The property regime in Romania

The Romanian Constitution which was introduced in 1991, provides that private ownership of land is guaranteed and protected.

However, since 1989, mainly due to international influences, the complexity of real estate transactions in Romania has grown considerably. These have led to a considerable number of changes to the law to meet the needs of investors, developers and financiers of real estate projects as well the need to harmonise Romanian real estate legislation with EU legislation.

A list of the key legislation regulating the property and construction market in Romania is set out at the end of this section.

Rights to Land and Buildings

Under Romanian law there are three basic rights to land and buildings:

• the right of ownership (freehold);
• various usage rights (lease, usufruct, superficies);
• rights under a concession

The acquisition of goods under Romanian legislation is generally based on the principle of contractual liberty. However, in the field of real estate such rule is only applicable to the acquisition of buildings. For the acquisition of land Romanian law provides for a number of exceptions to this principle.

Rights of Ownership

Land

The Constitution and the Land Circulation Law (Law no. 54/1998) contain a number of special rules covering transfers of ownership of plots of land. These stipulate that foreign legal entities (companies which are registered outside Romania) and foreign natural persons cannot acquire land in Romania (save for the situations expressly provided by the revised Constitution). However, foreign legal entities and natural persons can acquire land through a Romanian company provided that the objects of activity of the Romanian company include real estate transactions.

For a transfer of ownership of land to be valid, the transfer agreement must be authenticated by a public notary. If it is not, the agreement will be declared as null and void by the Court at the request of any of the parties or of any interested third party. If a building and its related land are sold through an unauthenticated agreement, the buyer will not acquire ownership of the land underneath the building, but only a "superficies" right over it – that is a right of usage over the land for the entire duration of the life of the building erected on the land. In such circumstances, the ownership of the building will be transferred to the buyer, as Romanian law does not require the same authentication for the transfer of ownership of buildings.

The Land Circulation Law also stipulates that co-owners, neighbours and tenants of agricultural plots of land located outside city borders have a pre-emption right over the plot. If this legal requirement is not observed, a holder of a pre-emption right can lodge a court action for the annulment of the sale and purchase agreement.

Another restriction on transfer introduced by the Land Circulation Law is that it is forbidden to transfer ownership of a plot of land when there is litigation pending in respect of the ownership of the plot. Any interested third party is entitled to file a court action requesting the court to declare the transfer agreement as null and void.

Also, there is a restriction on the amount of agricultural land that may be held. If a transfer agreement is executed, a buyer who is a natural person may not own, as a result of the agreement, more than 200 hectares of agricultural land per family.

Buildings

No special rules are provided in Romanian legislation in respect of the conveyancing of buildings and Romanian legislation allows foreign legal entities to acquire ownership of buildings.

Although an agreement transferring ownership of a building does not have to be authenticated, generally parties notarise these agreements as evidence of execution.

Various usage rights

Lease of Immovable Goods

The principle of freedom of contract also applies to the lease of immovable goods (ie. property) and Romanian law does not impose any restrictions over such leases. However, if the duration of the lease is more than three years, in order to be binding on third parties, the lease agreement must be registered with a special registry of the court. Lease agreements and other contracts for the transfer of usage rights over real estate properties concluded for less than 3 years will be binding on subsequent owners if they are authenticated or have a "certified date" (e.g. the date of registration in a public register or the date of legalisation).

There is no maximum term for a lease, although no lease can exist in perpetuity. However, it has been decided by doctrine and jurisprudence that a lease concluded for 99 years should be regarded as being one in perpetuity.

If the parties do not establish the duration of a lease it may be terminated at any time by any of the parties with prior notice. If the parties have provided a fixed term for the lease but at the expiry of this term the lessee continues to occupy the premises without being hindered by the lessor, the lease may be considered as tacitly renewed for an indefinite term.

Lease rights may be sub-let, assigned or contributed to the share capital of a company unless it is provided otherwise in the lease agreement.

Romanian legislation allows foreign legal entities to take a lease over land located in Romania or to obtain a usage right over land (either a concession right granted by the state or by a public authority, a superficies right or a usufruct right over the land). There are no specific requirements under Romanian law as to the form of a lease agreement or of an agreement for the transfer of a usage right over land, save for the registration requirements mentioned above.

According to the Law on Public Property, the lease of goods belonging to the state or any of its administrative-territorial units has to be approved by a decision or resolution of the Government or County or Local Council as appropriate. A lease of such public land can only be made following a public tender.

Special provisions on residential property

The Law on Dwellings regulates the legal framework for constructing, exploiting and administering residential properties. The law also provides for certain minimum clauses to be inserted in a lease agreement, such as:

• the delineation of exclusively and commonly used surfaces;
• the monthly rent and indexation thereof;
• advance payments;
• conditions of hand-over;
• obligations regarding the usage and maintenance of the leased premises;
• inventory;
• date of entry into force and term of the lease;
• conditions regarding the exclusive and common use of commonly owned areas;
• other occupiers (than the lessee) of the leased premises.

It also specifies clauses that cannot be inserted into a lease and which will be void if they are (such as the contractual exoneration of the landlord from any of its legal obligations). The principle of tacit renewal of lease agreements does not apply to residential properties.

The Law on residential properties also provides for the situations in which a lease can be terminated. These are at the lessee's request on 60 days' prior notice, at the landlord's request if the rent has not been paid for three consecutive months or damage has been caused to the premises and at the Landlord's Association's request if the lessee has not paid its common expenses for a period longer than 3 months. The sub-lease or improvement of the premises is allowed only with the prior written approval of the landlord.

Both the lease agreement and the sub-lease have to be registered with the relevant fiscal authorities.

Concessions

Under the Concessions Law, a concession agreement is an agreement by which the State or one of its administrative – territorial units (as grantor) grants a concession transferring to another person (concessionaire), for a certain period of time, but not more than 49 years, the right and obligation to operate an object, an activity or a public service, in return for a fee. The concessionaire may be a Romanian or a foreign legal or natural person.

The concession agreement must be approved, in accordance with the technical conditions imposed on the concessionaire by the relevant Government Decision or Resolution of the County/Local Council. A concession can only be granted following a public tender process.

On the expiry of the concession agreement, the concessionaire must return the object including any improvements made during the concession period, free of any encumbrances, to the grantor. Concessions of land must be registered with the Land Registry.

Restitution

Restitution of Land under the Land Law

Before 1990, most land in Romania was owned by the state, either as state property or as the property of state owned entities. Since the passing of the Land Law in 1991, ownership rights to land belonging to the former state owned farmers' associations have been transferred to individuals, state-owned companies (which are now being privatised) and farmers (although resale rights for agricultural land are restricted).

In addition there are special regulations governing the restitution of agricultural and forestry land (Law 1/2000). Pursuant to Law 1/2000, the amount of land that can be returned to individuals pursuant to the restitution process has been increased. Also, people who had receivables payable by the former state agricultural enterprises were granted the right to receive farmland. The same regulation allows the restitution of forested land up to a maximum limit of 10 ha/owner. This limit only applies to restitution, and does not prevent the acquisition of forested land larger than that.

Following the introduction of the restitution laws, around 90% of the agricultural land in Romania is currently privately owned. According to some sources, the percentage is even higher for land located inside city limits.

Restitution of property under the General Restitution Law-Law 10/2001

Under relatively new legislation, former owners of land unfairly appropriated by the State during the former regime were given a 6 month period during which they had the right to claim restitution in kind of their property (land and/or buildings) or the equivalent thereof. The law came into force on 8 February 2001, but the legal term for registering the restitution claims was extended by 2 successive 3-month periods and thus expired on 8 February 2002.

It should be noted that this regulation only applies to property that has been "abusively" appropriated by the State, i.e. at least one of the mandatory procedural rules was not complied with at the time of the transfer of ownership to the state.

As a general rule, former owners have benefited from restitution in kind of their former properties, whilst equivalent restitution has only been an exception (as opposed to the position under the previous restitution law for residential property). The law is particularly important when state owned companies are being privatised. If any claims have been registered before 8 February 2002 against land used by such companies they will be in an uncertain situation until the claims have been dealt with.

Ownership Titles

General

The ownership of land or a building may be proved by:

• an agreement transferring ownership (a sale and purchase agreement, exchange agreement, donation or other type of agreement);
• a court decision acknowledging ownership;
• an inheritance certificate;
• a decision of public adjudication;
• a Government Decision for the restitution of property which had been nationalised;
• an ownership title for agricultural lands restored on the basis of Land Law no. 18/1991 (republished);
• a certificate attesting the ownership of former state-owned companies, issued by the relevant Ministry.

If someone intends either to make a property investment or to take security over property, it is very important to carry out a detailed due diligence of the title of the property concerned. However, potential investors should be aware that a property title in Romania does not by itself constitute an absolute proof of ownership, but only a simple assumption. Absolute certainty (meaning absolutely no risk) can be ascertained only by proving the validity of each previous property transfer – this being called by the Romans "probatio diabolica". Investors from countries which have a system of land registration as a way of proving title (such as in Germany) should not be misled into thinking that the Romanian Land Book (Land Registry) gives the same certainty.

Land Registration

In Romania, there are four systems for publicly registering land:

• the system applicable in Valachia, Moldavia, Oltenia and Dobrogea (the Southern and Eastern parts of the country), regulated by the Civil Procedure Code – "public registration system based on the owner";
• the system applicable in Transilvania and in the Northern part of Moldavia, regulated by Law no. 115/1938 – "public registration system based on the property";
• an intermediate system regulated by Law no. 242/1947, applicable in some towns and villages located in the former Ilfov county;
• an intermediate system regulated by Law no. 163/1946, applicable in some towns and villages located in Transilvania.

Of these systems, the first two are by far the most important.

The public registration system based on the owner (Valachia and Moldova) has the following main characteristics:

• all ownership transfer agreements and agreements for the establishment of mortgages, a usage or a usufruct right or of an easement have to be registered only in order to make them binding as against third parties. The agreement remains valid if it is not registered, but it cannot be enforced against third parties;
• lease agreements with a duration of more than 3 years have to be registered in order to make them enforceable against third parties;
• registration is focused on the owner, and not on the property, making it difficult to carry out a search on the property;
• there is uncertainty regarding the status of a non-registered ownership transfer agreement.

The public registration system based on the property (Transylvania) has the following main characteristics:

• all ownership transfer agreements and agreements for the establishment of a mortgage, a usage or a usufruct right or of an easement have to be registered in order to make them effective;
• the registration is based on the property.

A new law on the cadastre and public registration of property was adopted in 1996 (Law no. 7/1996) which unified under the same umbrella these two real estate public registration systems. However, this law is not yet fully implemented due to the fact that all existing registers have to be replaced by an electronic register and there are various other actions which need to be implemented in order for the law to be fully implemented.

However, even though Law 7/1996 has several advantages compared to the old real estate public registration systems, it still has a number of major problems as registration of a right is not compulsory. Also, it still does not represent an absolute proof of the existence of a legal and valid right. There is a presumption that the right exists and if the new buyer registers the title in time, he will have good title against any other non-registered owners (whereas in Transylvania registration in the Land Registry was a requirement for the existence of the real right on the property).

In Valachia and Moldova the real estate public registration system was so completely changed by Law 7/1996 that no new registrations are now made in the old Land Registrys. Unfortunately there are no cross references between the old and the new Land Registrys. Therefore, if an owner has not made a new registration at the new Land Registry under Law 7/1996 an investor will have to go back to the old Land Registry to obtain information on a relevant property.

The situation is better in Transylvania as Law 7/1996 was implemented on the old Land Registrys and therefore it is possible to obtain evidence on a particular property going back to the 19th century.

Unfortunately the situation in Valachia and Moldova could remain unchanged for many years as under the new legislation current owners are not obliged to re-register their properties at the new Land Registrys. A new registration is only required if the parties to a transaction wish to operate transactions in the new Land Registry.

Until this is changed (ie. making registration in the new Land Registry compulsory), the solution for the investor/buyer (especially in Valachia and Moldova) is to check the validity of each previous transfer of the property and to impose a requirement on the owner to carry out the requisite formalities to register the property at the new Land Registry. Based on the principle of good faith, the desired transaction would in such circumstances be protected against adverse claims.

Mortgages

General

The Civil Code governs the general terms and conditions of a mortgage. According to the Civil Code mortgages cannot be granted on future properties (i.e. buildings to be erected by the owner of a plot of land) as both the mortgaged asset and the value of the debt have to be precisely determined at the date of execution. If they are not then the mortgage will be null and void. Also, the mortgage is indivisible, in that it continues to exist on the whole asset even if part of the debt has been paid.

To be valid, the mortgage agreement has to be concluded in notarised form. Mortgages do not have to be registered with the Land Registry but the registration insures the binding character and ranking of the mortgage. The registration with the Land Registry is effective for 15 years. At such time it must be renewed in order to maintain its ranking.

Financing of Real Estate Investments-Law 190/1999 on Mortgage Loans

Aimed at reducing time-consuming formalities, as well as at encouraging real estate developers, this law lays down special rules on loans in the area of real estate investments, derogating in some respects from the general law regime on mortgages mentioned above. However, the provisions of the Civil Code and the Code of Civil Procedure remain applicable as a general regulatory framework governing credits and security interests.

Mortgage loans are granted by authorised institutions in order to finance the construction, acquisition, rehabilitation or extension of real estate for residential, industrial or commercial purposes.

Romanian legal entities having as the object of their activities the construction, rehabilitation, consolidation or extension of property for residential, industrial or commercial purpose as well as Romanian legal entities that intend to build residences for their employees and Romanian citizens residing in Romania can benefit from such loans. Such loans are for a minimum 5-year term in the case of companies, and a 10-year term in the case of individuals. The loans have to be secured by a mortgage placed on the land and building which is the subject of the financing, or on equivalent properties.

Under these arrangements, a mortgage on future properties of the borrower is permitted which is an exception to the provisions of the Civil Code. The insurance of the mortgaged assets for the entire duration of the loan is mandatory.

The new law also sets forth specific rules to protect borrowers, such as the possibility of an early repayment and the negotiation of the interest rate.

In order to encourage capital investments in the real estate market, the law allows for the possibility of transferring mortgage receivables. Assignments can take place only for mortgage receivables with common characteristics regarding their nature, source and risks. Based on their mortgage portfolio, licensed financial institutions can issue securities, the total value of which should not exceed 75% of their valued portfolio. The same authorised institutions may issue bonds in order to attract the necessary funds to enable them to grant mortgage loans. The value of such bonds must not exceed 60% of their portfolio's value.

Even though practice guidelines were issued in early 2000 by the National Bank of Romania and the National Securities Commission, there has not been a wider spread introduction of such mortgaged backed securities in the Romanian market.

Acquisition of Interests in Land by Foreigners

As mentioned above, both the Constitution and the Land Circulation Law provide that foreigners (whether natural or legal persons) cannot acquire (by any means whatsoever, including by way of inheritance) any land in Romania (save for the cases expressly provided by the revised Constitution – see below) but may acquire usage rights over land (usufruct, use, superficies). However, foreigners may establish Romanian legal entities, which can then legally acquire land, provided, however, that the main purpose of the establishment of such company is not the acquisition of land but the carrying out of an investment.

As a result of the amendment of the Constitution, foreign citizens may acquire ownership right on lands

• under the conditions resulting from the integration of Romania into the European Union and from other international treaties signed by Romania, based on reciprocity;
• under conditions to be provided in the law that will repeal the current provisions of the Land Circulation Law; and
• by legal inheritance.

Consequently, save for those foreigners who are legal successors of Romanian natural persons, foreigners will generally be able to benefit from such provisions as soon as Romania becomes a member of the European Union. This will be subject to specific conditions to be established in a separate property law.

Construction

Acquisition of Land for Construction

It is a fact that in city centres (in Bucharest in particular but not only there) there are few locations available for large retail developments and that the peripheral areas of the city offer greater choice to developers in terms of land availability and parking facilities. However, these plots of land are usually agricultural land. Such use of the desired land makes it inappropriate for the investor or developer's business plan.

The Land Law divides land into several categories on the basis of its designated prescribed use. These are:

• Agricultural land;
• Forested land;
• Land situated permanently under water;
• "Intra-muros"(i.e. within city gates)-construction land;
• Land with a special designation (roads, railways, electricity and gas transportation, telecommunications, oil and mining exploitations, beaches, natural reservations, archaeological monuments, etc).

Irrespective of its location (inside or outside of city borders) a plot of land can be designated for either construction use or agricultural use. As Romanian legislation forbids the construction of buildings on land designated as agricultural land it is important when acquiring land for construction that in the due diligence process one should check not only the title (its validity and proper registration with the Land Book) but also the legal use of that particular plot of land.

The procedure for the change of land use from agricultural to construction use involves the approval of the county or Bucharest cadastre authorities for plots of land under 1 ha. The approval of the Ministry of Agriculture is needed for plots of land greater than 1 ha but under 100 ha and the approval of the Government is needed for plots of land exceeding 100 ha. Romanian legislation does not allow land to be split into several plots with a view of avoiding ministerial and governmental approval.

The procedure for changing the use is both expensive and time consuming. This should be taken into account when structuring a transaction and negotiating with an owner. A prospective purchaser of agricultural land should negotiate the purchase price bearing in mind that taxes for the change of use are between 100 per cent and 400 per cent of the purchase price or the market value of the land. This is a recent change in that before the entry into force of Law 453/2001 (changing certain provisions of the Construction Law 50/1991) land inside city borders was not subject to taxes related to the change of the agricultural use. This change is very important as the price of agricultural land in the neighbourhood of the big cities has increased enormously. Therefore this is an additional cost which an investor must take into account when putting together any business plan which involves such a change of use.

Construction Permit

The Construction Law provides that the execution of construction works may be carried out only on the basis of a building/demolition permit. This applies to all categories of construction (civil, industrial or agricultural). The building permit must be issued in accordance with the urban and territorial planning documentation.

Building permits are issued by the relevant Mayor save for those in respect of investments which have to be approved by the Government in which case they will be issued by the chairman of the local Council.

In order to simplify the procedure for obtaining a building permit a recent Law has been passed (Law 453/2001), amending the Construction Law. Under the new law the issuer of the building permit has to obtain, on behalf on the applicant, all legal approvals necessary for obtaining the building permit. This includes such things as connections to utility networks, fire permits etc ("sole approval").

The building permit has to be issued within 30 days from the date the application was registered, provided that the applicant has lodged all the necessary documentation, i.e.

• planning certificate (the official document which provides information about the legal, economic and technical status of the land and any construction on it existing at the application date and establishes urbanism requirements which have to be fulfilled as well as the list of approvals which have to be obtained);
• proof of title to the land and/or buildings;
• project for the authorisation of the execution of construction works;
• necessary approvals;
• payment of taxes.

The building permit is valid for a period of 12 months, during which the beneficiary has to begin the construction works. If the construction works have either not been initiated or have not been completed within the period provided in the building permit, an extension of the building permit may be requested for a further period of 12 months. If an extension is not requested then the building permit will expire. Only one extension will be granted.

Legal guarantee term applicable to construction works

Under the Law on Quality in Construction (Law 10/1995) the designer, the specialist responsible for control of the project, the manufacturer of the material, the suppliers of the construction materials and products, the construction contractor, the technician responsible for the control of the execution of works, the site inspector and the technical expert are liable in accordance with the obligations which have been allocated to them (by law or contract) for hidden defects in the construction arising within a period of 10 years from the handing over of the works. In addition, they are liable during the whole life of the buidling for defects in the structure, arising as a consequence of the non-observance of the design and execution rules valid at the time of its design/execution.

This provision cannot be negotiated and it applies to all construction and related instalments irrespectively of their ownership or use.

Key Legislation

The Romanian Civil Code dated 1864 such as subsequently modified;

• Law 18/1991-"the Land Law" such as subsequently modified;
• Law 50/1991 –"the Construction Law";
• Law 10/1995-"the Law on the Quality in Construction";
• Law 112/1995 regulating the legal situation of dwellings that have been transferred in the state ownership ("the Restitution Law on Dwellings")
• Law 114/1996-"the Dwelling Law";
• Law 7/1996 –"the Law on Real Estate Publicity System";
• Law 54/1998 –"the Land Circulation Law";
• Law 219/1998-"the Concessions Law";
• Law 213/1998-"the Law on Public Property";
• Law 190/1999 – "the Law on Mortgage Credits"
• Law 350/2001 –"the Town and City and Territorial Planning Law";
• Law 10/2001-on the legal regime of immovables that have been abusively taken over by the State in the period 6 March 1945-2 December 1989 ("the General Restitution Law").