After last year's record real estate deals which exceeded €2 billion ($3.09 billion) and which have put Romania in the spotlight for international investment funds, 2008 is looking as exciting as ever, with more and more long-term projects making the headlines. The list of international developers that have announced projects exceeding €14 billion and are due for completion in the next 10 years includes the names of TriGranit Development, the third largest property developer in Europe, Copper Beech, Moritz Group, Benny Steinmetz Group and Africa Israel Investments Group.

Although some scepticism emerged following the US credit crunch crisis and the temperate growth-rate of the Romanian economy, the real-estate market retains its high potential for profit return, as demand is still far from satisfied. The capital city, Bucharest, still holds a key position in attracting investments to residential, shopping malls and office buildings projects. But developers are also looking to further expand in other major cities around the country, with many projects already on the way or scheduled to be delivered during the course of the present year in Cluj, Timisoara, Brasov, Sibiu, Constanta, Oradea or Ploiesti.

Land deals form an important piece of the real-estate puzzle, requiring complex and detailed legal and technical assessment before any acquisition or financing takes place. This is especially true in the context of the many changes to which the property regime was subject since 1991, including the restitution process of property that was unjustly confiscated during the Communist regime. In such cases, a thorough investigation of the ownership title can save a lot of time and money in court.

Apart from the usual residential and retail projects, there is a growing interest among foreign investors in developing projects in the field of renewable energy resources. One example is the British investment fund Cofra Group, which intends to invest some €1.1 billion ($1.7 billion) in the construction of two wind power plants in Romania. Romania is considered a strong candidate for wind power development.

An intricate framework

The Romanian legal and regulatory framework that governs land is complex. There is a large amount of legislation. Advice given to investors must be tailored specifically to their specific projects. For example, specific legislation governs certain real estate sectors and activities, such as mining, environmental projects, hospitals, airports, wind farms or investment on the Black Sea coastline.

The ability to quickly obtain ownership over land is an important factor in any investment decision. Land can be acquired relatively easy by foreign companies through the incorporation of special acquisition vehicles in the form of limited liability companies. In fact, this indirect approach to acquiring land has been the most frequently used method in real estate transactions on the market. However, such an option does have some limitations, which aim at preventing the over-multiplication of limited liability companies with a sole shareholder. Thus, according to the provisions of the Romanian Company Law 31/1990, a natural or a legal person can be a sole shareholder in only one Romanian limited liability company. Furthermore, a Romanian limited liability company cannot have as sole shareholder another limited liability company that is owned by a sole shareholder.

The transfer of the ownership right of land is mainly regulated by the provisions of the Romanian Constitution, the Civil Code and especially the provisions of Law 247/2005 regarding the property and justice reform. As most of the land owned by private persons originates either from former state-owned companies that were privatised in the nineties or from the communist agricultural production associations, any title investigation must also observe the application of the special provisions of Law 18/1991 (the Land Law) or, as the case may be, Law 15/1990 regarding the reorganisation of state owned companies. Needless to say, the pieces of legislation mentioned above and the corresponding secondary legislation have given rise to many controversies, and have led to inconsistent judicial practice. In this context the advice of an experienced real-estate lawyer is essential in protecting an investment.

Under Romanian law, a public notary must authenticate an agreement that transfers the ownership right over land. Any such agreement that does not observe the provisions of the law is null and void. Also, pursuant to the provisions of Law 7/1996 (the Immovable Property Publicity Law), in order to be validly enforceable against third parties, the property right obtained by an acquirer of a real estate property must be registered with the Land Book.

It should be noted that if an immovable property is sold to two or more purchasers by the same seller, the Immovable Property Publicity Law gives priority to purchasers that registered their ownership right in the Land Book first and in good faith (that is, did not know about any prior sales), irrespective of the date of execution of the actual transfer agreements. Moreover, the public notary is obliged to check the status of the property as registered with the Land Book when authenticating a sale-purchase agreement. Therefore, the notary should refuse to authenticate a sale-purchase agreement if the Land Book extract is not clean.

It should also be noted that if a sale-purchase pre-contract is concluded before the actual transfer of the ownership right over land, such an agreement must be registered with the relevant Land Book along with an interdiction imposed on the seller to sell the property to other persons. If such a course of action is not observed, then, should the owner sell the property to other persons that register their rights with the Land Book, under Romanian law, the first promising-buyer could only file a claim for damages against the seller, while the second buyer would retain ownership.

Lastly, any construction project must observe the mandatory provisions of Law 50/1991 regarding the authorisation of construction works, the city planning law 350/2001 and the provisions of Law 10/1995 regarding construction standards, as further amended, and the vast secondary legislation in the field.

Breaking the deadlock

The debate about the right of foreign persons to acquire land in Romania is not new. It is based on multiple social, political and economic arguments – for example the efficient exploitation of agricultural land and the Romanian state's sovereign rights over the natural resources of the subsoil. In addition, there is always the need to maintain a proper balance between the objective of attracting foreign investments on the market and the risk of uncontrolled prices increases, especially on the background of speculative transactions.

Traditionally, a restrictive approach towards the possbility of foreign persons obtaining the ownership right over land has been an expression of the state's sovereign power. The Romanian Constitution of 1991, as it was initially adopted, stated that the law protects private property equally, irrespective of the owner. However, according to Article 41 paragraph 2 of the Constitution, in its initial form, foreign citizens could not acquire ownership rights over land in Romania. It should be noted that the ownership right over buildings can be freely transferred or owned, without any restrictions based on nationality.

The text of the Constitution only concerned foreign citizens, making no reference whatsoever to foreign legal persons. Thus, it could be argued that such companies could acquire the ownership right over lands without falling under the interdiction prescribed by the fundamental law. Nevertheless, the Romanian Constitutional Court, through a decision issued in 1997, stated that although foreign legal persons are not expressly mentioned by the constitutional text, there is no doubt that they cannot acquire the ownership right over land in Romania. The jurisprudence of the courts of law and the legal doctrine also adopted the view expressed by the Constitutional Court.

In this context, if a foreign person acquired the ownership right over buildings, for example apartments, then it would only have a right of use over the plot of land where the respective building was located. If the mandatory provisions of the Constitution had not been observed and a foreign person concluded an agreement through which it acquired the ownership right over land, then that agreement would be null and void. Such nullity is not subject to any statute of limitation and can be requested by any person with a justified legitimate interest.

Following the negotiation process for Romania's accession to the EU, Romania accepted the communitarian legal principles. The laws governing the regime of the ownership right over land are not exempt from European primary law, especially the free movement of persons, services and capital and the principle of non-discrimination. On this basis, the European Court of Justice has decided in a number of cases that restrictions on acquisition of real estate property by EU citizens are infringements of the freedom of establishment and the free movement of capital. All member states have the obligation to enable a national of one member state to acquire and use land and buildings situated in the territory of another member state.

In view of this, in 2003, the Romanian Constitution was amended. Article 44 paragraph 2 now states that foreign citizens can acquire the ownership right over land on the conditions resulting from Romania's accession to the EU and from other international treaties to which Romania is a party, based on reciprocity. For the application of the new constitutional provisions, the Romanian Parliament adopted Law 312/2005 regarding the right of foreign natural persons and companies to acquire land in Romania, which represents the main legal act regulating the conditions in which a foreign person can acquire the ownership right over land and which entered into force on the date of Romania's accession to the EU (January 1 2007). According to these legal provisions, a distinction must be made between companies that belong to member states (including both the member states of the EU and the member states of the European Economic Area, EEA), and companies that belong to other foreign states outside the EU and the EEA.

EU and EEA

During the preliminary negotiations, Romania requested a transition period in which foreign citizens and companies would be prevented from validly acquiring the ownership right over land. The EU accepted the idea of maintaining some restrictions, although not for the full period initially proposed by Romanian negotiators. As we will show below, the implementation into the national legislation of the results of the negotiations is still subject to interpretation.

Law 312/2005 states as a general principle that a company incorporated according to the laws of a member state can acquire the ownership right over land under the same conditions as those prescribed for Romanian legal persons. There are two exceptions to this general principle. First, non-resident foreign companies can acquire the ownership right over land for the opening of secondary offices after the expiry of a five-year term starting from the date of Romania's accession to the EU. Second, any foreign company can acquire the ownership right over agricultural land and forests only after January 1 2014 (seven years from Romania's accession to the EU).

Although the second prohibition is clear and unequivocal, several observations must be made in respect of the first restriction. Law 312/2005 states that a non-resident foreign company is a company that does not have one secondary office (branch) in Romania. According to the Company Law 31/1990, a branch is not a separate legal entity from its mother company and does not participate in its own name in the commercial activity. It must be noted that the interdiction prescribed by the law refers to the acquiring of land only with the purpose of setting up a branch. Thus, it can be concluded that, if the company acquires the land for a different purpose (for example, for investment purposes), then it can obtain a valid title right away. In any case, a non-resident company can easily open a branch in Romania and will be considered a resident within the scope of the provisions of Law 312/2005.

Although, Law 312/2005 was published in the Official Gazette in 2005 and entered into force in 2007, neither the public notaries nor the Land Book offices have a consistent practice in relation to the right of foreign companies to acquire ownership over plots of land.

Companies incorporated according to the laws of states outside the EU and EEA can acquire the ownership right over land in Romania based on the conditions set forth by international treaties and based on reciprocity. So far, Romania has not concluded international treaties with countries outside the EU and EEA.

Although there is room for improvement, the provisions of Law 312/2005 represent an important step towards new investment possibilities in the context of a rapidly developing and maturing market.

Author biographies

Valentin Berea Bulboaca & Asociatii SCA Valentin Berea is a partner at Bulboaca & Asociatii SCA. Before joining Bulboaca & Asociatii, Berea was an associate in the competition and litigation practice of the Bucharest office of a magic circle law firm. Berea specialises in real estate, competition and litigation. He has been involved in a significant number of complex real estate transactions as well as in the largest IP litigation to date in Romania. Berea is a licensed patents and trademarks attorney with the State Office for Inventions and Trademarks, and an assistant professor at Bucharest University Law School, teaching contract law to third year students. Berea is a graduate of the Law School of Bucharest University and the University of Paris I, Pantheone, Sorbonne, Faculty of European Law. He is a member of the Romanian Bar Association. He is fluent in English and French. Iustinian Captariu Bulboaca & Asociatii SCA Iustinian Captariu is a junior associate at Bulboaca & Asociatii SCA. He has experience in real estate and litigation transactions. Captariu graduated from the Law School of Bucharest University. Between July 2006 and September 2006 he undertook an internship at the Bucharest office of a magic circle law firm. He is fluent in English and French.