Author: | Published: 3 Apr 2003
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Commercial leasing

1. What legislation and/or regulatory bodies are responsible for regulating the relationship between landlord and tenant in Belgium?
The relationship between landlord and tenant is regulated by the provisions of Title VIII, Chapter II, Section I, Articles 1714 through 1762bis of the Belgian Civil Code. Most of these general provisions are not mandatory and will apply only if the parties did not provide for them otherwise by contract.

Under Belgian law, the term "lease" (huur or louage) refers to a contract pursuant to which one party commits to deliver to another party the possession of property for a specific term and in consideration of a certain price, which the latter commits to pay (Article 1709 of the Civil Code). The term "leasing", in both Dutch and French when used by Belgian legal commentators, refers to transactions where, typically, the lessor purchased the asset according to the requirements of the lessee when the lessee has an option to purchase the leased asset (financial leasing). We will use "lease" to mean huur or louage, as opposed to "leasing".

Certain specific contracts between landlord and tenant have been imperatively regulated. The law of February 20 1991 applies if the tenant uses the premises leased as his main residence; the law of November 4 1696 applies to farm leases; the law of April 30 1951 is applicable to "commercial leases", ie leases of real property to be used mainly by the tenant or a sub-tenant for retail trade or for the activity of a craftsman directly in contact with the public (such leases will be referred to as "retail leases").

The lease of offices or warehouses is only regulated by the general lease provisions of the Civil Code.

The law of April 30 1951 regulates, inter alia, the term of the lease agreement and the right for renewal, the revision of the rent, the tenant's right to modify the leased premises, the transfer of the lease and sub-lease, the consequences of the sale of the property, the indemnification of the tenant in case of government taking and certain specific procedural issues. The provisions of the law are mandatory.

2. What is the effect of a tenant's insolvency, and what remedies are available to landlords?
In the event of bankruptcy of the tenant the contract will most likely be terminated. The landlord may apply a contractual termination clause applicable in such an event. The receiver has the option to terminate the lease or to perform it further; the receiver is bound to make his choice upon formal request given by the landlord to do so.

In the event of request of the tenant for a settlement with its creditors (gerechtelijk akkoord or concordat judiciaire) the landlord will not be able to terminate the lease exclusively because of such initiative. However the landlord maintains the right to require the court to terminate the lease for non-performance.

By law, the landlord is granted the benefit of a security interest in all furnishings (including stock, machinery, furniture) present in the leased premises for the payment of a maximum of two years of rent overdue.

Conflicts might arise between the security interest of the landlord and a creditor of the tenant holding a pledge on the business, an unpaid seller claiming the benefit of a retention of title clause on assets sold and delivered and present within the leased premises. Under certain conditions, the claim of such creditors will prevail.

As a general rule the first date will be decisive (date of first performance of the lease, date of entry of the pledge on the business of the tenant). Under certain conditions, typically information given to the landlord prior to the entry of the assets in the premises, the claim of the unpaid seller might prevail.

In the ranking of priorities granted by law, the privilege of the landlord comes third, after the privilege for the recovery of the enforcement expenses and of expenses made for the preservation of the debtor's assets. In order to prevent removal of the furnishings, the landlord has the option of making an attachment.

3. How might changes in accounting standards affect the landlord/tenant relationship?
We are not aware of any proposed changes to the Belgian accounting standards. Changes to the International Financial Reporting Standards (IFRS) are less relevant, as the latter are not yet applicable in Belgium. As of 2005, listed companies will be obliged to draft their consolidated accounts in accordance with the IFRS. The Belgian government has still not decided in which other cases the application of the IFRS will also be allowed. The immediate impact of the application of the IFRS will of course depend on the final version of the exposure draft regarding the first time application.

4. How has recent statutory reform affected (or, how will proposed future statutory reform affect) the lease renewal process?
The lease renewal process is only regulated in a mandatory manner with regard to retail lease, main residence lease, and farmer's lease, pursuant to the specific statutes referred to above in section 1. The renewal process of none of the types of leases mentioned in section 1 has been affected by any recent statutory reform; we are not aware of any proposed future statutory reform.

5. How does human rights legislation in Belgium affect the landlord/tenant relationship?
A recent law dated February 25 2003 reinforced legislation against discrimination.

When a building is offered for lease on the market, a landlord may not discriminate when selecting a tenant. In addition to criminal sanctions, a victim of discrimination may request an injunction order to stop the discrimination.

6. What is the effect of conditions restricting tenants wishing to divest themselves of surplus properties ('alienation'), and how can those restrictions be satisfied or circumvented?
Under the general lease provisions of the Civil Code, a tenant may sub-lease or (partially) transfer the lease. Most leases restrict this by requiring the prior approval of the landlord. With regard to retail leases, the law of April 30 1951 provides that a contractual clause restricting the transfer of the lease will remain without effect in case the tenant transfers the lease jointly with the business operated in the leased premises.

In case of sub-leases, the initial tenant remains liable vis-à-vis the landlord for the performance of the contractual obligations under the lease agreement. In the event of a transfer of the lease the same rule applies for a limited period of time.

Securitization of real estate assets

1. How significant is the real estate securitization market in Belgium?
A securitization model was developed many years ago using real estate certificates, ie typically securities issued by the owner of the real estate where the certificate holders are entitled to a portion of the rental income and of the proceeds of the sale of the property. This rental income is treated as interest and only subject to a withholding tax of 15%. The repayment of the principal will, moreover, be tax neutral. From a tax point of view, a real estate certificate therefore constitutes an effective hybrid.

There have been private deals for the securitization of lease receivables, some related to leases granted to the European Communities.

2. What have the key real estate securitization deals been over the last 12 months?
To our knowledge, there have not been any significant real estate securitization deals in Belgium over the last 12 months.

3. To what degree of detail (if at all) are the parties obliged to disclose the lease terms on a formal registry (eg the land registry)?
An original or a certified copy of all lease agreements for real property must be submitted for registration; the registration duty to be paid is of 0.2% (20 basis points) on the aggregate rental amount increased with certain costs to be paid by the tenant (for residential leases the duty is limited to euro 25). The document filed with the registration office is not accessible to the public. None of its contents are published.

As creditors of the landlord might challenge any lease granted for the term exceeding nine years, the tenant, in order to be protected by a longer term, will need the contract to be notarized and to be copied in the register of the local mortgage keeper. Any interested person may have access to the register of the mortgage keeper.

4. To what extent can uninsured risks or potential legislation leading to rent reviews affect the sanctity of the receivable?
The allocation of risks between landlord and tenant is regulated by the general lease provisions of the Civil Code as further implemented by case law. Pursuant to Article 1722 of the Civil Code, if, during the term of the lease, the leased premises are totally destroyed by force majeure, the lease is automatically terminated. If it is only partially damaged, the tenant may request a reduction of the rent or the termination of the lease, according to the circumstances. During the lease, the tenant will be held liable for any damages to the leased premises and, in case of fire, will be deemed liable save evidence to the contrary (Article 1733 of the Civil Code). In such a case, the tenant's obligation to pay full rent will continue for the entire term of the lease.

The landlord and tenant may agree to allocate risks (as well as the consequences of an incident) in a different way. Often, the lease agreement will provide that the tenant must provide evidence of sufficient insurance coverage. The fact of whether or not a risk is insured, absent any contractual clause on the subject, will not have an influence on the question of which party bears that risk.

Contractual clauses as to the unconditional liability of the tenant to pay the rent are an essential element in any attempt to achieve "sanctity" of the receivable securitized.

5. How important a role do the rating agencies play in securitizations?
We are not aware of any significant securitization transactions whereby securities were offered to the public, and not of any significant role played by rating agencies.

Property outsourcing

1. How prevalent is property outsourcing in Belgium?
At present property outsourcing is a limited practice. There are more traditional sale and lease back transactions, but with no significant increase in the services rendered by the landlord / property manager to the tenant.

2. What are the relative benefits of each of private finance initiatives (PFIs) and public-private partnerships (PPPs); and

3. what lessons have been learnt from both private sector and public sector property outsourcing schemes in terms of performance, service provision, financial benefits, problems?
PFIs and PPIs are not (yet) common practice in Belgium. The rules related to the sale of government-owned real estate procedures are still relatively undeveloped, and recent published transactions have indicated that the government indeed obtained expert assistance.

4. To what extent should the service provider extend services to cover back office systems such as IT and human resources (HR)?
It is to be expected that, when property outsourcing develops IT, and to a more limited degree, HR, they would have to be included in the services offered.

5. What has been the effect of Enron and the accounting scandals on corporates considering off-balance sheet property outsourcing?
We have seen no noticeable effects.

6. What is the future of property outsourcing for the private sector?
There will likely be slow growth, with outsourcing most successful in the major cities.

Financing of real estate transactions

1. What are the most common methods by which purchasers finance high-value real estate transactions in Belgium?
The most common method is the middle or long term loan, secured by a mortgage on the real estate purchased combined with a pledge on the rental income from the property.

Since the cost of entering a mortgage is quite high, (1% of the secured amount) a practice has developed to reduce the amount secured by the mortgage (eg to 10% of the entire debt) and to require the owner to sign a power for mortgage for the balance. The lender may, at any time, register the mortgage for such amount but this second mortgage will only rank at the date of its entry.

Another common method of financing buildings (as distinguished from land) is a real estate leasing structure. As a general rule, the lease of real estate in Belgium is exempt from value added tax (VAT). As a consequence, the VAT paid for the construction of the building (presently 21 %), cannot be offset with any incoming VAT on rent. Subject to certain conditions a real estate leasing can qualify as a service subject to VAT (as set forth in a Royal Decree No 30 dated December 29 1992). Since, with this VAT leasing structure, the costs of construction can be reduced with 21%, real estate leasing has been used extensively.

Finally the purchasing company might consider issuing bonds secured by a mortgage on the property.

2. To what extent does stamp duty (or the equivalent) affect the cost and method of financing real estate transactions?
The transfer of real estate is subject to a registration duty of 10% (for property located in the Flemish Region) or 12.5% (for property located in the Brussels Region or the Walloon Region) of the purchase price. If the tax administration proves that the price paid for the property is at least 1/8th (12.5%) below its market value, it will require payment of an additional registration duty and of a fine.

Under certain conditions the transfer of title to professional resellers is subject to a reduced registration duty rate of 5%.

Until December 31 of the second year following the year during which a building has first been occupied or used (after its constructions or important transformation), the transfer of the building may be subject, at the discretion of the parties, to VAT (at the normal applicable VAT rate). The plot of land on which the building is erected will remain subject to registration duty.

In order to reduce the tax burdens, an investor may choose not to purchase the land but to enter into a long-term lease agreement (erfpacht or emphytéose) or to acquire a right to build (opstalrecht or droit de superficie). This right allows the investor to become owner of the building. Both a long-term lease and the right to build, as well as the buildings erected pursuant to such rights, can be mortgaged. The mortgage will not, however, survive the termination of the long-term lease, or the right to build.

The granting of both a long-term lease and a right to build are subject to a registration duty of 0.2% on the indemnities paid under the agreement for the entire term. The owner of the land burdened with such rights may still sell (the land).

As a general rule, no registration duties will be due on the transfer of shares of a real estate portfolio company.

3. To what degree of detail are the parties obliged to disclose the terms of financing on a formal registry (eg the land registry)?
A mortgage deed must be inscribed (and not copied) in the register of the local mortgage keeper. Such inscription will contain the identity of the creditor and debtor, the secured amount, and the identification of the encumbered property. Any interested party may obtain a mortgage certificate containing this information.

4. Is there any debate as to who holds the legal title to a mortgaged property?
This issue is not the object of any controversy or debate in Belgium. The lender never holds title of any kind to the mortgaged property; title remains with the initial owner. Even in case of an event of default, title to the property is not transferred to the mortgagee, who may only foreclose on the mortgage by requiring a court order for the public sale of the property.

Conveyancing issues

1. What are the various forms of property ownership in Belgium?
Under Belgian law, there is only one form of ownership (propriété or eigendom) which is the most complete right in rem. Other rights in rem can be granted with regard to real estate, such as a long term lease (emphytéose or erfpacht) and a right to build (opstalrecht or droit de superficie), usufruct, and easements.

A lease agreement does not grant a right in rem, but the tenant will have a contractual right to possession (genot or jouissance) of the property.

2. Other than the general principles of contract law governing agreements between vendor and purchaser, what other statutory governance, regulations or guidelines exist to protect the parties to a property transaction?
Most provisions on the sale of goods as contained in the Civil Code are not mandatory, so that the parties may contractually provide otherwise.

The transfer of real estate must be enacted per notarial deed. The role of the notary public is, as a public officer, to verify the compliance with all applicable legislation and to receive the tax. In addition, he will also advise the parties as to their rights and obligations. Any party may request to be assisted by a separate notary public without the incurrence of additional costs.

The notary public must verify the seller's title to the property and the absence of any mortgage or other encumbrance.

For real estate located in the Flemish Region, any sale is subject to the prior obtaining of a certificate of no-objection from the Flemish administration in charge of environmental issues. If no such certificate can be delivered further procedural steps are to be taken.

3. Is the practice of the vendor wanting to take advantage of development uplift prevalent? How do lawyers usually achieve this?
Without saying that the practice is prevalent in Belgium, we have seen development projects - mainly in retail - where in a share purchase transaction, the purchase price was partially dependent and could possibly be negatively adjusted in relation to take-up and rental income. In another transaction the price of the land was to be increased if the building permit to be granted allowed for a higher number of lettable properties than the parties initially expected.

4. How significant is e-conveyancing? What rules and regulations govern the e-conveyancing process?
E-conveyancing is insignificant in Belgium. Any transfer of real estate necessitates the intervention of a notary public. The notarial deed establishing the transfer will be registered at the registration office and transcribed at the register of the mortgage keeper. The only computer programme intervening in the process is the notary's word processor.

Modern communication methods are only used for marketing purposes.

5. How have legislation and recent case law addressed the issue of adverse possession?
The ownership of goods can be inquired by inheritance, donation, the effect of agreement (eg a sale and purchase agreement), accession or incorporation, or adverse possession.

Ownership title on real estate can be acquired after an uninterrupted, public and notorious, exclusive and undisputed possession of 30 years. Shorter terms are provided for the possessor in good faith and holder of a "lawful title" of acquisition. The "lawful title" in theory contains everything that is required to transfer ownership, but was not granted by the true owner of the property.

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