How does a lawyer see the Belgian real estate market?

Author: Yves Moreau, Linklaters De Bandt, Brussels

The law is, in itself, without interest if there is no society or interaction between people. As are (real estate) lawyers. They can only add value if there is a market and if the players are active on that market.

From an economic point of view, the Belgian real estate market – mainly Greater Brussels and Antwerp, but other locations are slowly emerging – is characterized by its stability and, to a certain extent, its predictability. Just as the presence of real estate in an investment portfolio is recommended, one should develop a taste for Belgian real estate when putting together international real estate investment strategies. The presence of many European institutions in Brussels and its status as capital of Europe has a positive impact on the image of the country and its real estate market.

The Belgian real estate market has attracted successive waves of investors (we all remember the Swedish wave in the 1980s, the German funds 10 years later and, most recently, the arrival of Irish and Spanish investors). And now, since a Royal Decree on July 3 2005, many foreign investors are bringing their own banks with them. Since that date, withholding tax is no longer due by Belgian companies (such as Belgian special purpose vehicles incorporated for the purposes of acquiring Belgian properties) reimbursing a credit by a bank established in the European Union (not only in Belgium).

These waves of foreign investors and the involvement of foreign developers (especially French developers) in the market have not put the Belgians off. Belgium has been one of the pioneers of Reits, and Belgian Sicafis are among the most active real estate investors in the country. Some of them own very large portfolios, and their size and status as a listed company with a favourable tax status have led them to comply with governance and even ethical rules, behaviour that in the past has not always been considered a distinguishing feature of the real estate business.

These changes in the market and in its principal players have led to a dramatic increase in the professionalism of the real estate business, a process that can still be seen today. Real estate agents have become well-educated specialists in real estate law and economics, while lawyers have been obliged to forget the good terms of small agreements à la belge and instead have adopted the high, heavy Anglo-Saxon standards demanded by their clients. Lawyers are no longer passive advisers. They have to lead a transaction once it is commercially agreed between their clients, from structuring to financing. Interaction is the word, and a lawyer can no longer make abstract points about non-legal aspects of a file if he/she wishes to remain in the game. Nowadays lawyers must be able to understand agents, engineers and environmental specialists. They must be able to negotiate the pricing of a transaction and, therefore, to understand – and to play with – very complex price formulas. Even investors are no longer in a position to disregard the increasing standards to be followed by their lawyers since, under the influence of newcomers in the real estate financing market, banks are now requesting detailed due diligence investigations and the use of an impressive mass of legal documentation. So-called CPs, to which financing is subject, are more and more concealing the real subject matter of the transaction: the transfer of real estate.

Belgian real estate law is mainly based on the Civil Code, which originates from the French Napoleonic Code and is still in force in Belgium. Both asset and share deals – share deals represent a large portion of real estate transactions in Belgium due to the very high level of transfer taxes (between 10% and 12.5% in most circumstances) – are governed by the legal rules on a sale. It looks easy but it is not. The practice, boosted by the moves towards professionalism mentioned earlier, has created an important set of market practices and clauses that only real estate lawyers can deal with.

Although civil law has not evolved much, other areas of law of paramount importance for real estate deals have undergone dramatic changes. This is mainly the case for the administrative aspects of a real estate transaction such as the zoning law and, in particular, environmental law issues. Zoning and the environment are regional matters in Belgium, which, as a consequence, despite its small area, are subject to three (very) different sets of laws. The most obvious recent change results from the Brussels Ordinance of May 13 2004 relating to the management of polluted soils. This ordinance, the drafting of which is far from perfect, has become a source of nightmares for many Brussels real estate owners, who may now often face hefty soil decontamination obligations for pollution that they did not cause.

The tax burden on real estate transactions, as well as new trends in the market, has had paradoxical consequences. Indeed, this situation has not resulted in new laws or other rules being enacted but rather in old laws being resurrected.

For instance, a certain practice has developed whereby investors acquire a long-term lease right (an emphyteutic lease) on a property, for a duration that can extend up to maximum of 99 years, rather than buying the property. The granting or the transfer of such a right only triggers a 0.2% registration duty, while the purchase of a property usually triggers a registration duty ranging from 10% (Flanders) to 12.5% (Walloon and Brussels regions).

Often the granting of such a long-term lease right is accompanied by the transfer, usually to a sister company of the lessee, of the bare ownership of the property. The official tax ruling committee accepts this structure, subject to strict conditions relating, among other things, to the value attributed to the long-term lease compared with the value of the property, and the prohibition on companies using that structure to change control for a certain period.

It is worth noting that the Belgian law on long-term leases dates back to 1824 – before Belgium came into existence.

The Belgian market is small and there are not enough high-quality office buildings to satisfy the hopes of all potential buyers. So, new investment trends have arisen. Investors are looking at retail centres, hotels, resorts, warehouses and even residential centres and retirement homes. These last two categories are subject to very strict legislation including, as far as housing is concerned, a special law of July 9 1971 (the famous Loi Breyne) protecting the purchasers of residential units to be built.

And so lawyers, used to handling significant real estate transactions, have been obliged to re-specialize in laws such as those regulating housing and retirement homes, laws they would never have imagined applying even a few years ago.

Real estate purchases have always had the advantage of being concrete. You touch what you buy. If your building burns down, your plot of land will never disappear or go bankrupt. However, that is no longer entirely true. Short-term profitability has become so important that real estate transactions increasingly relate to development projects rather than to completed buildings. Investors are now buying future or virtual real estate. So the role of lawyers has become that much more important, since the rights of their clients on the date of signature are no longer vested in an existing property (rights in rem or real estate rights) but only towards a person or entity, the seller, who is to build the building or, at least, to arrange for it to be built (rights in personam or personal rights). The contents of the legal documentation are, as a consequence, of the utmost importance and finding the right balance between the interests of the different parties in such a transaction is no easy task.

Belgium is a small but very international market, a market where many developers and investors are active and are served by advisers who have to display imagination and flexibility when assisting international players in this limited playground.