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
1. What legislation and/or regulatory bodies are
responsible for regulating the relationship between landlord
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
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
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
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
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
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
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
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 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
The common method to finance real estate acquisitions
is by way of mortgage loans typically ranging from 15 to 40
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
2. To what extent does stamp duty (or the
equivalent) affect the cost and method of financing real estate
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.
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
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
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
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.
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