Thought leadership from our experts

Real estate development in Romania. Some legal challenges and perspectives

The Romanian real estate sector has started to recover from the effects of the global economic crisis and the real estate market has been on an ascending trend in all real estate sectors.

As per World Bank overview in 20151, Romania has continued to produce economic growth and the country's national priorities are anchored in the EU framework. Such recent growth has been led by private consumption and a rebound in investment, which returned to near pre-crisis rates.

If I were an investor looking to develop real estate in Romania today, I would have several opportunities.

As a general comment, the initial challenge is finding the precise property to buy and getting permits in place, which can take (too) long due to administrative blockage often determined by the fear and lack of responsibility of the authorities (given the recent DNA anti-corruption wave) and also by the local and general elections which occurred during 2016.

If I want to develop industrial and logistics, the first half of 2016 witnessed strong activity while the vacancy level continued to decline, especially in respect of the production for automotive which still drives the growing demand.

In respect of retail, the increase in consumption and consumer confidence provided a strong motivation for retailers to continue their expansion plans in various important cities.

If I want to develop residential, it would be a rather safe bet. Given the favorable financing conditions available for both the developers and the purchasers, the residential market experienced continued growth in 2016, so I might have quite a high return on my investment.

On the other hand, if I were an investor or a developer which identified the opportunities above, I would ask my lawyers to make their first forays in order to identify which are the specific issues related to Romania market that I should be aware of.

Double-checking the ownership title and potential restitution claims

In the post-communist era, the Romanian governments made efforts to establish a coherent legal and institutional framework surrounding land restitution, but unfortunately the entire process has been characterized by unpredictability, inconsistent interpretation of the law, corruption, poor record keeping at local government level, as well as indecision in implementing adequate reforms.

In time all these factors have led to a significant number of legal challenges in respect of inappropriate restitution procedures and litigation against flawed or incomplete land title documents. In practice, this could explain why the acquisition of land in Romania is still not straight forward and often requires further investigations.

The possibility of a litigation in connection with restitution claims does still represent a risk, although small if early, proper and thorough due diligence is carried out by the lawyers coupled with cadastral/technical expertise.

As a precautionary measure against this risk, experienced law firms in Romania usually require letters from various public authorities aiming at confirming the presence and status of potential restitution claims or other litigation related to the ownership title. Normally the law requires such authorities to respond within 30 days, but in our experience certain authorities can take longer and may require further information before responding.

Approvals from other authorities might be required

The investor may opt for acquiring a property via a "share deal" (namely acquiring the shares of the Romanian company owning the relevant real estate asset) or by means of an "asset deal" (namely acquiring the specific property via a transfer document signed in front of a notary public).

In certain circumstances, prior approval of certain authorities may be required prior to the transfer of property. For instance:

  • in case of a share or an asset deal, should the relevant asset conduct activities requiring an environmental permit, then a permit or a response of the environmental authorities may be required;
  • in other cases, in case of a share deal, if both the purchaser and the target each had a turnover of over EUR 4 million in Romania in the previous calendar year, notification to the Romanian Competition Council is required;
  • in case of an asset deal, the investor's lawyers should bear in mind that the Romanian State has a statutory pre-emption right to acquire historic monuments (if this would be the case).

In addition, when selling agricultural land located outside municipal borders, a pre-emption right must be observed in favor of (i) co-owners, (ii) the agricultural tenants, (iii) neighboring owners and (iv) the Romanian state (in this precise order), in each case at the same price and on the same terms.

Securing the land – title insurance

Ensuring the land title is also a measure of risk management.

Whilst detailed legal and cadastral/technical due diligence on land title is of paramount importance and may significantly mitigate the risk of a potential claim or litigation, a further safeguard is to have in place title insurance. Whilst this will not prevent restitution claims from arising on land title, most likely it will protect the investor against the cost of a potential legal challenge and even compensate the investor for its loss of the property, at full market value.

Title insurance is possible and allowed in Romania. Fortunately, such title insurance has become more predominant in Romania real estate transactions and should be taken into account by investors. Due to the risks generated by the previous communist regime in relation to real estate ownership in Romania, often investors choose to protect large investments by taking out title insurance policies.

Drafting the contract – The hardship clause

If I were an investor, I would be interested in exploring along with my lawyers the effects of the hardship clause in Romania.

In the context of the global economic crisis, contract drafting has progressively taken into consideration exceptional unexpected events that radically change the background of a contract, making the performance impossible or excessively onerous for one of the parties.

For many years, Romania took the approach of the French law, with no possibility to adapt or terminate a contract due to hardship (unless the parties agree so). Instead, termination was possible only in cases of force majeure (acts of God) or in some fortuitous cases.

The new civil Code in Romania (entered into force back in 2011) answered the question of whether the parties should remain strictly bound by their obligations irrespective of the evolution of the underlying economic circumstances. As an effect of these new civil regulations, even if a hardship clause is not inserted in the contract, the party affected by new external exceptional circumstances that severely disturb the initial contractual framework may request the relevant law court to take appropriate measures in order to reinstate the contractual balance.

In principle, the New Civil Code provides that, if the circumstances allowing one party to claim hardship are incident, the judge may decide either (i) to adapt the contract in order to reasonably and fairly allocate between the parties the losses and benefits arising out of such new circumstances or (ii) to terminate the contract.

The introduction of the hardship clause in the New Civil Code has increased the awareness in contract drafting and the role of the lawyers since, depending on one's contractual position and intention, the contract may either remain silent on the hardship clause or one party may expressly waive the benefit of this clause or the parties may specifically indicate the circumstances entitling them to claim the hardship clause and the related benefits.

Conclusion

Certainly there are many other legal challenges, conditions and clauses to be explored by a potential investor and its advisors, either standard or specific to the deal. Nevertheless, from our experience, involving early in the process an experienced law firm to deal with the kind of issues mentioned above is always beneficial for a potential investor.


  1. http://beta.worldbank.org/en/country/romania/overview