Luxembourg

Author: | Published: 3 Apr 2003
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Property ownership in Luxembourg may be encountered in various forms whereby absolute ownership is only achieved where the usus, fructus and abusus are held by the same person. Property transactions have also become increasingly diversified and complex from a legal point of view whereby attractive legal and fiscal schemes are being used to achieve maximum returns or cost reductions. The present analysis will mainly focus on commercial property transactions whereby large scale private property transactions are still an exception given the limited size of the Luxembourg property market.

Commercial leasing

1. What legislation and/or regulatory bodies are responsible for regulating the relationship between landlord and tenant?
Absent a specific legal framework for commercial lease transactions, a short presentation of laws affecting landlord-tenant relations becomes a difficult task. Under Luxembourg law, the term lease (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. The term leasing should merely be used in accordance with its English legal meaning (see below).

The classification of a lease as a commercial or civil contract is the first hurdle that any practitioner needs to take. It may thus not be sufficient to label a contract to be commercial. Instead the relevant premises must be used for a commercial or business purpose. Also Luxembourg case law is poorly documented and Luxembourg courts would typically turn towards French and Belgian case law. The reference to foreign case law may prove a useful tool given that the French, Belgian and Luxembourg Civil Code all derive from the Napoleonic Code. Thus in Luxembourg, the relationship between landlord and tenant is regulated by the provisions of Title VIII, Articles 1708 through 1778 of the Luxembourg Civil Code. Commercial lease contracts have been given little attention by the Luxembourg legislator, merely enacting a few specific provisions protecting certain rights of commercial tenants.

It appears that the relationship between landlord and tenant has been imperatively regulated as regards almost exclusively private housing. The law of February 14 1955, as amended, modifying and coordinating the legal and regulatory provisions relating to leases, complements the general lease provisions contained in the Civil Code. The 1955 Act provided for the creation of local or municipal lease commissions (Commission des Loyers) acting as an arbitration body between landlord and tenant. The decision of this body may be appealed in front of the Justice of Peace (Justice the Paix), which has exclusive jurisdiction for all lease related matters.

The 1955 Act provides for, among other things, the regulation of lease tariffs (for private housing only), the right for renewal, the revision of the rent and certain specific procedural aspects. The tenant's right to modify the leased premises, the transfer of the lease and sub-lease issues and the consequences of the sale of the property are regulated in the Civil Code.

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 lease contract is not automatically terminated. Therefore the court appointed receiver (curateur) may, upon formal request by the landlord, either terminate the lease, perform it further or negotiate a new lease. The landlord may also rely on a contractual termination clause, although court action may be necessary to actually enforce it.

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

The landlord is granted by law the benefit of a security interest in all furnishings (including stock, machinery, furniture) present in the leased premises for the payment of the rent. Certain limitations apply unless the lease agreement has been validly registered (see below).

3. How has recent statutory reform affected (or, how will proposed future statutory reform affect) the lease renewal process?
A specific section in the Civil Code deals with the lease renewal process. These provisions date back to 1936 and have not been amended. Commercial leases are not regulated as to their duration. In practice, commercial leases will be entered into on a 3, 6, 9 year renewal basis, with a break option for both the tenant and the landlord in the third and the sixth year. If the lease has a fixed term, it will automatically terminate when the term lapses. Commercial tenants, though, may under certain conditions be entitled to a preferential renewal of their lease over a period up to 15 years (Article 1762-4 Civil Code).

At the end of the lease a commercial tenant may further be allowed to remain in the leased premises for two consecutive periods of 6 months each (sursis commercial). These extensions may only be granted by court order.

4. 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, unless otherwise provided for in the lease agreement, a tenant may sub-lease or (partially) transfer the lease. Most leases restrict this by requiring the prior approval of the landlord. A regulation-law of October 31 1936, does however offer protection under certain circumstances, where a going concern (fonds de commerce) is transferred in order to allow the continuity of the business operation as a whole (Article 1762-3 of the Civil Code) .

In case of either sub-leases or transfers, the initial tenant remains liable to the landlord for the performance of the contractual obligations under the lease agreement.

Securitization of real estate assets

1. How significant is the real estate securitization market?
A technique of securitization has first been established in a circular letter of the Luxembourg Revenue in 1997 with the recognition and regulation of the issuance of real estate certificates based on the Belgian model, that is, typically securities issued by the owner of the real estate whereby 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 at the level of the certificate holder. Under current Luxembourg tax law, interest payments are not subject to tax at source. The repayment of the principal will moreover be tax neutral. From a tax point of view, a real estate certificate constitutes therefore an effective hybrid.

The authors are also aware of a limited number of private deals for the securitization of lease receivables. Limited information has been available as regards mortgage-backed securitizations (RMBS) by domestic banking institutions. Securitization activities are not yet regulated by law, though a securitization bill is currently awaiting parliamentary action.

Several mortgage bond banks (banques d'émission de lettres de gage) operate in Luxembourg since their inception by a law of November 21 1997, as amended. Mortgage bond banks must confine their principal activities to the granting of loans specifically secured and refinanced via the issuance of mortgage bonds. These bonds are secured by specifically determined coverage assets (valeurs de couverture). Coverage assets (for example in rem property rights or property collateral) will vary depending on whether the mortgage bank has entered into mortgage or public sector lending. Each coverage asset is recorded in a special collateral register (registre de gages) maintained by the mortgage bank and supervised by an independent auditor.

Mortgage bondholders benefit from a high level of protection since every issuance must at all times be fully secured. Mortgage bond holders further rank first in respect of the relevant coverage assets in case insolvency proceedings are opened against a mortgage bank.

2. To what degree of detail (if at all) are the parties obliged to disclose the lease terms on a formal registry (for example, the land registry)?
The original lease agreement is subject to mandatory registration with the Administration de l'Enregistrement et des Domaines within three months of signing. If this registration formality is frequently omitted in practice and not effectively sanctioned, the lease agreement will still be valid and enforceable. However, in the context of commercial lease agreements, absent this registration formality, the tenant may not apply, for example, for the above sursis commercial. Even though lease agreements are subject to registration, the lease terms will nevertheless not be on public display. The registration formality confers a binding date (date certaine) to the lease agreement and is intended thus to protect the tenant.

Unless the lease agreement is subject to VAT (in which case a fixed registration duty of €12 applies), a 0.6% registration duty is assessed on the sum of all lease payments to be made over the entire lease period (if set for a definite period).

Lease agreements in excess of nine years, need to be passed in notarised form and registered or may not be enforced beyond the ninth year. A copy of such a notarial deed will be filed with the local mortgage keeper. Any interested person may have access to the register of the mortgage keeper.

3. 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 case, the tenant's obligation to pay full rent shall 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.

Property outsourcing

Property outsourcing is mainly structured through real estate leasing (for example, sale-leaseback) transactions that offer fiscal incentives and allow off-balance sheet property financing (see below).

Benefits of private finance initiatives and public-private partnerships are difficult to assess, although various public-private partnerships are currently promoting a few large-scale residential and commercial property developments in various parts of the country.

Financing of real estate transactions

1. What are the most common methods by which purchasers finance high-value real estate transactions in your jurisdiction?
The common method to finance real estate acquisitions is by way of mortgage loans typically ranging from 15 to 40 years.

Real estate leasing should be mentioned for commercial or industrial property developments. A lessor will typically enter into a 20 to 30 year lease term. At its term, the lessee will be entitled to purchase the property, renew the agreement or walk away. Real estate leasing has been used to defer the payment of transfer duties and registration taxes for the period of the lease. If the lessee levies the option at the end of the lease, transfer duties will be levied at that time. Input VAT may further be deducted where the parties are entitled to recover input VAT, though this feature may be unattractive for financial institutions with a low VAT recovery rate.

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 6% (for property located outside Luxembourg-City) or 9% (for most properties located in Luxembourg-City) assessed on the purchase price or the effective value of the property, whichever is higher. Under certain conditions professional resellers may opt for an increased duty (of 7.2% or 10.2%) subject to a 6% refund if the property is disposed off within two years and a refund of 4.8% if the property is disposed before the end of the fourth year. An additional 1% transcription duty (droit de transcription) applies in every case.

Investors may also opt not to purchase the land but to enter into a long term lease agreement (droit d'emphytéose) or to acquire a building right (droit de superficie). A long term lease agreement will generally be made for a fixed period varying between 27 to 99 years. The lease holder may exercise all property rights and even transfer their rights under the lease to any third party. They may also mortgage his leasehold.

When the lease expires, the lessor will automatically hold title to all the buildings located on the land. Unless otherwise provided for in the lease agreement, the leaseholder need not be compensated for any such buildings.

Building rights may be granted for a period of 50 years (renewable). The holder will be entitled to develop any construction on the land. Unlike for long term leases, the holder is entitled to due compensation upon termination.

Private real estate companies (sociétés civiles immobilières) remain the most popular vehicle to finance private or commercial property developments. From a tax point of view, the corporate veil will be disregarded. The relationship between the investors may be freely organized and regulated in the by-laws of the company. The transfer of any interests in the company will trigger the payment of the above transfer duties in proportion to the interest disposed of.

Private and public limited companies are also frequently used to develop and operate real estate developments. As a general rule, no registration duties will be due on the transfer of shares in these companies. Rental income or capital gains will, however, potentially be subject to double taxation, first at corporate level and secondly at shareholder level.

Eventually, real estate investment funds (whether in the form of a SICAV or FCP) should retain the attention of potential investors and property developers. Real estate investment funds are governed by Part II of the law dated March 20 1988, on undertakings for collective investments, as amended (the UCI ACT). Part II funds do not comply with Council Directive 85/611/CEE and thus, are not freely marketable within the EU. Luxembourg real estate investment funds may either directly own or invest in property developments, certain in rem property rights or shareholdings in real estate companies. The investment policy of real estate funds is, however, strictly regulated and investments into a single property may not exceed 20% of the net assets of the fund. The borrowing thresholds are further capped to 50% of the average valuation of the funds' properties, whereby the debt of subsidiary corporations is consolidated under certain conditions. On the tax side, the funds benefit from an income tax exemption. Instead they are generally subject to a 0.05% annual registration duty assessed on their net asset value. Unit-holders are further not subject to source taxation on dividend income and capital gains.

3. To what degree of detail are the parties obliged to disclose the terms of financing on a formal registry (for example, the land registry)?
Mortgage deeds must be inscribed in the local mortgage register. Such an 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.

Conveyancing issues

1. What are the various forms of property ownership in your jurisdiction?
Under Luxembourg law, there is only one form of ownership (propriété) 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 leases (droit d'emphytéose) and a building right (droit de superficie), (both mentioned above in Section D2), usufruct, and easements.

A lease agreement does not grant a right in rem, but the tenant will have a contractual right to possession (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 by notarial deed. The role of the notary public is, as a public officer, to verify the compliance with all applicable legislation and to collect the transfer tax. In addition, he will also advise the parties as to their rights and obligations.

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

E-conveyancing is insignificant in Luxembourg since 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.

3. How has the legislation and recent case law in your jurisdiction addressed the issue of adverse possession?
The ownership of goods can be acquired by inheritance, donation, the effect of agreement (for example, 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 thirty 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 which is required to transfer ownership, but was not granted by the true owner of the property.


Loyens Winandy
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