not have a statutory right to renew the lease. However, a lease concluded for a definite period of time may automatically continue indefinitely, if the tenant continues to use the premises following the end of the original term, provided the landlord does not object.

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)?

A tenant may invoke some change in circumstances (rebus sic stantibus) as a reason for early termination of a fixed term lease. In the absence of any contractual break right. However a contractual waiver of the right to invoke the change of circumstances provisions may be subject to judicial scrutiny and quashed if found contrary to the principle of good faith. 
A tenant may terminate a fixed term lease if the demised premises have become unfit for purpose or where there is interference by a third party that significantly derogates from the grant of the lease.

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

No.

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

If not determined otherwise, rent is paid bi-annually for leases of a term of one year or longer, or at the expiration of the lease period if the lease period is less than a year. In practice, however, it is common to provide for monthly advance payments.

2.2 Periodicity of reviews?

Serbian law does not provide for any automatic rent review provisions – in practice rent is adjusted in accordance with the contractual terms.

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

Serbian law does not provide for any rent review provisions and rent is adjusted in accordance with contractual terms.

In practice it is common to determine the rent in EUR and provide for indexation with reference to HICP (Harmonized Index of Consumer Prices) or other official EU standard.

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

No.

3.1 Internal maintenance, decoration and repair?

The tenant must hand over the leased premises in the condition in which the tenant took the premises, allowing for usual wear and tear. Unless otherwise specified in the lease agreement, the tenant is responsible for minor repairs and maintenance work required for the day-to-day use of the premises.

3.2 External maintenance, decoration and repair?

The responsibility for external maintenance would depend on the extent of the demised premises. These would normally fall to the tenant unless they were of a structural nature and not excluded by the lease.

3.3 Structural repairs?

Unless agreed otherwise in the lease agreement, the landlord is responsible for carrying out all the necessary repairs in order to keep the premises fit for purpose and he must ensure the maintenance of the building and of all essential equipment.

3.4 Insurance?

The landlord is responsible for insurance of the premises, unless agreed otherwise in the lease agreement.

3.5 VAT?

The landlord is responsible for payment of VAT on rent receipts.

3.6 Rates?

These are not applicable.

3.7 Other typical outgoings?

The landlord is responsible for other typical outgoings, unless agreed otherwise in the lease agreement.

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

There are no legal provisions that prohibit the charging of other costs to the tenant. However some costs can not be recharged in excess of the amount actually paid to the service provider.

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

Lease contracts are regulated under the Law on Contracts and Torts (1978) and regularly enforced before the Serbian courts.

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?

In order to the recognised in the court, the appraisal has to be prepared by the court appointed sworn court expert. All sworn court experts are locally qualified and listed in the Register of Sworn Court Experts held with the Ministry of Justice.

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

It is possible to obtain an environmental report from a local government agency or qualified environmental professional and such reports would be commonly obtained when the subject matter of a lease would involve industry specific objects (such as factories or infrastructural objects) or property in the vicinity of some environmental resorts or protected cultural monuments. Such reports are not usually obtained for ordinary business leases.

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?

It is not possible for environmental liability in respect of past or present breaches of environmental laws to attach to a lender by virtue of it holding a mortgage over real estate.

In the case of foreclosure the liability for breaches of environmental laws would attach to the person buying the property on sale. They would be held jointly and severally liable with the mortgagor. In this limited exception the lender will incur the liability as consequence of its foreclosure. It is otherwise not possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it enforcing a mortgage.