Lending to Romanian Borrowers
Generally, Romanian law does not impose any restrictions on lending by foreign banks without a presence in Romania. The key statute which regulates lending by foreign banks to Romanian borrowers is Banking Law no. 58/1998, as amended. In addition the National Bank of Romania ("Central Bank"), has also issued a number of regulations on the subject.
Foreign banks may lend to Romanian borrowers both in hard currency and in Romanian Lei ("ROL"); the latter is subject to limitations set out in the currency control legislation. Recent changes in the currency control legislation abolished the authorisation procedure in relation to hard currency loans to Romanian borrowers, which means that a Romanian borrower does not need to obtain prior permission from the Central Bank in order to receive a hard currency loan from a foreign lender. There is, however, an obligation on the borrower to notify the loan to the Central Bank for statistical purposes. In order to make a hard currency loan available, a foreign lender does not necessarily need to open a bank account in a Romanian bank; funds denominated in hard currency can be transferred directly from a lender's overseas account.
Lending in ROL by foreign lenders is subject to certain limitations set out in the currency control regulations. These include, in particular;
- the opening and maintaining of a ROL bank account by a foreign lender; and
- the ability to use ROL as a means of payment by foreign entities.
Both limitations are subject to specific regulations of the Central Bank. As a result, few, if any, loans are made by foreign banks in ROL. When a Romanian borrower requires funds in ROL, a multiple currency route will usually be used, whereby certain disbursements may be made to the borrower in ROL, whilst the entire facility is made available in hard currency.
Taking Security
Romanian law does not impose any direct restrictions on the taking of security by foreign lenders, either in terms of securing a borrower's obligation to repay, or in terms of the assets that can be pledged. The usual ways of securing a borrower's obligation that have proved to be reasonably effective in Romania are:
- a pledge; and
- a bank guarantee, where a third party (a bank) guarantees repayment in the event of default.
The Romanian civil and commercial legislation provides for other types of security, such as, for example, surety, which is, however, used more rarely. It is essential to note that the lender's choice of security is not limited to the types set out in the relevant Romanian legislation. Generally, any type of security may be used as long as it is not in violation of the mandatory provisions of the Civil Code and other applicable legislation.
Clearly, in a property finance project, a mortgage on the property undergoing development or construction is going to be the most likely choice of security. Mortgages of immovable property and property under construction are allowed and governed by the provisions of the Civil Code and the legislation on mortgage loans (see the section headed "Property"). The key issues that have to be considered by a lender whose loans proceeds are secured by a mortgage of immovable property are set out below.
Firstly, a due diligence exercise should be carried out on the property or development site that is to be subject to the pledge. Romanian law is not familiar with the concept of representations and warranties, but nevertheless representations and warranties are a common practice, and are requested by foreign lenders in most circumstances. However, due to a lack of relevant court precedents, the enforcement of these contractual provisions is still subject to a degree of doubt.
The main purposes of carrying out such a due diligence are:
- to check whether the ownership rights of the borrower in relation to the property in question are valid;
- to establish the legal status of the land plot where the site is located, whether the rights thereto belong to the borrower and, if so whether such rights can potentially be transferred to a foreign entity; and
- to check whether all the required licenses, permits and consents have been obtained by the borrower and whether all such documents can be transferred to a third party if the security is enforced.
The issue of most concern is the ownership right over the land on which the property/construction site is located. Although the new Law on the Amendment of the Romanian Constitution was enforced, inserting provisions considerably more liberal than their predecessors in respect of acquiring land in Romania by foreigners, these provisions are not yet applicable (see the section headed "Property"). Therefore, it is essential that this issue is addressed at an early stage in order to develop a structure that would be workable if the mortgage ever needed to be enforced.
Once the documents have been drafted and signed, a mortgage on immovable property must be registered with the local Land Registry. Whilst this is not strictly a mandatory requirement, it is in practice essential as a mortgage that has not been registered is unenforceable against third parties (and does not attain any priority ranking) and thus lacks effectiveness.
The enforcement of mortgages is perhaps the most sensitive issue in the whole transaction. Theoretically, a mortgage must be enforced by the Romanian courts. However, practically this is often complicated by factors such as:
- the time consuming and complicated enforcement procedures of the courts in Romania; and
- congestion in the court system.
To a large degree, the successful enforcement of a mortgage may depend on how well the due diligence exercise was carried out and whether all issues of concern were spotted and resolved at that stage. Moreover, it should be noted that on any enforcement, the only remedy available to the mortgagee will be the sale of the property in question, by means of a public auction. Romanian law does not recognize the concept of "step in" rights for secured lenders and on any enforcement the security will be transferred from the asset when it is sold to the proceeds of sale.
Other possible security measures include assignment of lease contracts; assignment of receivables; and pledges of accounts, but each of these has its own specific difficulties.
Contractual Protection
Theoretically, non-Romanian companies enjoy the same level of protection in Romania as those that are either registered or have an establishment in Romania. However, in order to enhance their protection, it is important not to overlook certain issues, which are briefly discussed below.
Choice of Law
Romanian law does not impose any restrictions in relation to the choice of law by the parties to a loan agreement, save for the general restrictions that are imposed by any legal system, such as public policy. However, it should be noted that, with regard to an accessory mortgage agreement, since it concerns immovable property located in Romania, there is a mandatory requirement under Romanian law for such an agreement to be governed by the laws of Romania. Otherwise the choice of foreign law to govern the contract will be recognised and upheld by a Romanian court provided that the choice of law is not contrary to public order and that the foreign law did not become applicable by fraud. Therefore, the largest share of cross-border loan agreements are governed by the laws of other European countries, and in particular, by English law. Although such agreements are enforceable in Romania, the following two points need to be taken into account when choosing a governing law:
- the mandatory provisions of Romanian law, such as the currency control provisions, will still apply regardless of which law has been chosen to govern an agreement;
- although the agreement may be enforceable in general, the enforceability of certain provisions can be an issue due to the difference in legal concepts and remedies offered by different legal systems. The areas of particular concern are the indemnity (or "gross-up") clause and, as mentioned above, the representations and warranties. All these form an essential part of the protections of a lender and must be drafted with reference to the Romanian legal system.
Choice of Forum
Under Romanian law, the parties are free to choose the institution to resolve disputes arising out of a contractual arrangement between them. It is quite natural that foreign lenders favour dispute resolution by way of international arbitration; for example, by the London Court of International Arbitration. Although such a settlement of a dispute is effective, especially when the governing law is a law other than the law of Romania, it should be borne in mind that any decision will need to be recognised and enforced in Romania. This procedure is sometimes time consuming and problematic. In accordance with the provisions of Romanian international private law, Romanian courts will recognise and uphold foreign court/arbitration judgments provided that
- the judgment is final in accordance with the foreign law;
- the judgment has been passed by a competent court in accordance with the foreign law; and
- reciprocity in respect of recognition of judgements exists between the courts of the foreign country and the courts of Romania. Whilst reciprocity exists as a presumption of law, Romanian courts will require proof that the judgment is final and that, amongst other things, the writs and other notices have been served in accordance with the relevant law. Romanian courts may refuse to recognise and enforce a judgment passed by a foreign court, if the judgment
- is contrary to public policy,
- has been passed as a result of a fraud in the foreign proceedings; or
- the exclusive jurisdiction of Romanian courts has been breached.
Security
In the case of a secured loan, it is often advisable (and sometimes mandatory, such as in the case of a mortgage over immovable property located in Romania) that Romanian law is chosen to govern the security documents and that disputes are referred to Romanian courts. Because the pledged assets are, in most cases, located in Romania, this will speed up the enforcement process.
