CMS Real Estate Finance

Transcription

1 CMS Real Estate Finance

2 Austria 6 Belgium 14 Bulgaria 20 Croatia 27 Czech Republic 33 England and Wales 41 France 48 Germany 54 Hungary 63 Italy 71 Luxembourg 78 The Netherlands 86 Poland 93 Portugal 101 Romania 109 Russia 118 Scotland 125 Serbia 134 Slovakia 142 Slovenia 149 Spain 157 Switzerland 164 Ukraine 174 Contacts 181

3 Introduction CMS is the organisation of European law and tax firms of choice for organisations based in, or looking to move into, Europe. We provide a deep local understanding of legal, tax and business issues and deliver client-focused services through a joint strategy executed locally across 28 jurisdictions with 52 offices in Western and Central Europe and beyond. CMS was established in 1999 and today comprises 10 CMS firms, employing over 2,800 lawyers and is headquartered in Frankfurt, Germany. We have a broad client base, which includes quoted and private companies, financial intermediaries, financial institutions, institutional investors, professional firms and public bodies. Value we bring to our clients Proven international capability built on deep local knowledge Our clients trust us to handle their legal affairs for two principal reasons: Each CMS member firm is a leading practice in its local jurisdiction and our advice reflects our understanding of national laws, culture and business practices. Members of the CMS organisation of law firms are experienced in working together to provide international advice underpinned by common procedures and the same high standards of quality and commitment. Client-based solutions Our approach is to work together, tailoring advice to reflect our clients needs and the markets in which they operate. What does this mean in practice? Advice, assistance and representation from specialist lawyers who work to the same exacting standards wherever they are based. Access to industry expertise and sector insights across European markets. Genuinely integrated project management and coordination. Flexibility of resources and the ability to tailor staffing levels to suit specific project needs. High standards of service quality and responsiveness. Sound commercially relevant advice Our teams are structured around industry and product specialisations, rather than divided along geographical lines, combining specialist expertise, industry knowledge and the experience of relevant assignments. This structure encourages the sharing of experience and sector knowledge, discourages reinventing the wheel and enables our lawyers to deliver cutting-edge legal services on national and cross-border deals. 3

4 Successfully delivering international solutions Our Real Estate Finance team combines the expertise of both our Banking and Real Estate practices. Our experienced European teams have secured a leading position in an increasingly sophisticated and fast-changing real estate market, providing innovative, commercial advice to the full range of market participants. CMS has a successful track record advising a wide variety of domestic and international clients including financiers, developers, real estate trusts and funds on all aspects of real estate investment and development financing. You will have access to lawyers who regularly work together on cross-border teams to ensure seamless legal support. Your team will analyse each deal and work with you to identify the solution(s) that will best enable you to achieve your commercial objectives. Delivering results Our approach Through meeting clients needs on the toughest of transactions, our team has built an excellent reputation for implementing practical and effective structures and solutions. Our strong track record will significantly reduce any learning curve, making our advice more cost effective. Our unrivalled understanding of the real estate industry and its surrounding issues enable us to provide our clients with practical, commercial guidance as well as solid legal advice. Our clients derive real value from their relationships with us. We differentiate ourselves, not purely on the quality of our legal advice, but also by delivering excellence in client service. This means understanding the unique needs of each client, understanding the challenges of each deal and providing a service that is tailored to the individual concerns of each client. The success of our team is thanks to our consistent, thorough and comprehensive approach to client feedback. If we can improve how we do things for you, we want to know about it as quickly as possible, so that we can make the necessary changes! 4 CMS Real Estate Finance

5 5 Bristol Amsterdam Brussels Utrecht London Edinburgh Aberdeen Luxembourg Antwerp Paris Leipzig Lyon Strasbourg Madrid Lisbon Seville Casablanca Algiers Rome Milan Zurich Ljubljana Vienna Bratislava Budapest Zagreb Sarajevo Tirana Belgrade Sofia Bucharest Prague Warsaw Kyiv Moscow Munich Dresden Berlin Hamburg Duesseldorf Cologne Frankfurt Stuttgart Barcelona CMS offices Rio de Janeiro Beijing Shanghai

6 Austria 6 CMS Real Estate Finance 6

7 A. Mortgages 1. Can security be granted to a foreign lender? Yes. There are no restrictions for the registration of mortgages for foreign lenders. 2. Can lenders take a mortgage over land and buildings on the land? Pursuant to the principle superficies solo cedit if a mortgage over land is established, such mortgage extends to the buildings thereon because they are an integral part of the land and follow its legal status; therefore, generally it is not possible to mortgage a building without the land on which the building is built on. The only exception is a so-called superstructure (Superädifikat) which is a building erected on land of another person which are built with the intention not to stay on the land on a continuous basis. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction. In both instances, the mortgagee would have the benefit of the same rights. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Under Austrian law, such mortgage certificates do not exist. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes, second ranking security can be taken. The registration procedure is the same as in the case of the first ranking land charge. The rank and priority of a land charge depends in principle on the time of receipt by the court of the respective application for registration. Change of the ranking in the land register is possible by way of an agreement between the respective secured parties. Priority deeds (Anmerkung der Rangordnung) with respect to an envisaged land charge have to be registered in the land register to become effective. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes, mortgaged real estate can be transferred to a third party without the lender s consent. The mortgagor and the mortgagee may agree that the mortgaged real estate cannot be transferred, however, such prohibition of transfer cannot be registered with the land register and has therefore no in rem effect. Such prohibition of transfer may only be registered with the land register if the agreement is made between spouses, parents and children (including adopted children) or brother / sister-in-laws. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Yes, privileged security interests (Vorzugspfandrechte) exist; such security interests come into existence when such claims become due and do not require a registration with the land register. Therefore, such security interests are not always recognizable in the land register and override mortgages which were registered earlier. The most important privileged security interests are the security interests in connection with real estate taxes. 2.6 Can all monies mortgages be taken? An all monies mortgage (being a mortgage where the mortgaged property stands as security for an indebtedness that is not determined at all at the time the mortgage is created) is not possible under Austrian law because claims must be determined following the principle of speciality. However, the principle of speciality is weakened by the maximum amount mortgage, i.e. a mortgage under which only the maximum amount to which the land can be encumbered is entered into the register. However, also in case of a maximum amount mortgage the mortgage secures an individual claim originating in a specific legal relationship. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes, claims for rent can be pledged and assigned. The landlord and the lender shall conclude an agreement assigning / pledging the landlord s existing and future claims towards the tenant. To become effective, the assignment / pledge has either to be notified to the tenant or the assignment / pledge has to be entered into the accounting books of the landlord. Since claims are not immovable objects, no registration with the Land Register is required. In the event of the borrower s default, the lender may be directly repaid from the assigned claim. It should be noted that according to the Austrian Rental Act, certain lease agreements may only be pledged if the mortgage is granted as security for loans financing useful improvements of the real estate. 7

8 2.8 Is it customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes, it is possible and common practice to pledge bank accounts. However, most general terms and conditions of banks provide for a right to preferentially settle claims by using the funds on the client s account. Thus, the lender usually asks the pledgor to agree with the account bank to waive such preferential right. Usually, if the bank account is pledged, the debtor can dispose of his account, as long as no default occurs; it is however also possible to additionally block the pledged account. 3. What are the mechanisms for registering land and for registering and perfecting security? For the registration of land or a mortgage a public deed is required (notarial act or private deed which contains certified signatures). 3.1 Consequences of failure to register? The ownership right has not been perfected until its due registration with the land register (exceptions apply with regard to obtainment of a real estate by way of universal succession) and therefore the pledge is not protected by the publicity rules of the land register. Also mortgages (and other rights in rem) do not validly exist until registration with the Land Register. In order to avoid registration fees, lenders sometimes accept a registrable mortgage deed which is deposited with the lender or a notary public and which enable the lender to file them in case of an event of default. However, also in such case no right in rem is established until registration of the registrable mortgage deed. Due to the fact that registration with the Land Register is a requirement for the establishment of a right, a missing registration has the consequence that no right is established. This means that claims are not secured, as long as they are not registered with the Land Register. 3.2 Formalities for execution of security and costs? Formalities for execution of securities Costs relating to execution The costs relating to mortgages include (i) notary fees, (ii) fees of the Land Register and (iii) stamp duty. (i) The notary is entitled to notary s fees in connection with the attestation (Beglaubigung) of the mortgage deed and, in case of submission to immediate forced execution, the notarial recording of such submission. The submission to immediate forced execution is a notarial deed executed by the owner of the property whereby the owner submits itself to immediate forced execution, i.e. without the pledgee having to obtain a court judgement. Since not only the signatures are notarially certified but the whole deed is notarially recorded, the notary fees are higher. The notary fees are calculated in accordance with the Notarial Fees Act (Notariatstarifgesetz). (ii) In case of registration of the mortgage with the Land Register, registration fees according to the Court Fee Act (Gerichtsgebührengesetz) in the amount of 1.2% of the mortgaged amount are payable. (iii) Mortgage agreements are generally subject to stamp duty in the amount of 1% of the secured amount according to the Stamp Duty Act (Gebuhrengesetz). No stamp duty is payable on the mortgage agreement if the loan agreement (secured by the mortgage) is subject to the stamp duty. 4. Can the lender use a Security Trustee to hold security on trust for creditors? Under Austrian law, there is no concept of trust similar to English law. However, it is possible for a security trustee to hold the security interest in its own name but on behalf of the secured lenders. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Generally, the security has to be transferred to the new lender (unless in case of a so-called legal cession ). If each lender is registered as a pledge, the mortgage needs to be transferred separately to the new owner. If the correct form of the security trustee is used, no security document needs to be signed. The creation of a land charge requires a notarially certified consent in respect of the registration of the land charge from the owner of the property and registration there of with the competent Land Register. 8 CMS Real Estate Finance

9 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? In general, a transfer of the lease to another tenant requires the consent of the landlord. However, the tenant may sublease the premises if such sublease is not disadvantageous to the landlord and is not expressly prohibited under the lease agreement (whereas such prohibition has to be based on an important reason if the Austrian Rental Act (Mietrechtsgesetz) applies on the lease agreement). 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? In general, based on the Council Regulation (EC) No 44 / 2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters and on Austrian law, the parties to a contract can choose a foreign jurisdiction. However, disputes relating to real estate can only be settled by the competent Austrian court. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? In general, domestic (i.e. Austrian) arbitral awards become final and enforceable without review. Foreign arbitral awards are only recognized and enforceable in Austria if such recognition is provided for in international treaties to which Austria is a party. Thus, e.g. treaties within the scope of the New York Convention on recognition of arbitral awards are enforceable in Austria. Further, foreign judgements rendered under the Council Regulation (EC) No. 44 / 2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters will generally be reviewed and enforced without review of the merits of the case (if enforcement is not prevented by specifically in art. 34 enumerated factors). Further, a foreign arbitral award is acknowledged according to Austrian Execution Law (Exekutionsordnung) if the mutual recognition of arbitral awards of such foreign country is provided for by binational agreements or regulation. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? For the forced sale (Zwangsversteigerung) (or forced administration (Zwangsverwaltung)) procedure, the court for the Land Registry at which the real estate is registered is competent. The creditor has to submit with the application for forced sale a list of all persons having rights on the real estate and an enforcement title (such title being the positive final judgement or a directly executable notarial deed). The court appoints an expert who assesses the value of the real estate and fixes the day of the public auction. After the sale of the real estate the court fixes the date for distribution of the purchase price to the creditors. The forced administration serves for settlement of the creditors claims by the use of the revenues arising from the administration of the real estate (such as rental revenues). The forced administration may be applied together with the forced sale. For administration of the real estate, an administrator is appointed by court. Based on recent court precedents, it appears doubtful whether a private sale (based on a power of attorney by the owner to the creditor) is possible (unless the debtor is cooperative). 6.4 Is the lender responsible for the maintenance and insurance of the real estate after default until sale? According to the Austrian Execution Act, in case of a forced sale proceeding, as of acquisition of the real estate, the acquirer of the real estate enters into the insurance agreement concluded by the former owner of the real estate and is responsible for maintenance and insurance of the real estate. If after the initiation of the sale proceedings and the sale of the real estate, forced administration (Zwangsverwaltung) is applied for by the creditor, the court appointed administrator is in charge of the maintenance of the real estate and has to pay insurance premiums using the revenues of the real estate. If the owner maintains the possession of the real estate during this phase, the owner himself is responsible for the administration and maintenance of the real estate. 9

10 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? Under Austrian law in the case of a borrower s default, the ownership of the mortgaged property is not automatically transferred to the mortgagee. Any such provision agreed on between the mortgagor and the mortgagee prior to maturity of the claim is null and void. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? No. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes, security over shares in an Austrian company can be granted to foreign lenders. 2. Can second ranking security be taken? If so, how is it registered? Yes, second ranking security can be taken and is established in the same way as a first ranking security; provided that certain specifics apply (and cooperation of the first ranking beneficiary will be required) for joint stock companies. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? No public registration is provided for under Austrian law. 3.2 Formalities for execution of security and costs? The security is established by the share pledge agreement (providing for a first or other ranking pledge) and perfected by the required publicity act. Usually, the notification of the company is sufficient as publicity act; only in case of shares in joint stock companies which are chartered by a document of title, does the document have to be transferred to the lender. Without the publicity act the security is not perfected. The only costs which occur are the costs of the legal advisors in connection with the drafting of the share pledge agreement. 4. Do the shares need to be transferred into the name of the lender or its nominee? No, such transfer is not needed. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? In the case of enforcement the shares may be sold either by the court (either by public auction or, if the shares have a determinable market value (e.g. in case of stock), by private sale of the court appointed administrator without public auction) or, if agreed between the parties, by the pledgee by private sale. A forced administration by a court appointed administrator is not foreseen under the Austrian Execution Act, however, the share pledge agreement often contains irrevocable power of attorneys issued by the pledgor authorizing the pledgee to sell the real estate in the pledgor s name and / or to exercise the pledgor s shareholder rights. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? It is common practice for a subordination agreement to be entered into between the borrower, its shareholders and lenders of a facility granted to that borrower. These deeds of subordination will provide for the subordination of the shareholders loans to other loans granted to that borrower. However, it is not common practice that such provisions are included in the share pledge agreement. Without such subordination agreement, the loans from shareholders are usually not subordinated unless they have been granted to the company during financial distress instead of injection of share capital in such case under the terms and conditions of the Equity Substitute Act (Eigenkapitalersatzgesetz), such loans may be regarded as equity and will therefore be subordinated to other loans provided to the company. 10 CMS Real Estate Finance

11 C. Leases Real Estate Finance Austria Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The length of the lease contract is determined by the parties in accordance with their economic needs, subject to the comments below. The typical lease length depends on the kind of use (private / commercial) and the sector (small retailer, shopping city, hotel). 1.2 Maximum / minimum lease length if any? Under Austrian law, in general, no maximum or minimum term of lease agreements exist. Only with respect to leases which fall under the scope of the Austrian Rental Act (Mietrechtsgesetz) and which are concluded for a fixed term, the Austrian Rental Act imposes a minimum lease length of three years (whereas the tenant may terminate the lease agreement after one year); this provision also applies to every extension of such lease agreement. Lease agreements may either be entered into for a fixed term or for an indefinite period of time. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Lease agreements entered into for a definite period of time expire upon the end of the lease term. Fixed term contracts may only be terminated before their expiry for good cause. Lease agreements entered into for an indefinite period of time may be terminated in accordance with the notice periods agreed between the parties or the notice periods provided for under the Austrian Civil Procedure Act (Zivilprozessordnung). Private lease agreements concluded for an indefinite period of time and which fall within the scope of the Austrian Rental Act may only be terminated for the reasons set out in the statute. Lease agreements entered into for a definite period of time may be extended by the parties by mutual agreement. The fixed term in a lease agreement can either be an unconditional fixed term (unbedingter Endtermin) (i.e. in such case the lease expires automatically with the lapse of agreed lease term) or a conditional fixed term (bedingter Endtermin) (i.e. requiring, in addition, a termination notice). If a conditional fixed term was expressly agreed between the parties, the lease agreement will be extended automatically if no party submits a termination notice. Further, irrespective of the fact whether a conditional or an unconditional fixed term was agreed, if the tenant continues to use the premises following expiry of the lease and the landlord does not react, the lease agreement is extended automatically for the period set out in the lease agreement, and, if no term is stipulated, the extension is for one month. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? A fixed term lease agreement may be terminated by either party for important reason, such reasons being stipulated in the Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch) and in the Austrian Rental Act (Mietrechtsgesetz). 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? Any limitation of the contractually stipulated use that is not unsubstantial may entitle the tenant to a reduced rent. Except for the limitations of termination and the implied extension of lease agreements, the tenant has no right to take possession of the real estate beyond the rights under the lease agreement. With regard to lease agreements which fall into the scope of the Austrian Rental Code, specific provisions with regard to determination of maximum rents apply. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Rent is usually paid monthly in advance. For commercial leases in shopping centres and hotels, quarterly payments are market practice. With regard to hotels in particular, often a combination of fixed term and variable term is agreed with an annual adjustment. 2.2 Periodicity of reviews? The periodicity of review depends on the contractual agreement. Usually, rents are adjusted in accordance with the consumer price index. For lease agreements within the scope of the Austrian Rental Act, the rents are yearly reviewed in view of the maximum rents provided for in the statute. 11

12 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Usually, the rent is annually adjusted in accordance with the consumer price index, whereas deviations of up to 10% are often not taken into account. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? With regard to lease agreements within the scope of the Austrian Civil Code, no statutory control regime is provided for; with regard to lease agreements under the scope of the Austrian Rental Act, a differentiated regime for maximum rents is stated. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The lease obligations depend on the type of lease agreement as some lease agreements are governed by the Austrian Civil Code and others by the Austrian Rental Act which contains more provisions for the benefit of the tenant. For the avoidance of doubt, most of the commercial leases are governed by the Austrian Civil Code. According to the Austrian Civil Code, the landlord is obliged to maintain the lease premises in a usable condition. Most of the maintenance obligations are usually transferred to the tenant. 3.2 External maintenance, decoration and repair? According to the Austrian Civil Code, the landlord is obliged to maintain the lease premises in a usable condition. Most of the maintenance obligations are usually transferred to the tenant. 3.3 Structural repairs? The landlord is responsible for structural repairs. 3.4 Insurance? Insurance costs are operational costs and have to borne by the tenant. 3.5 VAT? 3.6 Rates? Generally, public charges (e.g. real estate taxes) are to be borne by the landlord and operational costs are borne by the tenant. In the case of execution of a lease agreement, stamp duty falls due. The parties usually agree that the tenant shall pay the stamp duty. 3.7 Other typical outgoings? No. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Normally, the tenant has to pay all service charges. The definition of operational costs in the relevant statutes is quite broad; therefore, management costs may also be operational costs to be borne by the tenant. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Contractual stipulations and terms of leases are generally enforceable and supported by the Austrian courts unless such provisions contravene against mandatory provisions of the Austrian Civil Code or Austrian Rental Code. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? In order to be recognized by a court, a property valuation must be made by a domestically regulated and qualified expert appointed by the court. However, the parties of a loan agreement or a lease agreement may contractually agree on the (e.g. yearly) valuations by a foreign appraiser and may relate certain consequences (as increase of rents; event of defaults) therewith. A reduced rate of 10% applies for the leasing of immovable property for accommodation purposes. If the property is leased for commercial purposes, VAT at 20% applies. 12 CMS Real Estate Finance

13 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? A public register regarding certain contaminations exist (Altlastenregister). Except for that, no public available information exists. There are however, various professional service providers specialising in environmental compliance which may provide environmental due diligence reports. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No, a lender holding or enforcing a mortgage cannot be held liable for past or present breaches of environmental laws relating to the mortgaged properties unless the lender purchases the real estate. 13

14 Belgium 14 CMS Real Estate Finance 14

15 A. Mortgages 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take a mortgage over land and buildings on the land? Yes. 2.1 The distinction between mortgages on land and buildings on the land? None. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. A second ranking mortgage is established before a Belgian Notary and must be registered at the Mortgage Registrar ( Bureau de la Conservation des Hypothèques / Kantoor van Bewaring der Hypotheken ). A second ranking mortgage ranks below the first ranking mortgage as a matter of law. If the second ranking mortgagee wishes to take enforcement action it can do so but the first ranking mortgagee has a primary right to sell the secured real estate. The first ranking mortgagee is entitled as a matter of law to receive the net proceeds of enforcement to apply to the sums owed to it, whether enforcement is carried out by that mortgagee or not. Priority deeds are not required and the concept of a deed regulating priorities is an unknown concept to Belgian law. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. A mortgagee can enforce the mortgage even though the property is no longer owned by the original mortgagor. In practice, a mortgage deed includes an agreement not to sell (or grant rights in or to) the property except with the prior written approval of the lender. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Numerous legal liens and privileges can attach to all (or part) of a debtor s assets. Prior ranking security arising by operation of law ranks in priority. Specific advice should be taken. Examples of prior ranking claims are claims for unpaid rent, unpaid insurance premia and claims by sub-contractors. In addition, Belgian tax authorities and governmental social authorities have a general lien over all non-real estate assets of a debtor for monies owed to them by the debtor. 2.6 Can all monies mortgages be taken? Yes. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. A receivables pledge of rents can be taken which would be enforceable against the relevant tenant once that tenant receives notification of the pledge. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. Security is taken over bank accounts by a receivables pledge. It is usual for lenders to contractually restrict the borrower s rights to withdraw funds from the borrower s bank accounts. Typically, the receivables pledge agreement allows the borrower to freely operate their accounts until default occurs. After default, amounts standing at credit on those accounts are to be paid to the lender and cannot be withdrawn without lender consent. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? Security is not enforceable against third parties. 3.2 Formalities for execution of security and costs? Mortgages must be (i) established before a Belgian Notary (by way of a notarial deed) and (ii) registered at the relevant local Mortgage Registrar (becoming effective on registration). A mortgage is valid for 30 years from the date of registration but it can be renewed. 15

16 Registration duties 1% of the secured obligations. Mortgage duties 0.3% of the secured obligations. Mortgage Registrar s fees Calculated on a sliding scale with no set maximum based on the amount of the secured obligations (the fee for each tranche of EUR 25,000 of the secured amount, being EUR for the first tranche and EUR for each further tranche) plus a nominal fee depending on number of pages in mortgage deed. Notary fees From % to 1.71% of the secured obligations. Administrative costs EUR 650 All security constituted by attending a Notary requires the lender to be represented. Usually the lender grants local Belgian lawyers a power of attorney (limited in scope and duly legalised in the lender s own jurisdiction) to enable the lender to be represented before the Notary. It is recommended the power of attorney is put in place ahead of completion. 4. Can the lender use a Security Trustee to hold security on trust for creditors? No. Parallel debt arrangements are used instead: the agent borrows loans from each of the syndicate lenders (which the agent on-lends to the borrower). The borrower grants security to the syndicate for the agent s liability to the syndicate lenders. The borrower s loan liability to the agent is unsecured. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? In case of a merger between banks (involving a transfer of the mortgage to a new entity), no new security needs to be signed. In case of the refinancing of a bi-lateral loan (i.e. the transfer of the mortgage to a new lender), a notarial deed for novation is possible but almost invariably a new mortgage is taken by the new lender and the old mortgage is released. In a parallel debt situation no new security needs to be taken. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? A lease of retail premises together with the business assets ( cession du fonds de commerce / overdracht van het handelsfonds ) can be transferred without needing landlord s consent. For other leases, the outgoing tenant will not be bound by the terms of the lease if it received landlord s consent to transfer the lease to a new tenant. If the outgoing tenant transfers its lease interest to a new tenant without the lender s consent, the outgoing tenant will remain liable under the lease. Unless a default has occurred, it is unusual for the lender to have control over changes in tenants. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? A foreign jurisdiction can be chosen to settle disputes between lenders and borrowers. In the current context, issues relating to the enforcement of the Belgian security and rights / interests in Belgian property would be determined by the Belgian courts and Belgian law. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? No. Belgium is, however, party to the Brussels and Lugano Conventions and subject to the Brussels Regulation (EC44 / 2001) on recognition and enforcement of judgments in civil and commercial matters, which generally provide for recognition of judgments of most EC partners, except in limited circumstances. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The enforcement of a mortgage results in the sale of the property to a third party. Except for private sales by a receiver / liquidator, the real estate is always sold by a notary public under the supervision of the court. The sale is normally by way of a public auction. However private sales may also be permitted by the court. 16 CMS Real Estate Finance

17 A secured lender cannot appoint a receiver or a liquidator to a company. If a company is bankrupt, the receiver (who is appointed by the commercial court) may suspend any lender enforcement and sell the property by private or public sale. The sale needs to occur within a one-year period (before the expiry of the receiver s authority to sell) and the receiver is obliged to pay the net proceeds to the first ranking mortgagee after paying the holders of liens / privileges (see A2.5) and his own costs. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. However, a lender may choose to maintain / insure. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? Foreclosure is prohibited. Mortgagees may not gain title to the property without any obligation to sell it. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? No. B. Security Over Shares 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes, if first ranking pledgee approves, a third party pledge-holder can hold the pledged shares for the account of multiple pledgees. B3.2 for perfection requirements. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? If the pledge is not registered, the security is not enforceable against third parties. 3.2 Formalities for execution of security and costs? A pledge over registered shares requires appropriate book entries (registration) in the company share register. The pledge over dematerialised shares is perfected by the booking (registration) of the shares on a special pledge account. A pledge on bearer shares requires the delivery of the shares to the pledgee. No noteworthy taxes / costs (except legal fees and banking fees in connection with granting a pledge over dematerialised shares). 4. Do the shares need to be transferred into the name of the lender or its nominee? Generally, no. A special pledge account can be opened in the name of the lender or its nominee for dematerialised shares. Bearer shares need to be delivered to the lender. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Generally the enforcement of the pledge and the sale of the pledged assets require the prior approval of the President of the commercial court, which can be obtained by summary proceedings. The sale needs to be by public auction unless the court approves sale by private bargain. In some instances and where agreed in the pledge agreement, the pledgee can be entitled to appropriate pledged financial instruments and / or sell the financial instruments to third parties either through private sale or auction, without the need for court approval. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders can be contractually subordinated. Shareholders can agree that repayment of their loans are waived / written off should default occur, but this is not yet customary in Belgium. 17

18 C. Leases Note: our answers do not apply to leases entered into with retailers. Specific legislation protects the position of the retailer as tenant. 1. Lease Structure 1.1 Typical lease length? The lease length is determined by the parties in accordance with their economic needs, subject to the comments below. Usually, a term of 9 years. 1.2 Maximum / minimum lease length if any? Not applicable. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Subject as follows, a lease is entered into for a fixed term: Lease agreements may provide the tenant with a break option, allowing the tenant to terminate the lease before the end of the agreed lease term if it gives the requisite notice; If, after fixed term expiry, the tenant stays in the premises without objection of the landlord, the lease is renewed on the same terms and conditions (i.e. for the same duration and rent as the original lease); A lease with no express duration is deemed to be granted on a rolling month-to-month basis and can be terminated by either party giving 1 month s notice; It can be agreed that a lease will automatically renew at expiry of the fixed term on the same terms and conditions (i.e. for the same duration and rent as the original lease), unless notice is duly served to terminate. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? If leased premises are destroyed (and can no longer serve the purpose for the premises were leased), the lease is automatically terminated. If the landlord is in breach of his obligations under the lease the tenant can seek the termination of the lease before the courts. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? No. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? No statutory provisions. Generally rent is payable in advance, typically either on a monthly or on a quarterly basis. 2.2 Periodicity of reviews? 2.3 No rent reviews are allowed during the lease term, except indexation reviews (see C2.4 and C2.5). 2.4 Basis of review (upwards-only or variable, indexation or market rent)? Rent is usually reviewed annually by reference to a specified index (see C2.5). 2.5 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Yes. The rent can be indexed only once a year in accordance with the health price index (which can increase or maintain the amount of rent payable). Generally, leases provide that the rent will not decrease below the originally agreed rent (even if the index is negative). The earliest such a review can take place is on the first anniversary of the lease. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Small repair and maintenance works connected with the ordinary use of the let premises are borne by the tenant. 18 CMS Real Estate Finance

19 3.2 External maintenance, decoration and repair? The landlord must maintain the let premises in a good state of maintenance during the lease term and carry out all repairs required in that respect ( landlord s works ). However, leases often provide that the landlord is only responsible for structural repairs and that all other maintenance and repair works are borne by the tenant. External and internal maintenance, decoration, repair beyond the landlord s works and maintenance / repair obligations accepted in the lease are the tenant s responsibility ( tenant works ). 3.3 Structural repairs? All repair costs which are not tenant works (such as structural repairs) are borne by the landlord. 3.4 Insurance? There is no statutory obligation to have insurance cover in place. Buildings insurance is frequently taken out by the landlord and the premium is then charged to the tenant under the terms of the lease. Most leases require the tenant to insure its own assets placed in the premises. Generally, it is a lease condition that each party to the lease obtains a waiver by its insurer of any rights it might have to insurance proceeds paid out by the other party s insurer. 3.5 VAT? 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The lease agreements are recognised by Belgian law and case law assists in the interpretation of lease agreements. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? To be recognised by a court, it is advisable that a property valuation report be prepared by a domestically regulated and qualified expert. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. Lenders often request such report prior to lending. It is seldom requested by parties entering into a lease. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. Standard leases are not subject to VAT. 3.6 Rates? See C Other typical outgoings? See C The ability to recoup any landlord outgoings (including management costs) by way of service charges? Common practice is for the tenant to enter into a triple net lease: the tenant is obliged to pay (i) rent, (ii) maintenance / insurance / repair costs and (iii) real estate taxes. (ii) and (iii) are charged as service charge. Landlords tend to include as many items as possible in the service charge. 19

20 Bulgaria 20 CMS Real Estate Finance

21 A. Mortages 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take a mortgage over land and buildings on the land? Yes. Mortgages can also be taken over the right to build a building on land (but not over the land itself). The owner of the land grants the right to a developer. This right converts by operation of law to a full ownership right in the building at the end of construction. In some circumstances, a fresh mortgage is not required over of the building (once the building is constructed) but advice should be sought. 2.1 The distinction between mortgages on land and buildings on the land? A building can be owned by someone who does not own the land upon which the building is built. A mortgage can be granted over a building only, land only or the building and land. Also, premises within the building (e.g. an apartment) can be mortgaged where those premises form a separate real estate. Registration and enforcement procedures for all these mortgages are the same. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. Priority is established by the date (and, if on the same date, the time) of registration and priorities cannot be varied by entering into a priority deed. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. Registered security will be enforceable against new owners of real estate. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Yes. The following items are deducted from the real estate gross sale proceeds before the lender (as mortgagor) is paid: (i) enforcement costs (ii) costs incurred by creditors obtaining a court order to stop the sale / disposal of the real estate (injuction); and (iii) unpaid real estate taxes. In bankruptcy proceedings, the first ranking mortgagee has priority over all other creditors. 2.6 Can all monies mortgages be taken? No. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? The right of the landlord to receive rent can be pledged under a receivables special pledge agreement. The pledge agreement is signed, registered with the Central Pledges Registry and the tenant(s) is / are notified of the pledge by the lender or the landlord. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Security over bank accounts can be taken by a pledge over receivables (see A2.7 for mechanics). Collateral over bank accounts can be also taken under the Financial Collateral Arrangement Act. It is possible and usual for lenders to contractually restrict the right of the pledgor to dispose of the funds in accounts (without lender consent) until the scheduled interest and capital repayments are made. 3. What are the mechanisms for registering land and for registering and perfecting security? There are two kinds of mortgages: a contractual mortgage and a statutory mortgage. Contractual mortgage A contractual mortgage is created by (i) execution of a mortgage agreement as a notary deed followed by (ii) its registration with the Real Estate Registry. 21

22 Statutory mortgage A statutory mortgage is registered at the request of an entitled creditor (by application to the Real Estate Registry). It can only be registered in favour of (i) a seller of real estate (for the consideration payable for the real estate) (ii) by a joint owner of the real estate (iii) banks (securing real estate / property rights acquired entirely or partially with the proceeds of a loan) A statutory mortgage is usually taken by lenders as (i) the borrower does not need to be a party / agree and (ii) registration fees are lower. 3.1 Consequences of failure to register? If the mortgage has not been registered with the Real Estate Registry then it has not been validly created and cannot be enforced. The registration is valid for 10 years. It can be extended before or after the expiry of the previous registration term for a period of 10 years. It is recommended that the registration is renewed before expiry to preserve the security and its ranking position. If renewed after expiry the mortgage will rank as of the date of the renewed registration. If other mortgages / rights are registered against the same real estate before that date those other mortgages / rights would have a prior ranking position. 3.2 Formalities for execution of security and costs? A proper description of the secured obligations in the mortgage is important. Their amount, maturity and interest rate is included in the mortgage and registered with the Real Estate Registry. It is important that legal advice is taken before making any amendment, increase, transfer, novation, substitution or other change to the secured obligation. Most changes need to be made in writing with notary certification of the signatures so the obligations (as varied) remain secured. In certain situations a new mortgage might need to be taken (e.g. if the loan itself is increased). Variations and new mortgages need to be registered with the Real Estate Registry. Notary Fee Calculated on the amount of the secured obligations with a current maximum of BGN 6,000. Registration Fee 0.1% of the secured obligations (all mortgages). Please note that additional likely costs include translation costs and costs of certification of documents such as powers of attorney. All security constituted by attending a Notary requires the lender to be represented. Usually the lender grants local Bulgarian lawyers a power of attorney (limited in scope and duly legalised in the lender s own jurisdiction) to enable the lender to be represented before the Notary. It is recommended the power of attorney is put in place ahead of completion. 4. Can the lender use a Security Trustee to hold security on trust for creditors? Generally, no. Where a syndicate is lending the security is granted in favour of the lenders (not in favour of any agent) so each lender can exercise its own security / enforcement rights. For administrative convenience one of the syndicate banks or other person can be authorised to act / sign / enforce on behalf of the syndicate lenders, although such authorisation can be revoked at any time by the grantor (as a matter of law). Security agent arrangements are recognised for bondholders and holders of other debt securities under financial collateral arrangements. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Transfers (assignments) need to be registered at the relevant security registry, but there is no need to take fresh security. Novations need the consent of the borrower / guarantor / mortgagor / pledgor and (in a syndicate) all lenders. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? The tenant may sub-let the premises to a third party, unless it is expressly forbidden in the lease. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? If the dispute is not within the exclusive jurisdiction of Bulgarian courts and the dispute is with regard to Bulgarian property rights, any such dispute may be submitted to a foreign court by an agreement in writing between the parties. Bulgarian property rights stem from assets located in Bulgaria, rights governed by the laws of Bulgaria and assets whose creation or security enforcement is governed by the laws of Bulgaria. 22 CMS Real Estate Finance

23 The parties to a dispute over Bulgarian property rights may also agree that the dispute should be settled by an arbitration tribunal, unless the dispute is with regard to real estate rights or employment rights. Bulgarian courts have exclusive jurisdiction to resolve, among others, claims regarding real estate rights in property situated in Bulgaria, and disputes related to mortgages must be submitted to a Bulgarian court. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Bulgaria is subject to the Brussels Regulation (EC44 / 2001) on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters so qualifying judgments will be recognised and enforced by the Bulgarian courts assuming the limited grounds for refusal do not apply. For recognition and enforcement the lender would need to initiate proceedings in the Bulgarian courts. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Mortgage (a) A writ of execution is needed (allowing the mortgagor to enforce the mortgage). This writ is issued by the court. (b) The mortgagee engages a court officer (called an execution officer ) to sell the mortgaged real estate by silent public auction (for a period of 1 month) to the highest bidder. Other mortgagees / creditors can join in this process. (c) The court officer gives the borrower 2 weeks written notice to pay the amounts owed to the mortgagee and at the same time he applies to the Registration Agency for an injunction over the mortgaged real estate (which prevents the borrower / mortgagor disposing of the real estate from that date). (d) When the highest bid is announced all other bidders are entitled to make higher bids and the highest bidder is declared as owner of the mortgaged assets. Payment in cash is due by the end of that week. If the mortgagee is the highest bidder it need only pay sale price less the amount of the secured obligations. (e) The court officer makes the distribution in accordance with the priority rules. There are detailed rules on subsequent auctions if the first auction is not successful. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. If the debtor fails to manage the real estate properly / obstructs its inspection, the court officer may arrange for an agent to manage the property. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? The mortgagor and the mortgagee cannot agree, before an event of default has been declared, that the mortgagee can take title to the real estate in a default situation. However, the mortgagee can buy the real estate at public auction (see A6.3 for mechanics) and, after default, a voluntary agreement to sell is possible. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? If enforcement action for public liabilities starts and / or injunctions are put in place for them before bankruptcy proceedings start, their enforcement / effect is not stayed by the bankruptcy proceedings. Public liabilities are claims by the Bulgarian revenue authorities and have equal ranking to secured claims. After satisfaction of such claims and secured obligations (on a rateable basis) any remaining net proceeds are transferred to the bankruptcy estate. The Bulgarian court sets the date when a debtor was insolvent and this date could be months or even years in the past. Insolvency claw-backs (un-doing transactions at undervalue and transactions preferring one or more creditors over the general body of creditor) apply from the date the court sets. In marginal cases, obtaining evidence of solvency when taking security would be recommended. The general prohibition on Bulgarian joint stock companies giving financial assistance (including security) for their own shares should be considered when structuring a transaction requiring acquisition finance. Bulgarian limited liability companies are not subject to the prohibition. 23

24 B. Security Over Shares 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes. Pledges on one asset rank the order in which the pledges were created (or registered, where registration is required). 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? If a pledge is not registered in the appropriate register (and registration is required) valid security has been created but third parties could acquire a prior ranking security over the shares by registering their security first. 3.2 Formalities for execution of security and costs? (a) Possessory pledge (bearer certificated shares) delivery to the pledgee. (b) Possessory pledge (registered certificated shares) certificates are endorsed indicating they are pledged, are delivered to the pledgee and the pledge is noted in the company s shareholders book. (c) Pledge of de-materalised shares registration with the Bulgarian Central Depository and the pledge is registered in the company s book of book-entry shares. (d) Pledge of quota (equity participation in a limited liability company) a written pledge with notarial certification of signatures is registered with the Commercial Register with the Bulgarian Registry Agency. Highly illiquid. (e) Pledge of dividends receivables pledge registered in the Central Pledges Register and notified to the company in which shares / quota are pledged. (f) Floating charge ( pledge of going concern ) a written pledge with notarial certification of signatures is registered with the Commercial Register. To create effective security against third parties the pledge also needs to be registered against assets which are registered with a specialist registry (e.g. Central Depository for de-materialised shares, Real Estate Registry for real estate etc). 4. Do the shares need to be transferred into the name of the lender or its nominee? No. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? (a) Possessory pledge of shares (commercial transaction) if certain conditions are met, out-of-court sale by private bargain at market value / stock exchange value is permitted. If not a court enforcement procedure is available and a professional or state enforcement agent is required to carry out a public auction of the shares. These shares can also be sold via the mechanism in B (b) Registered pledges a simplified out-of-court procedure by filing a notice with the Central Pledges Register and notifying the pledgor. The pledgee can sell two weeks after the filing. The sale proceeds are distributed by an accountant (appointed by the pledgee) according to priority rules. Complications can arise if procedure is challenged. Method depends on the nature of the pledged asset: Shares the pledgee can transfer the pledged shares in the appropriate manner (e.g. by endorsing them). Stock exchange shares are sold at the previous day announced value. Quotas the pledgee cannot freely sell the quotas. The pledgee can request payment from the company of the net assets value of the quotas in the most recent balance sheet which is not usually realistic and the final resort is to apply to the court to either put the company into liquidation or for removal of the quotaholder as a member. Voluntary sale to existing quota-holders on terms to be agreed between the parties is likely to be the only commercially realistic means of promptly realising sale proceeds. Floating charge the pledgee may sell some or all the assets. There is an onus on the pledgee to sell the assets least core to the pledgor s business first. If all assets are to be sold the pledgor appoints a manager who controls the management of the company pending sale. 24 CMS Real Estate Finance

25 Dividends the pledgee can sell the right to receive or collect the cash. The pledgee is not entitled to have the ownership of shares / quotas transferred directly to him. Enforcement sales are not exempt from merger control. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Shareholder loans can be subordinated on a contractual basis between creditors (it is not binding on the company or insolvency officers). In insolvency proceedings, shareholder loans are generally paid only after the full satisfaction of the other creditors. However shareholder loans are paid prior to (i) transactions where there is little or no value to the company and (ii) creditor expenses incurred in those insolvency proceedings. Is it not customary for shareholder loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur, but it is possible. C. Leases 1. Lease Structure 1.1 Typical lease length? The parties to a lease can agree the term of the lease subject to C1.2 below. Generally, commercial leases are for a fixed term. Typical lease lengths for normal commercial leases we see generally range between 3 to 10 years, with longer leases for anchor tenants and special-purpose premises. 1.2 Maximum / minimum lease length if any? Commercial leases can have a term over 10 years. Otherwise, the term cannot be longer than 10 years. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? The parties to the lease agree termination / renewal terms, failing which: (a) Fixed term if after expiry of the term, the tenant continues to occupy the premises with the knowledge and without the objection of the landlord, the agreement shall be deemed extended for an undefined term but capable of being terminated by either party by giving 1 month s prior written notice. (b) Undefined term each party can terminate the agreement by giving 1 month s prior written notice. If the rent is payable daily only 1 day s prior written notice is needed. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? The tenant can unilaterally terminate the lease upon (i) non-performance of the landlord, (ii) destruction of the property or (iii) the landlord s right to use the property being terminated. The parties to the lease can agree to terminate the lease before its expiry. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? If the leased premises are not fit for purpose, the tenant is entitled a rent reduction or to terminate the agreement. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? Generally, paid monthly in advance on the 5th to 10th day of the month. However any other arrangements are possible. 2.2 Periodicity of reviews? There are no statutory provisions for rent reviews. It is common practice to agree an annual rent indexation. 25

26 2.3 Basis of review (upwards-only or variable, indexation or market rent)? The indexation is usually in accordance with the Harmonized Index of Consumer Prices of EUROSTAT or of the Bulgarian National Statistical Institute. Review on a market rent basis is not customary. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Unfair lease terms may become invalid under consumer protection law if the tenant is a natural person acting in a non-business capacity. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? For negotiation. If no agreement is recorded, nonmaterial internal and external repairs due to normal wear and tear are a tenant expense. All other repairs (if they are not the tenant s fault) are a landlord expense. Common area maintenance costs, in a shared building, (e.g. the costs for electricity, cleaning, elevator, etc.) are usually paid by the tenant. 3.2 External maintenance, decoration and repair? See C Structural repairs? Landlord. 3.4 Insurance? Insurance cover is not required by law. Parties can agree who is responsible for insuring the premises. If the landlord insures the premises, the landlord will generally aim to pass that cost on to the tenant under the lease terms. 3.5 VAT? Residential lease (to natural persons) are generally VAT exempt. Accommodation provided by a hotelier 7% VAT (to become 9% as of 1st April 2011 pursuant to the most recent amendments to the Bulgarian VAT Act). All other leases, 20% VAT. 3.6 Rates? Usually the landlord is responsible for the payment of the state fees or taxes. The landlord will generally aim to pass those costs onto the tenant under the lease terms. 3.7 Other typical outgoings? Fixed-term leases typically provide that where the tenant terminates the lease before its expiry the tenant is liable to pay (under an indemnity provision) the total amount which would have been payable under the lease for the duration of the term. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Normally, the tenant pays all service charges (water, heat, power etc). The parties generally agree that management costs shall be paid by the tenant. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The terms of the leases are recognised and supported by court practice in the jurisdiction. However, if a specific clause is deemed invalid this does not render the lease agreement invalid itself. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? No. However, whenever an expert appraisal is required by the court, such expert is chosen from the list of appointed qualified experts, which every regional or district court maintains. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Only the Ministry of Environment and Water and the Regional Inspectorate of Environment and Water is authorised to make environmental impact assessments. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. 26 CMS Real Estate Finance

27 Croatia 27

28 A. Mortgages 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take a mortgage over land and buildings on the land? Yes. 2.1 The distinction between mortgages on land and buildings on the land? Generally, none. However, if a building is built on the basis of a permission granted by the landowner (pravo građenja) it is possible to register that building as a legally separate real estate with its own topographical lot number. It is possible to take a mortgage over that building only, or the land only or both the building and the land. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. The ranking of a mortgage is determined in order of the date of its submission for registration at the relevant Land Register. The ranking of mortgages can be altered by a Croatian deed of priority (ustup prvenstvenog reda hipoteka) which needs to be registered at the relevant Land Register in order to be binding. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Yes. The following are deducted from the real estate gross sale proceeds before the lender (as mortgagor) is paid: (i) court enforcement fees (ii) notary public enforcement fees and (iii) mortgagor s unpaid propertyrelated taxes accrued in the year prior to enforcement. 2.6 Can all monies mortgages be taken? No. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. A landlord s right to receive rent can be assigned to a lender by assignment (ustup radi osiguranja). Such assignment has to be executed as a notarial deed and registered with the relevant Governmental Registry (FINA). Notices of assignment need to be given to the tenants to create valid security. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. Security is customarily taken by: (a) Debenture (zadužnica) this is the preferred method. A lender s signature must be certified by a notary public. Certification by a non-croatian notary is likely to need legalisation. (b) Pledge which is created by notarial deed and must be registered with FINA Registry and notified to the account holder bank. All security created by attending a Notary requires the lender to be represented. Usually the lender grants local Croatian lawyers a power of attorney (limited in scope and duly legalised in the lender s own jurisdiction) to enable the lender to be represented before the Notary. It is recommended that the power of attorney is put in place ahead of completion. If a mortgage is a notarial deed, the mortgage becomes directly enforceable. It is usual to contractually restrict rights to withdraw funds in the above manner. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequence of failure to register? A mortgage over land needs to be registered with the relevant Land Registry (which are administered by the Croatian Courts). If the mortgage has not been registered with the Land Registry then it has not been validly created and cannot be enforced. The Mortgagor s signature to the mortgage needs to be certified by a notary public. Certification by a non-croatian notary is likely to need legalisation. 28 CMS Real Estate Finance

29 3.2 Formalities for execution of security and costs? Notary fees (for notarial deed) Calculated according to the amount of the secured obligations with a current maximum of approx EUR 5,500. Notary fees (for signature certification) Less than EUR 10. Land Registry fee Approx EUR 35. See also A3.1 above. 4. Can the lender use a Security Trustee to hold security on trust for Creditors? No. A security trustee cannot be registered as holder of rights / title for other creditors in any Croatian public registry. However, syndicate lenders can enter into Intercreditor arrangements to similar effect. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Existing security needs to be amended to show the change of the lender in order for the new lender to be registered as the mortgagee with the Land Registry. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Generally a tenant cannot transfer the lease without the consent of the landlord, unless the landlord has agreed otherwise. If the tenant transfers the lease, it remains bound by the lease even if the landlord has consented to the transfer. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Parties to an agreement may freely choose jurisdiction of a foreign court or foreign tribunal for settling any disputes on a contract if (i) one of the parties of the agreement is foreign and (ii) the subject matter of the contract does not fall within the exclusive jurisdiction of the Croatian courts. The Croatian courts have exclusive jurisdiction in relation to disputes relating to the title or other proprietary rights (including mortgage) on real estate located in Croatia and certain other matters as a matter of public policy (e.g. fraud, criminal matters and constitutional matters). 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Yes. If a recognised reciprocity treaty / arrangement is in place with the relevant state. Croatia is not party to the Brussels and Lugano Conventions and is not subject to the Brussels Regulation (EC44 / 2001) on recognition and enforcement of judgments in civil and commercial matters so if the intention is for a foreign forum to be selected this should be discussed with Croatian lawyers. Croatia is a party to the New York Convention so a foreign arbitral award would be recognized and enforced by Croatian courts. The usual court procedures in Croatia for recognition / enforcement would need to be followed for foreign judgments and arbitral awards. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? A mortgage is enforced by court enforcement involving: public auction arranged by the court or notary public or private bargain with mortgagor s consent before the first public auction A reserve price will be set for the first auction (2 / 3 of an expert-determined market value). If the real estate is not sold, a final auction will take place with a reserve price of 1 / 3 of the expert-determined market value. If that reserve price is not reached the enforcement process stops and the real estate is not sold. A security holder cannot appoint a receiver. An administrative receiver can only be appointed by the Croatian courts as a result of insolvency proceedings being raised by any creditor or the company itself. An administrative receiver takes control over the management of the company and all its assets (whether unencumbered and encumbered by security). 29

30 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? No. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? A foreign lender should take advice before agreeing that disputes relating to real estate and mortgages located / created in Croatia are to be heard by a non-croatian court or arbiters. Non-Croatian judgements / awards on those matters may not be enforceable in Croatia. B. Security Over Shares 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes. Ranking position of a share security is determined in order of the date of its submission for registration at the relevant FINA Registry e.g. first submitted has first ranking position. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? If a notarial deed pledge has not been registered with the relevant FINA Registry then it has not been validly created and cannot be enforced. 3.2 Formalities for execution of security and costs? Shares in a limited liability company Pledge (signed as a notarial deed) FINA Registration the lender applies for the deed to be registered at the relevant FINA Registry and encloses the requisite supporting evidence and fee. The FINA Registry shall issue a decree on pledge registration. Book Registration the Pledge needs to be registered in company s book of shares. Notary fees (for notarial deed) Calculated according to the amount of the secured obligations with a current maximum of approx EUR 5,500. FINA Registry fee Approx EUR 40. A pledge could be signed in a form other than a notarial deed but this is not recommended. 4. Do the shares need to be transferred into the name of the lender or its nominee? No. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Yes, the shares can be sold to a third party. The pledgee cannot appoint receivers / liquidators. Direct enforcement The pledge can be directly enforced [(see A2.8 above for meaning)] by private sale if so agreed in the pledge. The shares cannot be appropriated. As mentioned above the appointment of a receiver is not envisaged by Croatian law. Croatian law only recognises an administrative receiver in cases where insolvency proceedings are raised. 30 CMS Real Estate Finance

31 Temporary receiver of shares In a default situation, the pledgee can apply to the court for the appointment of a temporary receiver to collect dividends and other proceeds relating to the shares. Monies collected are deposited with the court and are paid to the pledgee for application against the secured obligations. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from the shareholders are not automatically subordinated but can be contractually subordinated. Shareholders can agree that repayment of their loans are waived / written off should default occur, but this is not yet customary in the Republic of Croatia. C. Leases 1. Lease Structure 1.1 Typical lease length? The length of the lease is determined by the parties in accordance with their economic needs. For shopping centres lease agreements with anchor tenants are usually concluded for the term of 10 to 15 years, and with other tenants for the term of up to 5 years. In our experience typical lease lengths for other normal commercial leases we see generally range between 3 to 10 years, with longer leases for anchor tenants and special-purpose premises. 1.2 Maximum / minimum lease length if any? None. It is also possible to have a lease for an indefinite period of time with a right to terminate on 3 months written notice unless agreed to the contrary. However, for business premises the indefinite duration cannot be for less than a year, unless expressly agreed between the landlord and the tenant continues to use the property with approval of the landlord, that lease is converted by operation of law into a lease for an indefinite period (see C1.2). Accordingly, the onus is on the landlord to serve notice on the tenant before the expiration of the fixed term that occupation of the leased subjects after the fixed term is not permitted. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? No. If there are no tenant break-options, no destruction / disrepair of the premises (where the premises are unfit for the purpose let) and the landlord complies with its other obligations under the lease and statute, the tenant does not have the ability to terminate early (unless the landlord agrees). 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? If the property is not in the state agreed in the lease when the tenant takes entry (and the landlord was informed of the defects and failed to rectify them), the tenant may (i) terminate the agreement, (ii) request proportional reduction of the rent or (iii) take necessary actions for the property to be in the agreed state (at the landlord s cost). No rent is payable while the property is unavailable for use due to maintenance. Additionally, the tenant shall be entitled to seek reduction of the rent via Croatian courts if the property has certain legal / material defects. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? The parties may freely agree on terms of rent payment but generally it is agreed that rent is paid monthly or quarterly in advance. If there is no agreement, the tenant pays the rent monthly in advance, by the 5th day of the current month. 2.2 Periodicity of reviews? Generally annual reviews. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? There are no statutory controls as leases are governed by the lease terms. Renewals are agreed in writing. However, if a fixed term lease expires and the tenant 2.3 Basis of review (upwards-only or variable, indexation or market rent)? The rent is usually adjusted with the Annual Consumer Price Index ( CPI ) published by the Croatian National Bureau of Statistics. Another frequently used index is adjustment of the rent with the Harmonized Index of 31

32 Consumer Prices ( HICP ). Market rent is not generally used as a basis of review. CPI has tended to grow from year to year in previous years by 3% to 5%. Retail tenants in shopping centres tend to have a fixed rent plus an additional variable rent (calculated according to a formula relating to turnover). 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? No. Charging significantly lower-than-market rent could have tax implications. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Generally, the landlord, save that for shopping centres, generally the tenant. 3.2 External maintenance, decoration and repair? Generally, the landlord. The tenant is not entitled to make any structural changes or to change its exterior design without the landlord s prior approval. 3.3 Structural repairs? Generally, the landlord. 3.4 Insurance? Insurance cover is not a legal requirement. Generally, tenants are required by the terms of their lease to insure the leased property and all its own assets on the property against all normal commercial risks. 3.5 VAT? 23% VAT is payable on rent and service charge. 3.6 Rates? None. 3.7 Other typical outgoings? 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Generally, yes. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Leases are recognised by the Croatian courts (unless such terms are contrary to Croatian mandatory rules). Case law in Croatia may be used as a guide but is not binding. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? The Croatian courts would appoint a surveyor / valuer from the court s own list of local expert witnesses to act as an expert witness in relation to appraisal of Croatia real estate. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Environmental reports can be issued by government authorised persons / entities. Before engaging a professional to provide such a report their authorised status should be checked with the relevant government authority. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. Utility charges generally paid by the tenant. The tenant bears the whole (or its agreed proportion) of the costs of usual wear and tear of the property ( tekuće održavanje ). 32 CMS Real Estate Finance

33 Czech Republic 33

34 A. Mortgages 1. Can security be granted to a foreign lender? Yes. The most common types of security interests are as follows: a) Mortgage over real estate which is perfected only after due registration in the Real Estate Register (katastr nemovitostí); b) Pledge over movables which is perfected by signing of a pledge agreement and either (i) handing over of the security or (ii) upon its registration with the Pledge Register maintained by the Notarial Chamber of the Czech Republic (if the pledged movables are not handed over to the pledgee); c) Pledge over shares (in case of a joint stock company (akciová společnost)) where perfection of a pledge depends on what kind of shares is involved: pledge over physical bearer shares in a joint stock company is established by a pledge agreement and handover of the shares; pledge over physical registered shares in a joint stock company requires (in addition to an agreement and handover) a duly executed endorsement to be placed on the reverse side of the share certificates specifying the creditor; for a pledge of dematerialised ( book-entered shares), the pledge must be registered on the shareholder s account maintained by the Central Securities Depository Prague (Centrální depozitář cenných papírů); d) Pledge over ownership interest (obchodní podíl) in a limited liability company (společnost s ručením omezeným) is effective upon its registration in the Commercial Register; e) Securities interests over receivables: receivables may be subject to pledge or security assignment. Whereas the same receivable may be subject to several pledges securing several obligations (the creditors position differs according to the ranking of the pledge) and the pledge ceases to exist automatically after the secured obligation is paid up in full. The assignment of receivables is a one-off security interest, which requires a re-assignment of the receivable after the fulfilment of the secured obligation. Lenders usually require that the security interest over receivables be established in the form of a security assignment, where the lender s position is safer, rather than a pledge of receivables. The security interests over receivables differ pursuant to the nature of the receivables subject to the pledge: pledge over receivables on bank accounts, which becomes effective vis-à-vis the account bank upon the notification thereof. As the assignment of receivables would not be practical in this case, a pledge is typically established; security assignment of receivables arising under contracts, typically under insurance agreements (insurance policies), leases (consent of tenants is not required in such a case), commercial contracts with customers, etc., which becomes effective vis-à-vis the debtor upon its notification by the pledgor or pledge; pledge over receivables arising under contracts (e.g., leases, commercial contracts, etc.); it becomes effective vis-à-vis the debtor upon its notification; f) Pledge of enterprise which is perfected upon registration with the Pledge Register maintained by the Notarial Chamber of the Czech Republic. The enterprise is defined as the aggregate of tangible, personal and intangible components relating to a business activity of the Pledgor. Rights and other property values which belong to the Pledgor and which are used to operate the Pledgor s enterprise or which, because of their nature, are intended to serve this purpose are appurtenant to the enterprise. We would like to point out that the relationship between the assets / real property being subject to pledge / mortgage over itself and (at the same time) being a part of the pledged enterprise is not clear in law; therefore, the pledge of enterprise is typically established as second-ranking following the pledge / mortgage over the respective assets / real property and its enforceability ay be questionable in such a case. (However, the lender would still be fully secured by the pledge / mortgage over the respective assets / real property); g) Security transfer of rights; h) Pledge over trademarks, this is perfected by registration in the Trademarks Register maintained by the Industrial Property office (Úřad průmyslového vlastnictví). 2. Can lenders take a mortgage over land and buildings on the land? 2.1 The distinction between mortgages on land and buildings on the land? Yes. Lenders can take a mortgage over both land and buildings on the land. There is a distinction between the title to (i) the land and (ii) the building built on it (i.e., the land and the building on it are legally two different items and may have different owners). 34 CMS Real Estate Finance

35 Similarly mortgages in relation to land and any building are two independent mortgages. Therefore it is possible to establish a separate mortgage over the building and a separate mortgage over the land. Also, the ranking of the mortgages may be different. Lenders usually require that the mortgage is established over any borrower s real property as a first ranking one; in case of refinancing, there is usually a clause in a mortgage agreement that the mortgage shall become a first ranking one after the repayment of the existing obligation and deletion of the existing mortgage from the Real Estate Register. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? A second ranking security can be taken in the case of a pledge of movables, trademarks and receivables, as well as in the case of a mortgage. Neither shares in a joint stock company nor ownership interest in a limited liability company may be pledged more than once (no second ranking pledge is possible). A security assignment of receivables and security transfer of rights are one-off security interests. No second ranking security is possible. After the repayment of the secured obligation, the assigned receivables or transferred rights do not automatically pass back to the assignor, but there must be a re-assignment thereof. Where a registration of pledge or mortgage is required, a second ranking security is registered in the same way as the first ranking one. A second ranking mortgage over the real property is registered in the Real Estate Register. The ranking depends on the date and time of filing of the application for registration of mortgage with the relevant Cadastral Office. The registration process of mortgages is the same, regardless of the ranking of the mortgage to be registered. Similarly, the process of registration is similar in the case of pledge of movables and enterprise (registration with the Pledge Register) and trademarks (registration with the Trademarks Register). 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes but the lender and the mortgagor can agree that the real estate is not to be transferred. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? No. 2.6 Can all monies mortgages be taken? No. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. A landlord can assign its right to receive rent to the lender in security by signing an assignment, unless the assignment is prohibited under the lease contract. The landlord is obliged to notify the tenant about assignment. 2.8 Is it customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict the borrower s rights to withdraw funds from accounts before the scheduled interest payments and capital repayments are made? Yes. It is customary and possible for a borrower to transfer its rights in its bank accounts to the lender in security. A lender and a borrower can agree restrictions on the borrower s rights to withdraw funds from its accounts before the scheduled interest payments and capital repayments are made. Such restrictions are often agreed on commercial lending transactions, particularly in respect of rental accounts. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? A mortgage is perfected when registered. In other words, it is not effective and does not exist as a security until registered with the Real Estate Register. 3.2 Formalities for execution of security and costs? For the transfer of ownership of real property, Czech law requires a written contract with signatures of the parties verified by a public notary or other authorized person. Furthermore, the transfer of the title must be registered in the Real Estate Register. The transfer of ownership is perfected when recorded in the Real Estate Register. Although the procedure of registration is a lengthy process, which may take several months, the registration of the transfer of title is effective as of the date of filing of the application. The Cadastral Office is usually very strict; therefore, the proper preparation of all the documents to be filed is advisable. Apart from legal and administrative costs (e.g. costs of translation of documents in Czech, extracts from the Commercial Register of the parties, etc.), there are costs of notarisation (including an apostille, if applicable) and the administrative fee for filing of the application with the Cadastral Register is CZK 500 (i.e. approx. EUR 18) per filing. 35

36 4. Can the lender use a Security Trustee to hold security on trust for creditors? Czech law does not recognize the concept of a trust or a security trustee. However, in the case of syndicated loans, one of the lenders is appointed as a security agent, whose position is similar to the one of a security trustee. In such a case, security interests are established in favour of the security agent. The security agent has a contractual obligation under agreements concluded with the other lenders (e.g. to represent them regarding the borrower and to provide them with a relevant portion of the proceeds from the enforcement of security interests if the borrower defaults, etc.). 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? The mortgage is a right in the asset. It secures and encumbers certain real property regardless of who owns it. No new security is needed if the lender changes, however arguably there could be a duty to re-register the new lender at the Real Estate Register. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Yes. A new lease contract is required when tenants change and that lease contract requires the signature of the landlord. Also, if a tenant wants to sublet the leased premises to a third person, the tenant must obtain a prior written consent of the landlord. In the case of a sublease of residential premises, the landlord s written consent is always required by law. In the case of non-residential premises this statutory requirement applies unless otherwise stipulated in the lease agreement. The sublease agreement must be executed in writing. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Where there is a foreign element in a transaction (e.g. the lender is a foreign entity), the parties generally have a free choice of law in their contracts and which courts have jurisdiction (except to the extent they are forum shopping ). Such choice may not be recognised if there is not a significant foreign element. In accordance with EC Council Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Czech courts have exclusive jurisdiction on real estate located in the Czech Republic. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? The EC Regulation (see A6.1) guarantee automatic recognition and simple enforcement procedure for judgements issued by courts from EC member states, subject to certain conditions (e.g. non-existence of a decision of a Czech court in the same matter, fair trial requirements, compliance with a public order, reciprocity, etc.). Recognition is not simple procedure. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The method of enforcing the security depends on the type of security itself. Generally, it is possible to enforce a debt by way of sale of real estate, sale of movables, sale of entire enterprise, court ordered transfer of receivables in favour of the lender, forced deduction of the salary or other income of the employee (if the debtor is a natural person), or establishment of a mortgage on other real estate. If a creditor has an execution title (either an enforceable judgement that he has a claim against the debtor or a notarial deed on direct enforceability), he can initiate enforcement proceedings on any of his securities without going through the court proceedings where the creditor has to first prove he has a claim against the debtor. Typically, lenders will require borrowers to enter into notarial deed on direct enforceability for this reason. The creditor has several options for execution that is: court execution; execution by executors; or public auction. The court execution is very formal, lengthy but less expensive. Although using the same methods, the execution by executor is usually less time consuming but more expensive. Public auction is another enforcement alternative that can be used only in cases of a sale of real estate, sale of an enterprise or sale of movables. This method is based on an agreement of a creditor with an auctioneer regarding holding the auction. In fact this method is very similar to court proceedings. In the case of assignment of receivables (rents), the assignee may collect the rents directly from the tenant. 6.4 I s the lender responsible for maintenance and insurance of the real estate after default until sale? No. 36 CMS Real Estate Finance

37 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? No. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? As mentioned above, the registration process especially of a mortgage (with the Real Estate Register), pledge over book-entered shares (with the Central Securities Depository Prague) and pledge of ownership interest in a limited liability company (with the Commercial Register) is a formal procedure. The foreign lender shall evidence its existence and authorisation of the persons who signed documents on its behalf. Therefore, we recommend that the documents and powers of attorney are signed by the lender s representatives listed in its company registration, or that the authorisation of such persons is evidenced e.g. by a list of specimen signatures or confirmation by a notary public. All documents filed as attachments to applications for registration must be translated into Czech (by an official translator), signatures must be notarised and apostilled. In order to eliminate possible complications of registration, it is advisable that the foreign lender contacts its Czech legal counsel prior to the filing and provides for all documentation required by law. B. Security Over Shares 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? No. 3. What are the mechanisms for registering and perfecting security? Shares evidenced by certificates The pledge is perfected when the shares certificate(s) are handed over to the lender or its nominated agent (e.g. a bank or notary called a depositary ). If the shares can be transferred by endorsement the pledge is perfected when the certificate(s) are handed over to the lender or its agent, duly endorsed with the pledge details. Dematerialised shares The pledge is perfected when it is registered at the Central Securities Depository Prague. Ownership interest of limited liability company The pledge is perfected by its registration in the Commercial Register. 3.1 Consequences of failure to register? If the relevant perfection requirements in B3 are not met, the security is not validly created and cannot be enforced. 3.2 Formalities for execution of security and costs? Notary depositary fee If the secured obligations are CZK 100,000 (i.e. approx. EUR 3700) or less the fee is 1.2% of the secured obligations. If above CZK 100,000, the percentage is on a decreasing sliding scale depending on amount of secured obligations with the minimum percentage of 0.1 % applying. Dematerialised share pledge registration fee Currently CZK 174 (i.e. approx. EUR 7) per share using written application or CZK 41 (i.e. approx. EUR 1.7) per share using electronic application. Ownership interest pledge registration fee CZK 1,000 (i.e. approx. EUR 37). 4. Do the shares need to be transferred into the name of the lender or its nominee? No. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Yes, the shares ownership interests can be sold to a third party. The lender enforces its pledge through a sale of the shares by one of the prescribed methods, being (i) public auction or (ii) sale through a Securities Trader. 37

38 Pledged ownership interests can be sold via (i) public tender and (ii) public auction. Private sales of pledged shares ownership interests are not possible. If the public auction is unsuccessful, the lender and the pledgor can agree that ownership title to the ownership interests of limited liability company is to be transferred to the lender in satisfaction of all or part of the secured obligations. In case of unsuccessful public auction of shares the lender can be entitled to exercise rights concerning shares. The lender is authorised to receive the dividend payments and other payments resulting from the possession of the share from the date of the payment default. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders can be contractually subordinated. Shareholders can agree that repayment of their loans are waived / written off should default occur, but this is not yet customary in the Czech Republic. C. Leases 1. Lease Structure 1.1 Typical lease length? Although lease lengths may vary according to the business strategy of the landlord, geographic location, age of the leased premises and type of property, in our experience commercial leases are generally entered into for a specific period of time (as opposed to indefinite periods) and their usual length is approx. 5 years. 1.2 Maximum / minimum lease length if any? None. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Tenants of commercial premises do not have any statutory rights for renewal or extension of the lease period. The landlord does not need to serve any notice to avoid an extension of the lease. If the lease concerns the entire building or land, the tenant may terminate the lease when the building or land is sold to a third party. Therefore, landlords in such cases usually use transfer of shares in SPV rather than the direct sale of property. Sale of the building does not affect leases of commercial units. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? The statutes include a number of reasons for which the tenant may terminate a fixed term lease. The reasons typically relate to a breach of contract by the landlord. However, some of the reasons for termination can be excluded by contract. The overriding reasons for termination of fixed term leases by tenants are: If the premises are not suitable for use according to the lease agreement; If the building or land is transferred (only in the case of a lease of the entire building or land); If the tenant loses its licence for activities carried out in the leased premises (non-residential premises only, can be excluded by contract); If the landlord grossly breaches its statutory obligations (commercial premises only, although this can be excluded by contract). 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? If the tenant does not vacate the premises after termination of the lease, the landlord cannot remove the tenant from the premises, but must seek a court order and, eventually, enforce the order in execution proceedings. The proceedings may be lengthy. However, failure to vacate the premises may be sanctioned in the contract and the landlord s rights may be well secured by contractual penalties etc. 38 CMS Real Estate Finance

39 In the case of tenant bankruptcy, the bankruptcy administrator may terminate the lease. Any receivables of the landlord would be settled in the bankruptcy proceedings on a pro-rata basis. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? Rent is usually paid in advance. Payments both on a monthly and quarterly basis are usual. 2.2 Periodicity of reviews? Most leases are subject to indexation on an annual basis. The Czech Statistical Office for rents in CZK and HICP Eurozone index for EUR rent are usually used. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Often the indexation is upwards only, depending on the strength of the position of the landlord. Review is usually based purely on indexation, not on market rent levels. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Not in commercial leases. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The landlord must provide premises suitable for the purpose of the lease. Internal maintenance, including walls, ceilings, floors, all equipment, doors, windows, electrical, mechanical, plumbing, heating, ventilating, air conditioning, security systems, fire prevention, sprinkler systems, is usually the responsibility of the tenant. 3.2 External maintenance, decoration and repair? Landlords are usually responsible for maintenance and repair of the building structure, exterior walls, roof, main common utilities and ventilation systems, and surroundings of the building (gates, communications, etc.), unless damage was caused by tenant. 3.3 Structural repairs? Landlords are usually responsible for structural repairs. The tenant may not modify structural parts of the premises / building without the landlord s approval. 3.4 Insurance? In the case of a lease of commercial premises, the landlord usually maintains property insurance for replacement costs of the building. Landlord insurance costs are usually recovered through outgoings payments. The tenant is usually required to have all risk property insurance for its property installed in the premises and liability insurance for certain minimum coverage. In the case of a lease of entire buildings, tenants are asked to provide full coverage all risk insurance and liability insurance. 3.5 VAT? If the landlord is a registered VAT payer, 20% VAT is charged on rent and service charges. The landlord may choose to apply or not apply VAT on rent, but most landlords apply VAT because of tax advantages. Please consult your tax advisor for more details. 3.6 Rates? In good commercial leases (triple net leases), landlords include all payments in connection with the lease into the service charges / outgoing payments. 3.7 Other typical outgoings? In good commercial leases (triple net leases), tenants are required to pay for all outgoings, including utilities (water, sewage, power, lighting in common areas), reception services, security services, landlord s insurance, costs of repairs, replacements, modifications, administration and management costs and general maintenance, repair and replacements. Tenants often pay advance payments on a monthly or quarterly basis, based on the landlord s estimate of the cost of outgoings. Usually once a year, the landlord provides for reconciliation of the advance payments and actual cost of outgoings. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Landlords usually include outgoings in the service charges. The payments for outgoings / service charges are usually paid in advance on the basis of the landlord s estimate. After reconciliation is made, the tenant must immediately pay any outstanding amounts; in case of overpayments by the tenant, the overpayments may be set off against the next outgoings payment. The tenant s financial obligations (including rent and outgoings) are secured by a security deposit, bank / corporate guarantee or, if necessary, other sanctions (e.g., right of the landlord to terminate the lease). 39

40 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The terms of the lease agreements are recognized and enforceable by the courts (if in compliance with mandatory provisions of law). However, due to the time-consuming nature of the court proceedings, commercial leases usually include an arbitration clause. As arbitration is used in most disputes and arbitration awards are not public, available case law is not extensive. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? No. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. PI insurance cover for these professionals (if any) can vary significantly so should be checked when the professionals are being engaged. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. 40 CMS Real Estate Finance

41 England and Wales 41

42 A. Mortgages 1. Can security be granted to a foreign lender? Yes. Security can be granted to a foreign lender. 2. Can lenders take a mortgage over land and buildings on the land? Yes. Lenders can take a mortgage over land and buildings on the land. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction in law: the definition of land includes all fixtures attached to it. Accordingly, all buildings (unless they are movable) by definition constitute land and are subject to the same mortgage as the plot of land on which they are situated. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Land Registry mortgage certificates for a certain value are not issued. Mortgage-backed securities can be issued evidencing debt secured by mortgage in a securitisation transaction. The cost depends on the complexity of the transaction. These are transferable. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. Second ranking security can be taken. The registration is effected the same way as for the first-ranking security. It is usual in commercial transactions for a priority deed to be entered into and registered at the Land Registry. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes, but it is usual in commercial transactions for a lender to agree with the owner to place a restriction on the title at the Land Registry to ensure that prior consent is obtained. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? No. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. A lender can take security over rent by way of first fixed charge or security assignment. However, a mortgage over land gives the lender the ability to sell the land with all rents receivable. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. Such security can be taken by way of first fixed charge or security assignment. However, the creation of a fixed security (charge or assignment) requires the lender to exercise control over the charged accounts i.e. to restrict the chargor s rights to withdraw funds. This is often not practicable in the case of operational accounts. These are therefore left to be freely operated by the chargor until the bank decides to enforce its security. Still, such accounts are subject to a floating charge which ranks behind fixed charges and preferred creditors. 3. What are the mechanisms for registering land and for registering and perfecting security? An overwhelming majority of land in England and Wales is registered at the centrally-maintained Land Registry. All mortgages over land (whether registered or not) must be registered by submitting the mortgage instrument to the Land Registry which then records the details of the mortgage against the title of the mortgaged property. If the security is created by an English company or by a foreign company that has registered a branch in England and Wales, the mortgage should be first registered at Companies House (the UK s registry of companies) within 21 days after the date of the mortgage s creation. 3.1 Consequences of failure to register? Failure to register at Companies House will render the security conferred by the mortgage void against the liquidator or administrator and any creditor of the company. Failure to register at the Land Registry means a third party purchaser in good faith may acquire the land free of the mortgage. 2.6 Can all monies mortgages be taken? Yes. 42 CMS Real Estate Finance

43 3.2 Formalities for execution of security and costs? Certain rules apply to the way a mortgage instrument is executed. These are relatively simple and involve the inclusion of certain wording into the document and it being signed by either two signatories of the mortgagor or by a single signatory in a presence of a witness. There are no additional costs. 4. Can the lender use a Security Trustee to hold security on trust for creditors? Yes. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? In bilateral transactions, no new security needs to be signed if the new and the previous lenders assign the mortgage as between themselves. However, the lenders commonly require the chargers to confirm that the change to the lenders has no effect on the existing security. In syndicated transactions using a Security Trustee, the security is held automatically for the lenders from time to time. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Control over changes in the tenants depends on the terms of the lease. Whether the original tenant will remain liable under the lease depends on the time of its creation. Tenants under leases created before 1 January 1996 remain contractually liable in relation to the obligations in the lease. A tenant under a new lease (i.e. created on or after that date) will only be liable if it entered into an authorised guarantee agreement. There are still a substantial amount of old leases in operation. 6. How can the lender enforce its security? Generally this is done privately. This depends on the type of the charge the lender holds. Two primary remedies available to a holder of security including a floating charge over the whole or substantially the whole property of a company are: (a) an out-of-court appointment of an administrator (where the company is incorporated in the UK); or in relation to a foreign company, if its centre of main interests (COMI) is in England and Wales, or (b) an appointment of an administrative receiver (although this is now only possible in a limited number of circumstances). A holder of a mortgage of real estate may: (i) exercise its power of sale or (ii) appoint a receiver. The remedy of foreclosure is little used and discussed in more detail in paragraph 6.5 below. 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Yes. Such choice will be recognised and upheld by an English court if (a) it was freely made in good faith by the parties and not for the purpose of avoiding the mandatory law of another jurisdiction; and (b) there are no reasons for avoiding that choice on the grounds of public policy. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Yes, although this depends on any relevant treaties. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The key difference between a receiver and an administrator is that a receiver owes its duties to the lender which appointed it whereas an administrator acts in the interest of all creditors and has a primary goal to rescue the company as a going concern. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? This depends on the enforcement action taken by the lender. If the lender takes possession of the property, then he will be responsible for maintenance and insurance. The lender can avoid this by appointing a receiver instead. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? Foreclosure is available but rarely used in practice. It involves a two stage court process (the mortgagor being given time to pay after the first stage). The mortgagee s right to foreclose arises when the legal date for redemption has passed. There is no requirement to sell by public action. 43

44 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? The English legal regime is generally favourable towards lenders. However, the rules relating to the floating and fixed charges, legal and equitable mortgages and the registration requirements are quite intricate at times and have to be understood in detail to appreciate the quality of the security taken in each particular situation. One example is taking fixed security over bank accounts which is an area of law that is constantly developing. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes. Share charges (please see 4 below) usually rank in order of creation (provided they are properly registered). 3. What are the mechanisms for registering and perfecting security? (a) A share charge must be registered with the Registrar of Companies at Companies House in England & Wales within 21 days from the date of creation of the share charge. Form MG01 is submitted together with an original of the share charge and a fee of 13. (b) The articles of association may need to be amended to permit a transfer of shares on enforcement of the security. (c) A power of attorney is required from the owner of the shares in favour of the lender (usually included in the share charge itself). (d) The lender should obtain a blank stock transfer form, signed by the owner of the shares. (e) The lender should take custody of the share certificate(s). 3.1 Consequences of failure to register? The consequences of non-registration include invalidity against administrators and liquidators and a loss of priority against other creditors of the borrower who subsequently register a charge against those assets. 3.2 Formalities for execution of security and costs? To provide valid security a share charge must be in writing and executed as a deed. Deeds in England & Wales are executed by (i) one director and a secretary; (ii) two directors; (iii) one director in the presence of a witness; (iv) an attorney in the presence of a witness or (v) under the common seal of the company. Deeds can be signed in counterpart in England & Wales. The cost of registering a share charge with the Registrar of Companies at Companies House is 13 (please see 2 above). 4. Do the shares need to be transferred into the name of the lender or its nominee? No. There are usually two ways in which security is taken over shares in England & Wales: (a) Legal mortgage this involves transferring the shares into the name of the lender and issuing a new share certificate to the lender. The lender becomes the owner of the shares and this is recorded in the Register of Members of the company. In the event of a default the lender may sell the shares. When the loan is repaid, the shares are retransferred back to the borrower or shareholder. (b) Equitable mortgage or fixed charge (these are virtually indistinguishable) unlike a legal mortgage, this security does not involve the transfer of ownership in the shares to the lender. The charge encumbers the shares by attaching the lender s power to sell the shares. The lender takes custody of the share certificate(s), together with blank stock transfer form(s) (the transferee s name is blank) executed by the owner of the shares. If there is a default, the lender may enter its name into the stock transfer form, or that of a purchaser. It is usually the case that an equitable mortgage over shares (or fixed charge) is taken. There is more administration involved in taking a legal mortgage and this would expose the lender to possible liabilities and / or obligations as owner of the shares. 44 CMS Real Estate Finance

45 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? On enforcement, the shares can be sold to a third party (the powers of sale are usually included in the share charge). It is worth noting that fewer buyers may be willing to buy a private company than the real estate itself due to other potential liabilities. Yes. Security can be enforced directly without recourse to the courts or any requirement to have a public or auction. A receiver may be appointed under the terms of the share charge to exercise the powers of sale or the lender may sell the shares itself without appointing a receiver. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Yes. It is usual in commercial transactions for shareholder loans to be subordinated. This is effected by entering into a subordination agreement or intercreditor agreement. In light of recent experience following the credit crunch, lenders are more concerned that in order to be able to sell the shares without retaining the residual liability for shareholders loans, it is necessary to be able to sell the shares free of such debt. This can be achieved if there are provisions for the debt to be written off as part of the enforcement or if the lender takes security to be taken over the loans from the shareholders. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? There is no minimum / maximum length of lease and this depends on commercial negotiation. Retail leases in the current market would typically be for 5 10 years with prime office leases for a typical term of years. The average length of a new lease is shortening: in 2008 it fell to 5.9 years compared to 8.7 years in Maximum / minimum lease length if any? The lease length is commercially agreed between the parties. Lease terms can extend from a period of weeks or up to 999 years. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? If a business lease is granted, then this will usually fall within the provisions of the Landlord and Tenant Act 1954 ( 1954 Act ). Pursuant to the 1954 Act the tenant will have an automatic right to renew the lease at the end of the lease term unless the landlord and tenant have agreed that the automatic rights of renewal do not to apply (by the landlord serving a statutory notice and the tenant swearing a statutory declaration before the lease is granted or an agreement for lease has been exchanged). The business tenancy will then be 1954 Act excluded and no rights of renewal will apply. Where the lease is not excluded from the 1954 Act, the landlord may only be able to oppose a tenant s request for a renewal lease in restricted circumstances prescribed by statute eg. where the landlord intends to demolish or reconstruct the premises and requires possession of the premises in order to do so. The parties can also agree a contractual (as opposed to a statutory) right of renewal to be incorporated within the lease. 45

46 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? As stated above, the 1954 Act protects tenants with an automatic lease renewal unless the parties agree that the provisions of the 1954 Act should be excluded. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? None other than any contractual break rights which may be agreed between the parties. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? Rent is typically paid either quarterly or monthly in advance, but can be in arrears and depends on what is commercially agreed between the parties. 2.2 Periodicity of reviews? To be determined commercially between the parties but typically on office leases, rent is reviewed every five years. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? As agreed between the parties, but typically upwards only based on market rent. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? No. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? This depends on what is agreed between the parties and the extent of the premises demised (let) to the tenant. If the internal premises only are demised, then the landlord would usually retain the obligations for external maintenance, decoration and repair and may recharge any costs incurred to the tenant through a service charge. Where the tenant takes a lease of the whole property (internal and external) it would be usual for the tenant to be responsible for all internal and external repairs and maintenance. 3.2 External maintenance, decoration and repair? See 3.1 above. 3.3 Structural repairs? See 3.1 above. 3.4 Insurance? Either party can insure the premises, although it is usual for the landlord to insure with the cost of insurance being recovered from a tenant by way of insurance rent. 3.5 VAT? Value-added tax will be payable where the landlord has elected to charge VAT. 3.6 Rates? These are usually the responsibility of the tenant. 3.7 Other typical outgoings? Dependent on what is commercially agreed between the parties but the tenant will usually pay all other outgoings (eg. utilities) and property taxes. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Where the landlord manages the property (which is usual where the premises form part of a multi-let building or estate), it will provide the services (which usually, include security, heating, lighting and decoration, repair / replacement of external and common areas and equipment). All such costs would be recovered by way of a service charge. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Yes. 46 CMS Real Estate Finance

47 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? If there is no specific requirement a RICS appraisal would be a sensible precaution. The requirements as to any appraisal will depend on what is prescribed by the relevant documentation, eg. definition and requirements of a Valuation in a contract. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. An environmental consultant may be appointed to undertake a range of different investigations and reports. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? Yes. A lender may assume the liability attaching to a borrower, depending on the liabilities of the borrower. For example, where there are past breaches the borrower or its purchaser may have agreed to indemnify a previous owner against all environmental liabilities and a lender when enforcing its security would assume this liability. Where there are present breaches of environmental law, it is assumed that any owner, including a mortgagee which is in possession of the land, would be liable. 47

48 France 48 CMS Real Estate Finance

49 A. Mortages 1. Can security be granted to a foreign lender? Yes, as a general principle there are no restrictions on the ownership of land by foreign parties and the taking of security over land or property by a foreign bank. 2. Can banks take a mortgage over land and buildings on the land? A mortgage (hypothèque conventionnelle) may be granted over land and over buildings on the land. This security notably gives the secured creditor a preference right over the sale proceeds following a disposal of the secured property. A mortgage must be executed by a notarised deed. A mortgage extends to all improvements on the mortgaged immovable. When a party has a right to build on another s property, it may grant a mortgage on the buildings whose construction has started or is planned. In the case of the destruction of the buildings, the mortgage will apply to any new buildings constructed on the mortgaged land. Please note that French law provides for other types of security over property: a lender s lien (privilège du prêteur de deniers) is very similar to a mortgage (hypothèque conventionnelle) but may only be granted to an entity financing the real estate property; a gage immobilier (previously antichrèse) is a security where the secured creditor takes possession of the real estate property and benefits from the enforcement proceeds. In practice, this security may be more complex to structure as it often requires the execution of a leaseback agreement for the grantor to stay in possession of the property. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction between mortgages on land and buildings on the land, except in certain specific ground leases (bail à construction and bail emphytéotique), where the lessee may only grant a mortgage over construction. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? There are no mortgage certificates for a certain value under French law. Mortgages may be transferred with the underlying claim to a new creditor. They may not be transferred from one property to another. Since March 2006, a mortgage may be rechargeable, i.e. it can secure loans other than the initial secured amount. 2.3 Can second ranking mortgage security be taken? If so, how is it registered? Yes. Second ranking mortgages are registered with the land charges registry (Conservation des hypothèques) and rank according to their respective registration dates. 3. What are the mechanisms for registering land and for registering and perfecting security? Land securities must be notarised to be valid between the parties. In order to be enforceable against third parties, they must be registered at the land charges registry (Conservation des hypothèques) of the district in which the property is located. So called silent mortgages are notarised but unregistered mortgages. A creditor may register them at anytime but such registration may be too late for the mortgage to rank first. A security which is not registered remains valid between the parties but is not enforceable against third parties. Except legal costs (for drafting and negotiating the security documents), the creation and registration of a mortgage (hypothèque conventionnelle) would cost almost 1 2% of the guaranteed amount (including accessories), including: notary fees (negotiable, to a certain extent), fees of the land registrar (conservateur des hypothèques), taxes of land registration (taxe de publicité foncière), which is not applicable for registration of a lender s lien (privilège du prêteur de deniers). 49

50 4. Can the Bank use a Security Trustee to hold security on trust for creditors? The concept of trust was introduced under French law in 2007 (known as fiducie), enabling the appointment of a security trustee in a French law agreement. Independently from the setting-up of a trust, article of the French Civil code provides for the appointment of a security agent which may be granted with the right to create, register, manage and enforce any security interest on behalf of one or several creditors. Those mechanisms remain unused in the French practice, where it is generally recommended, in the context of loan documentation governed by French law, to have all creditors acting jointly to hold the security. A French party may enter into an English law agreement implementing a security trustee mechanism but the recognition of such a mechanism before a French court or before a French registry (as the case may be) could be debatable. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? As a general principle and subject to the lenders being duly registered as beneficiary of the security, article 1692 of the French Civil code provides that the sale or assignment of a claim includes the accessories of the claim, such as security, prior charges and mortgages. It follows that generally, the assignment of the loans (change of lender) will trigger the transfer of the security, except otherwise provided in the security documentation. While it may be recommended to update the land charges registry (Conservation des hypothèques) in case a lender is registered as beneficiary, thereby triggering signature of all beneficiaries and payment of land charges registry (Conservation des hypothèques) nominal fee, such update may prove unnecessary in case the lenders are represented by a security agent (as mentioned above). 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Tenants of commercial property may freely transfer the lease with their business. The landlord has no control, but the original tenant becomes guarantor of the new tenant until the end of the lease. 6. How can the Bank enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Disputes relating to land securities and the enforcement of land securities may only be settled by the competent French court where the property is located. Foreign courts may settle disputes concerning the loan for instance, but may not decide upon the validity or rank of security over land. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgments without review? Yes, within the limit of the applicable international conventions. 6.3 How can that security be enforced? Enforcement procedures generally put the property up for sale by means of a public auction, and certain mandatory procedures must be followed. Generally, where a creditor has an enforceable title in relation to an unpaid debt (the debt is enforceable if the loan agreement or other debt instrument is created by a notary deed or the creditor has an enforceable court decision), the creditor may have the property sold. In practice, creditors and debtors often agree to sell the property to avoid lengthy and costly public sale procedures. Subject to few specific limitations, a creditor may agree in advance with the grantor that the ownership of the property will be transferred to the secured creditor upon enforcement of the mortgage, on the basis of an assessment of the value of the property made by an expert. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes, as a general principle, there are no restrictions on the ownership of shares by foreign parties in general and the taking of security over shares by a foreign bank. 50 CMS Real Estate Finance

51 2. Can second ranking security be taken? If so, how is it registered? Creditors may contractually agree to organise the ranking of security over shares. In the absence of any agreement between the creditors to share the benefit of the security and with respect to their respective ranks, security over shares is generally ranking at the date it is made enforceable against third parties (by registration and / or notification by bailiff, depending on the type of shares see 3 below). Any subsequent security over shares is made enforceable in the same way as any precedent existing security over such shares. 3. What are the mechanisms for registering and perfecting security? The form and means of perfection of security over shares depend on the corporate form of the company whose shares are subject to security interest. For a société civile immobilière, the shares are pledged (nanties) and such pledge is created in writing. It is perfected by (i) a notification made by a bailiff to the company issuing the pledged shares (such notification may be avoided if the pledge agreement is made in a notary deed) and (ii) registration of the pledge agreement with the commercial court (tribunal de commerce) where the company is registered. Such formalities require the prior registration of the pledge agreement with the French tax authorities (which, in practice, necessitates a French language executed version of the pledge agreement). For a société en nom collectif or a société à responsabilité limitée, the shares are pledged (nanties) and such pledge is created in writing. It is perfected by registration of the pledge agreement with a special register of the commercial court s clerk (greffe du Tribunal de commerce) where the company is registered. Such registration is valid for 5 year period and has to be renewed as necessary. For a société anonyme or société par actions simplifiée, the pledge over the shares (held in a dematerialised financial securities account) is created by pledging a dedicated financial securities account (nantissement de compte-titres). The shares are credited to such dedicated financial securities account, opened in the name of the pledgor. When such a financial securities account is held by the issuing company itself (and not by a licensed intermediary or depository), moneys received under the shares shall be credited on a separate bank account which be part of the pledge. The pledge over a financial securities account (nantissement de compte-titres) is perfected by the execution by the pledgor of a statement of pledge (déclaration de nantissement de compte-titres). 4. Do the shares need to be transferred into the name of the lender or its nominee? Transfer of the shares to the lender or its nominee is not required to create or perfect a pledge over shares. 5. How can the lender enforce its security? The pledge may be enforced by public auction (vente judiciaire), judiciary foreclosure (attribution judiciaire) or, if provided for in the pledge agreement, by the transfer of the pledged shares to the creditor. In the latter case, the transferee may have to make a balancing payment (soulte) for the amount of the value of the transferred shares exceeding the amount of the secured liabilities. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Commercial lease agreement structure 1.1 Typical commercial lease agreement length? The typical lease agreement length is nine years. 1.2 Maximum / minimum commercial lease agreement length? The term of the lease agreement may not be less than nine years. The parties may not deviate from this rule but may agree on a longer term. Only perpetual leases agreements are forbidden. Please note that leases agreements with duration of more than twelve years must be notarized and registered with the Land Registrar. 51

52 1.3 Statutory contracts and obligations relating to renewals / terminations of commercial leases agreements (do tenants have an automatic right to renewal or can they apply to the courts for a new lease agreement); also does some form of notice need to be served to terminate a lease agreement in order to avoid a renewal? Commercial leases agreements shall end only by virtue of a notice given in accordance with custom and practice and at least six months in advance. In the absence of notice, the lease agreement shall continue by tacit renewal beyond the term stated in the contract. The tenant has a statutory right to renew the lease agreement when the period of the previous contract expires. The landlord may refuse the renewal of a lease agreement, but in this case, must pay the evicted tenant a compensation for eviction equal to the prejudice caused by the absence of renewal. 1.4 Are there any overriding statutes enabling the tenant to break a fixed term lease (whether or not included as a term of the lease agreement)? Unless otherwise specified, the tenant is entitled to terminate his lease agreement at the end of each three-year period. He has to give a written notice at least six months before the end of the three-year period by extra-judicial means. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? Any limitation of enjoyment for the tenant may justify a decrease of the rent. 2. Rent / Rent reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? No legal text imposes particular terms governing the method of payment of rent nor its frequency. The parties can then provide for monthly or quarterly payment in advance or in arrears. Rental income is usually receivable quarterly in advance. 2.2 Periodicity of reviews? While initial rents are determined freely, rent reviews during the term of the lease agreement are however governed by public policy provisions. There are two types of reviews: The three-year period review, if a party formally ask for such review. The yearly review according to an escalator clause (see 2.3 below). 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Rent is usually indexed annually. The parties may expressly agree on a clause providing for indexation of the rent. As a result, the rent is modified on the basis of an index, which must be directly related to the purpose of the lease agreement. Such clause is referred to as an escalator clause. This index can be the national index of building costs. In 2008, for certain activities defined by decree, an index of commercial rents was introduced. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (ie. rent control)? The initial rent is not governed by any legal provisions. It is freely negotiated by the parties and normally reflects market conditions. During the lease term: the amount of the revised rent shall correspond to the rental value. Nonetheless, it is specified that, unless there has been a material change in local market factors which has, in itself, caused a variation of more than 10% of the rental value, the rent increase or decrease may not exceed the change in the quarterly national index of building costs or index of commercial rents since the last time the rent was determined amicably or by court order: the rent revision is subject to the capping rule. For this review, a period of three years at least must have passed since the beginning of the renewed lease agreement or since the last amicable or judicial fixation of the rent. Upon renewal: in the same way, barring any substantial change in the elements on which the determination of the rental value is based, the rent of a renewed lease agreement shall not exceed the variation in the quarterly national index of building costs or index of commercial rents published by the INSEE since the date on which the initial rent for the expired lease agreement was determined. 52 CMS Real Estate Finance

53 3. Lease agreement obligations who has responsibility for: The rules of the Civil Code on lease agreements and other customary rules will normally apply in the absence of contrary agreement of the parties. 3.1 Internal maintenance, decoration and repair? See External maintenance, decoration and repair? See Structural repairs? The landlord usually bears the cost of major repairs as defined by article 606 of the Civil Code (roof, structure, foundations). But there is an increasing trend to pass these costs onto the tenants. All other repairs and redecoration costs are passed to the tenant through the service charges. An inventory of fixtures is usually drawn up when the tenant takes possession of the premises and when he leaves them. Unless otherwise specified, the landlord is responsible for the compliance works imposed by the Administration. 3.4 Insurance? The landlords will invariably insure a multi-let building. The lease contract may provide that the full cost of insurance will be passed back to the tenant. The tenant must take out operational liability insurance and occupiers liability risks. 3.5 VAT? It is at the landlord s discretion to decide whether he opts for the subjection of the rents perceived in the VAT. 3.6 Rates? Rent is subject to VAT at the normal rate of 19.6%. 3.7 Other typical outgoings? In general, the landlord requires a rental deposit equal to 6 months rent. This is provided either in the form of a cash payment or a bank guarantee. The tenant has a statutory right to transfer the lease agreement to the purchaser of his business. The tenant has no statutory right to sublet without the landlord s consent. 3.8 The ability to recoup any land lord outgoings (including management costs) by way of service charges? The common practice is to execute triple net leases agreements under which the tenant, in addition to the rent, is obliged to pay the costs of maintenance and repair, insurance as weil as taxes. Landlords tend to include as many items as possible in the service charges. 4. Enforceability 4.1 Are terms of leases agreements / contracts recognized and supported by case law in the jurisdiction? No. 5. Valuation 5.1 To be recognized in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors) qualified appraisal report accepted and recognized in each jurisdiction? To be recognised by a court, a property appraisal has to be prepared by a domestically regulated / qualified party. 5.2 Are banks able to take security by way of an assignment over rental income? In France, it is possible for a bank to take a separate security assignment over rental income that a property generates thanks to several contracts delegation / living pledge / assignment over rental income. 5.3 Can a separate entity awn land and the rental income derived from the land? In France, it possible that a separate entity can own land and the rental income derived from the land. Indeed, the property can be shared between the bare-owner and the usufructuary. The usufruct is the right to enjoy things of which another has ownership in the same manner as the owner himself, but on condition that their substance be preserved. It may be established on any kind of immovable property. 53

54 Germany 54 CMS Real Estate Finance

55 A. Mortgages 1. Can Security be granted to a foreign lender? Yes. In general, there are no restrictions on the ownership of land or the taking and enforcing of security rights by a foreign party. 2. Can banks take a mortgage over land and buildings on the land? Yes. The German Civil Code (BGB) provides for two basic types of security interests over real estate, which again may appear in a number of variations and which allow the secured creditor to use the proceeds generated and / or the value represented by the real estate to discharge the secured liability. One is the accessory mortgage (Hypothek), the other is the abstract land charge (Grundschuld). Both concepts confer a right in rem to the secured creditor which allows him to enforce payment of a certain amount of money out of the real estate in the case of the debtor s default. The land charge represents the more popular and commonly used type of security over real estate as opposed to an accessory mortgage. The reason is that a land charge does not directly link the security right to the existence of a particular and defined claim and, therefore, gives more flexibility to the lender than an accessory mortgage. The connection between the real right and the secured claim is made in a special security purpose agreement. 2.1 Distinction between mortgages on land and buildings on land. There is no such distinction. A land charge is granted over a plot of land but the scope of the security interests extends to the economic entity established on the encumbered land as a whole. Buildings on the land are considered as belonging to the land (sec. 94 German Civil Code) and will automatically be encumbered by a land charge. Furthermore, the land charge generally encompasses accessories as well as fruits and produces of the land. In principle, a building cannot be separately encumbered by way of land charge. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? A security interest over land can take both the form of a certificated land charge (Briefgrundschuld or Briefhypothek) or the form of a uncertificated land charge (Buchgrundschuld or Buchhypothek). In both cases the costs are the same (cf. below 3.2). A certificated land charge can be transferred by a written assignment and the delivery of the certificate whereas in case of non-certificated land charges the transfer requires a respective entry in the land register and the declaration of the parties needs to be attested by a German notary to be registerable with the land register. 2.3 Can second ranking security be taken? If so how is it registered? Yes. The registration procedure is the same as in case of a first ranking land charge. The rank and priority of a land charge depends in principle on the sequence of its entry in the land register. The land charge which is registered first ranks prior to all subsequent land charges and other subsequent encumbrances. However, the ranking may also be changed after registration of the land charge by way of an agreement between the respective secured parties. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. German statutory law does not require the mortgagee s consent for any transfers since the registered mortgages and other encumbrances will remain in force so that the mortgagee s legal position is not adversely affected by the transfer of the real estate to a third party. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holder)? In addition to mortgages which are registered in Section III of the German land register German law also provides for other encumbrances, such as easements (Dienstbarkeiten) like, for example, rights of way and rights of use, and annuity charges (Reallasten), which are registered in Section II of the German land register. The priority of these encumbrances depends on their time of registration so that all entries in Section II of the German land register which were registered prior to the relevant land charge in Section III will be prior in rank. In case of an enforcement the holders of such prior ranking encumbrances will be preferred creditors for an amount to be fixed by the court representing the value of their encumbrance which falls away as the result of the court auction. Furthermore, the German Law on Compulsory Enforcement (ZVG) provides for certain privileged security interests. For the purpose of the distribution of enforcement proceeds the following claims have priority in the following order: (i) certain interests incurred in connection with a compulsory administration (Zwangsverwaltung) of the respective real estate property; (ii) certain claims of a receiver (Insolvenzverwalter) if the forced execution takes place in connection with an insolvency proceeding; (iii) certain claims in connection with a compulsory 55

56 execution regarding commonhold property; and (iv) claims in connection with public easements, recurring benefits, particularly without limitation real estate tax, interest, surcharges or pension benefits. It is noteworthy that under German law certain encumbrances on the real estate property, such as in particular public easements, are not shown in the land charge register. However, most of the federal states provide for registers with respect to such public easements. 2.6 Can all monies mortgages be taken? The granting of an all monies mortgage, i.e. a mortgage securing an unlimited indebtedness which is not determined at the time the mortgage is created, is not possible under German law. However, in case of a land charge (Grundschuld) the parties only need to specify the maximum amount without linking it to particular claims so that by entering into a respective security purpose agreement (cf. answer 2 above) the parties can agree that up to the maximum amount of the land charge all monies owed by the mortgagor to the mortgagee presently or in the future in connection with their business relationship shall be secured by the land charge. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. Under German law the landlord s rights to receive rent can be assigned by an assignment agreement. It needs to be noted, however, that in case of an insolvency of the landlord rent assignments will only be valid for the rent falling due up to and including the month in which insolvency proceedings are opened, while the assignment of rent for later time periods ceases to be effective. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Under German law the borrower may grant a pledge over his bank account in favour of the lender. It is also possible to make contractual arrangements for blocked accounts, such as e.g. debt service reserve accounts. In case of German account pledges it needs to be noted that the standard terms and conditions of German banks provide for an account pledge of all accounts opened so that a respective waiver of the account bank is required for the lender s account pledge to become prior in rank. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register If land charges are not registered with the Land register then the security has not been perfected. In particular, as long as a land charge has not been registered, the chargee will not be protected by the publicity rules of the land register (sec. 892 German Civil Code) so that third parties can acquire the property without the still unregistered land charge (or other encumbrance). 3.2 Formalities for execution of security and costs? Formalities for execution of security The creation of a land charge requires a notarially certified consent in respect of the registration of the land charge from the owner of the property and registration thereof with the competent land register Cost The costs associated with creating a security interest on German real estate include the notary s fees and the fees of the land register. The notary is entitled to notarial fees in connection with the attestation (Beglaubigung) of the mortgage deed and the notarial recording (Beurkundung) of the submission to immediate forced execution by the property owner which is generally required by German banks. In order for the land charge to be immediately enforceable, i.e. without the necessity of the chargee to obtain a court judgement first, the owner of the property has to execute a notarial deed whereby the owner submits itself to immediate forced execution. Since not only the signature of the owner is notarially certified but the whole deed is notarially recorded, the notary fees for the submission to immediate forced execution can be substantial. The land register charges a fee for the registration of the land charge. Both the notarial fees and the registration fees depend on the amount of the land charge and the amount to which the owner submits itself to immediate forced execution and will be calculated on the basis of an official German legal cost index (Kostenordnung). 56 CMS Real Estate Finance

57 4. Can the Bank use a Security Trustee to hold security on trust for creditors? Under German Law, there is no concept of trust similar to English law. However, it is possible for a security trustee to hold non-accessory security interests such as land charges (but not accessory security rights such as mortgages and pledges) in its own name but for the account of the secured lenders. A parallel debt structure may be used to enable a bank to act as security trustee also in respect of accessory security rights. In case one bank acts as security trustee the secured lenders might bear the insolvency risk of the security trustee What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? In case of a land charge (Grundschuld) the land charge needs to be transferred separately to the new lender only if each lender is registered as land chargee. If the concept of the security trustee is used, no new security document needs to be signed. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? In general, a transfer of the lease to another tenant requires the consent of the landlord. However, a tenant of a residential lease may sublet part of the premises if he has a legitimate interest to do so. In this case, the original tenant will still be bound by the lease and be liable against the landlord under the lease agreement. 6. How can the Bank enforce security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? In general, under German domestic law and under the Council Regulation (EC) No 44 / 2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters, the parties to a contract can chose a foreign jurisdiction to settle disputes. However, disputes relating to land securities and disputes relating to lease agreements can only be settled by the (locally) competent German court. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? German domestic law generally allows the enforcement of domestic arbitral awards without review. The enforcement of foreign arbitral awards is governed by international treaties. Foreign judgements rendered under the Council Regulation (EC) No 44 / 2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters will generally be recognised and enforced without review of the merits of the case. Only the existence of specially enumerated factors set out in article 34 of the regulation may prevent enforcement. Other foreign judgements may be also recognised and enforced in Germany without such review if the requirements of sec. 328 of the German Code on Civil Procedure (ZPO) are met (in particular reciprocity of recognition, no violation of public policy or due process of law, no contradiction with other judgements). 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The enforcement of a land charge can be achieved by an application for execution after the chargee has obtained an enforceable judgment. Furthermore, the chargee may, at the time the land charge is granted, request the notary to issue an immediately enforceable copy (vollstreckbare Ausfertigung) of the land charge that enables the chargee to enforce the land charge immediately by applying for enforcement proceedings without having to first obtain an enforceable title by initiating separate legal proceedings. The German law on Compulsory Enforcement (ZVG) provides for two main possibilities of enforcement; Either the chargee may apply for a compulsory court sale in which case the real estate will be auctioned through respective court proceedings following which the proceeds of the auction will be distributed to the chargee and other preferred creditors in the order of their priorities. A private sale would only be possible if the lender / chargee and the borrower / charger jointly agree that the borrower sells the property by way of a private sale. 57

58 The second possibility for the chargee is to apply for court order of compulsory administration (Zwangsverwaltung) in order to benefit from the income of the real estate property. The competent court will in that case appoint an administrator who will administer the real estate property and distribute the income from the real estate to the secured creditors in the order of their priorities. Under German law, land charges are assignable and can be sold and transferred to third parties. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? Pursuant to the German law on Compulsory Enforcement (ZVG) the administration and use of the real estate remains with the debtor within the limits of due management of the property unless these duties are transferred to a court appointed administrator by way of a compulsory administration. 6.5 I s there a method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? In case of a compulsory court sale (cf. answer 6.3 above) the lender can submit bids and thereby acquire the property for himself. 7. Is there anything else that you would specifically point out to a UK lender as being unusual or particularly difficult? Under German law the enforcement of land charges whether by a compulsory court sale or by a compulsory administration follows strict and complex rules which are administered and / or monitored by the competent German court. Only in rare cases can a land chargee be authorised by the court to appoint its own administrator (so-called Institutsverwalter). B. Security Over Shares In Germany, real estate is regularly held by single purpose vehicles incorporated as limited liability companies or limited partnerships. We therefore highlight the specific issues that arise in the context of enforcing a security interest taken over the shares of a German limited liability company and a limited partnership. 1. Can security be granted to a foreign lender? Security over shares in a German limited liability company or a limited partnership can be granted to foreign lenders. 2. Can second ranking security be taken? If so, how is it registered? Second ranking security over shares in a German limited liability company or a limited partnership can be taken. The granting of a security over such shares does not require registration. The rank of multiple securities over one share is determined by the chronological order in which the security interests were created 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? Neither the granting of security over shares in a German limited liability company nor over shares of a limited partnership requires registration. 3.2 Formalities for execution of security and costs? The pledge of shares in a German limited liability company is done in the same way as a transfer of shares in such company: pledgor and pledgee have to conclude a notarised share pledge agreement. In addition, the consent of the shareholders meeting or the other shareholders of the company regarding the pledge of a share may be required pursuant to the articles of association of the company. The pledge of an interest in a German limited partnership only requires the conclusion of an agreement between pledgor and pledgee and the consent of the other partners, if any. The agreement between pledgor and pledgee does not have to meet any formal requirement; in particular, no notarisation or registration is required. A notarisation of the pledge agreement is required in case the pledge of the interest in the limited partnership is combined with the pledge of the shares in the general partner of the partnership that is a limited liability company. 58 CMS Real Estate Finance

59 The costs for the notarisation of a share pledge agreement regarding shares of a German limited liability company depend on the value of secured obligation or the value of the pledged share if the value of the pledged share is lower than the value of the secured obligation. For example, the fees for the notarisation of a share pledge agreement with a value of EUR 1,000, are EUR 3, Do the shares need to be transferred into the name of the lender or its nominee? A transfer of shares is not required for the granting of an interest in the shares. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to any courts and are private sales of security possible? Does it have to be sold by auction? In principle, the enforcement of a pledged share requires an executory title pursuant to the German Code of Civil Procedure, e.g. a court decision, but pledgor and pledgee may agree on waiving the requirement of an executory title. When the requirements for the enforcement of the pledge (Pfandreife) are met, the court competent for execution may, upon application by the pledgee, issue an attachment order regarding the pledged share. The attachment order has to be served upon the shareholder and the company. Only the court competent for execution decides on the procedure of the realisation of the pledge. The pledged share may be realised by public auction or a private sale. The private sale is usually carried out by the bailiff, but the court may also appoint a third person. As a public auction regarding shares in a company is unlikely to be successful, the pledgee may request the court to decide on a private sale through the pledgee or a direct transfer of the share to the pledgee. However, the parties of the share pledge agreement cannot agree on a certain procedure, the decision remains with the court competent for execution. The aforementioned procedure basically applies to the enforcement of a pledged interest in a limited partnership accordingly. However, the sale of the interest in a limited partnership through a public auction or a private sale is only possible if the sale of the interest is generally permitted by the articles of association or if the other partners of the partnership agree to the sale in the individual case. If the sale is not possible, the pledgee may terminate the partnership. To avoid the termination of the partnership, the articles of association of a limited partnership often provide that the issuance of an attachment order regarding a share in the partnership results in the exclusion of the respective partner. In these cases the pledgee is entitled to a settlement payment. As a pledge is a security instrument of strictly accessory nature, the pledge of a share of a company can only be transferred to a third party by transferring the secured claims. 5.2 Are loans from shareholders subordinated? If so, how is it done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders are subordinated if this is expressly agreed with the borrower or another creditor. A subordination agreement has to meet certain qualifications imposed by German insolvency law but does not require a certain form. It is customary that shareholder loans are waived or written off contractually as part of an enforcement or a share pledge should a default occur. C. Leases We usually would expect the lease to be an operating lease and therefore the lessor would not be required to obtain a financial services license in accordance with the German Banking Act (KWG). In case of a financial lease, the details need to be assessed within lieu of the individual circumstances. Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The length of the lease is determined by the parties in accordance with their economic needs, subject to the comments below. Many valuable commercial leases have a fixed term of 5 to 10 years. Tenants are often granted options to extend the leases (2 to 5 years). 59

60 1.2 Maximum / minimum lease length if any? The fixed term of the lease is 30 years at most. After the expiration of 30 years, the lease can be terminated by either party. So called chain leases are permitted, if the new agreement is an independent expression of the parties intent. Thus, the parties can agree on consecutive lease agreements with a fixed term amounting to more than 30 years (if e.g. they agree on a new lease with identical conditions with a fixed term of 30 years after 7 years of the initial 30-year-term have already expired, the parties can virtually agree on a 37 year term). However, the parties can also agree on a registered permanent lease (Dauernutzungsrecht) under the German Condominium Act (Wohnungseigentumsgesetz), should they desire a term of more than 30 years. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?) A fixed term lease expires automatically at the end of the term, unless the parties have agreed on an extension option or an automatic extension. A lease created for an indefinite period of time is subject to ordinary termination by either party and expires at the end of the respective contractual or statutory notice period. However, if after termination of the lease the tenant is still using the property with the approval of the landlord the lease is deemed to be extended for an indefinite period of time and can be terminated by either party within the statutory notice period. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? Either party may terminate the lease agreement for good cause with immediate effect (i.e. in case of material default of the other party), if under the circumstances of the individual case and consideration of the parties interests a continuation of the lease cannot be expected of the terminating party. This can be, inter alia, the case, if the landlord does not hand over the leased property or does not warrant the contractual use vis-à-vis the tenant, e.g. if the leased property is defective in a way that is preventing the tenant to use the property in the contractually stipulated way. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? Any limitation of the contractually stipulated use (e.g. road blocks, noise and so on) that is not unsubstantial may entitle the tenant to reduce the rent or even to claim compensation for damages. 2 Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? Usually, rent of a fixed sum per month or per year is agreed upon. For shopping centres or other retail properties, hotels and restaurants payment of a turnover rent is widespread, sometimes in addition to a fixed (base) rent. Rent is usually paid monthly in advance. Quarterly payments in advance carry the risk that the tenant must pay the creditor s receiver again in the case of the landlord s insolvency and are therefore rarely accepted. 2.2 Periodicity of reviews? Usually, rent is adjusted every two or three years. It is also usual practice for the rent to be adjusted according to changes of the consumer price index on an annual or permanent basis. Automatic changes of the rent in accordance with changes of the consumer price index require that the landlord be bound by the lease for 10 years at least. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? It is usual practice for the rent to be adjusted according to the changes of the consumer price index (up or down). In market practice the rent is often adjusted if the index changes by more than 10 index points or percent. In many cases the adjustment to be made is not identical to the adjustment of the index, but is a certain percentage of this change (e.g. 80%). Instead of an indexation of the rent, the parties may also agree on a progressive rent which increases in a fixed quantum. 60 CMS Real Estate Finance

61 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? A provision whereby the rent is automatically adjusted will be generally regarded as valid as long as it falls into one of the categories of exemptions stipulated in the German Price Clause Act (Preisklauselgesetz). Such an exemption applies if the term of the lease from the tenant s point of view (i.e. extension options in favour of the tenant are included) is at least 10 years and the rent is adjusted both upwards and downwards in accordance with a price index fixed by the Federal Statistical Office (Statistisches Bundesamt). In case of an infringement of the German Price Clause Act, however, the relevant provision is valid until the infringement of the relevant statutory regulations is determined by a court with binding effect. 3 Lease obligations: who has responsibility for: 3.1 Internal maintenance, decoration and repair? Under the provisions of the German Civil Code, the landlord is generally obliged to maintain and repair the let property, including interior decoration and repairs. In practice, however, these obligations are usually passed on to the tenant to a large extent except for the maintenance of roof and structure of the buildings. 3.2 External maintenance, decoration and repair? Pursuant to German law, the landlord is generally obliged to keep the leased premises in a condition suitable for the agreed use and maintain them in such condition throughout the period of the lease. In practice, however, these obligations are usually passed on to the tenant. The costs for the main tenant of commonly used spaces and outside areas are also usually passed to the tenants as ancillary costs to a certain extent. 3.3 Structural repairs? Whereas the responsibility for the internal and external maintenance may at least in commercial leases be passed on to a wide extent to the tenant, the landlord remains regularly responsible for structural repairs, i.e. repairs of the roof and structure of the building (Dach und Fach). 3.4 Insurance? Whereas insurance is not obligatory, the landlord normally takes out insurance for basic insurance risks (Elementarschäden) against fire, storm, hail, flood water etc., while the tenant usually takes out operational liability insurance which covers any damage caused by the tenant s operations. The full cost of property insurances taken out by the landlord will normally be passed back to the tenant as service charges. 3.5 VAT? Under leases for commercial use, the landlord has the option of choosing to add the VAT to the rent or not, if the tenant s business transactions conducted in the lease premises are subject to VAT as well. Otherwise, the landlord may not be able to recover VAT. 3.6 Rates? In addition to the service charge, the parties normally agree that the tenant must pay other ancillary costs, such as public charges (in particular, real estate tax) and premiums for insurance taken out by the landlord. Apart from that, the landlord is responsible for rates. 3.7 The ability to recoup any landlord outgoings (including management costs) by way of service charges? In order to charge any costs to the tenant, the lease agreement must precisely state each type of costs. Generally, a large part of landlords outgoing are charged to the tenant, including under commercial lease management costs. They are, however certain restrictions to be observed if the lease agreement may be subject to control of standard terms and conditions. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Unless specific clauses are deemed invalid pursuant to the German Standard Contract Terms regulations incorporated in the German Civil Code, contractual stipulations and terms of leases are, in general, enforceable and supported by the German courts unless they do not conflict with obligatory statutory provisions. 5 Valuation 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? To be recognised by a court, a property valuation must be made by a domestically regulated and qualified expert. 61

62 5.2 Is it possible to obtain environmental reports from a local government agency or a qualified, insured environmental professional? The German municipalities keep registers in which environmental dangers or findings are recorded and which are open to public review. However, the registers show only information that has become known to the public authority and there may be other environmental damages on the property that are not publicly known yet. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No, unless the lender has used the property by itself or becomes the owner of the property as a bidder in the auction for enforcing the mortgage. Statutory environmental liability is only possible for former and personal owners and users of the property as well as for the person responsible for the environmental damage. 62 CMS Real Estate Finance

63 Hungary 63

64 A. Mortgages 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take a mortgage over land and buildings on the land? Land and the buildings erected on it are generally treated as one real estate interest (registered in the land registry under the same topographical lot number). Consequently, a mortgage established over the real estate extends to both the land and the buildings on the land. Exceptionally, if a developer is granted a land use right, it is possible to register the building constructed on the basis of that right as a legally separate real estate from the land with its own topographical lot number. In such a case it is also possible to take a mortgage over that building only, or the land only or both the building and the land. 2.1 The distinction between mortgages on land and buildings on the land? There are no distinctions with respect to either the nature, effectiveness, enforceability or the registration procedure regarding a mortgage over land or a mortgage over buildings. In case these are registered under different topographical lot numbers, the owner of the building has a right of use of the land at all times. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? The concept of mortgage certificates does not exist in Hungary. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. The registration process of a second (or subsequent) ranking mortgage is basically the same process as that for the registration of a first ranking mortgage. Security ranking depends on the date the application for registration of the mortgage in the actual Land Register (ALR) is filed with the relevant Land Registry (LR). The concept of a priority deed does not exist under Hungarian law. Mortgages rank by operation of law based on the time of filing the application. However, the parties can reserve in advance a ranking for a mortgage that is yet to be established. However, it is possible for the ranking of mortgages to be changed with the consent of all affected parties registered in the ALR (e.g. owner, other mortgagees etc) by filing appropriate written declarations / consents with the LR. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes, unless a negative pledge (i.e. prohibition of alienation or encumbrance) was registered simultaneously with registering the mortgage in the land registry. Such a negative pledge registration can only be effected if the real estate is purchased at the same time the mortgage is created. If such registration is in place, the LR should refuse to register the title of the new owner without the consent of the mortgagee. In practice the LR often requires the consent / confirmation of the mortgagee, even if no negative pledge restriction is registered. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Yes. In a liquidation, preferred creditors in relation to the real estate are: (i) any person who has started court enforcement procedure against the real estate (if the enforcement was registered by the LR before the commencement of the liquidation); and (ii) any person who requested the police seize the real estate (that person is deemed to have the same rights as a mortgagee of the real estate). The order of priority of payment of these creditors and an existing mortgagee is the order in which the following occurred (first in time being paid first) being (i) the date of registration of the enforcement right by the LR (ii) the seizure of the real estate (seizure may not be recorded by the LR in the ALR) and (iii) the registration date of the existing mortgage in the ALR. 2.6 Can all monies mortgages be taken? No. The nearest Hungarian equivalent is a framework mortgage which secures all liabilities of the borrower arising from specified loan / facility / security arrangements made between the lender and the borrower (listed in the mortgage agreement) up to a maximum amount set out in the framework mortgage agreement. 64 CMS Real Estate Finance

65 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. The landlord s right to receive rent and other receivables can be (i) pledged or (ii) assigned in a security assignment. The assignment needs to be notified to the tenant(s). 2.8 Is it customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes, a borrower can grant a pledge over the balance of its existing and future bank accounts (which accounts are usually held by the lender). The rental account is almost invariably pledged and it is usually contractually agreed that (i) withdrawal of funds from the rental account needs the prior consent of the lender and (ii) in a default situation, the lender can (a) prevent the borrower having access to funds to the borrower s accounts and (b) exercise a collection right over the balance of such accounts. 3. What are the mechanisms for registering land and for registering and perfecting security? (a) Land and buildings To transfer ownership title either (i) an order of an authority or (ii) an agreement (being a notarial deed or being countersigned by a lawyer / legal counsel) needs to be produced to the LR. The new owner must be registered by the LR into the ALR. The transfer is perfected upon the registration of the new owner as registered owner in the ALR. (b) Registering and perfecting security Mortgages must be established by an agreement creating a mortgage (being a notarial deed or being countersigned by a lawyer / legal counsel). The mortgage must be registered by the LR into the ALR. The mortgage is perfected upon its registration in the ALR. 3.1 Consequences of failure to register? If a change of ownership is not registered in the ALR, the title to the property is not transferred. If a mortgage is not registered in the ALR, that mortgage does not create valid security. 3.2 Formalities for execution of security and costs? The mortgage must state the maximum secured amount. Such amount is usually around one hundred and thirty per cent. (130%) of the total secured obligations. The costs for the creation of a mortgage are: Notary fees A fee on a sliding scale depending on the amount of the secured obligations ranging form HUF 20,000 to HUF 200,000,000 (approx. EUR 73 to EUR 730,000) plus hourly rates of the notary public. LR fees HUF 12,600 (approx. EUR 46) for each lot affected and each mortgage. 4. Can the lender use a Security Trustee to hold security on trust for creditors? A security agent may be appointed by syndicate banks to administer the mortgage and other security. The concepts of trust and parallel debt are unknown under Hungarian law. The (less robust and less protective) alternative is each lender being named as a joint and several beneficiary under the transaction documents. Each lender gives the security agent power of attorney to, amongst other things, sign for the lender in relation to the transaction documents and to enforce the security. An alternative would be consignment : broadly an agency arrangement where the security agent concludes the security agreements in its own name but for the benefit of the lenders. Enforcement of lenders claims by the security agent as a consignee might be problematic. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Most Hungarian security interests are ancillary to the underlying debt owed to the lender. If a lender s rights under a bi-lateral facility agreement are being transferred to a new lender, it is not necessary to enter into a new security agreement. However, the new lender must be registered in the relevant registers (where registration is a perfection requirement of that security). If, in a syndicate of lenders (who have appointed a security agent), one lender wants to transfer its lending commitment to another person, new security does not need to be taken. The security agent continues to hold the security for the syndicate (whose composition can change over time). 65

66 It is important to note that if an amendment is made to a facility agreement, which is more onerous to the borrower (e.g. increase of margin, increase of facility amount, the final maturity date is pushed out), new security must be created (covering all (i.e. original and increased) claims) and, where applicable, registered in the relevant registers. Such security interest is usually created as a second priority security, with the first priority security being released 90 days following the registration of the second priority security (to put that new security beyond challenge by any liquidator / third party creditors). After such release(s) the second ranking security interests should automatically become first ranking. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Transfer of the lease As a general rule: the tenant is not entitled to transfer its interest in the lease but this can be varied by agreement in the lease e.g. the tenant may transfer if it obtains the prior approval of the landlord for the transfer; real estate can only be sublet or otherwise leased to third parties with the prior consent of the landlord. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Hungarian law is the only competent governing law of the mortgage. Hungarian courts have exclusive jurisdiction in case of disputes relating to real estate located in Hungary. Otherwise parties are generally free (except to the extent they are forum shopping ) to choose which laws apply to contracts and which courts have jurisdiction. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Yes, as a general rule, foreign arbitral awards and foreign judgments are recognised and enforceable in Hungary (by virtue of applicable EC Regulations and other international conventions) without any scrutiny in the merits, unless a constitutional right of one of the parties is violated. However, if the dispute relates to real estate located in Hungary, the Hungarian courts have exclusive jurisdiction (i.e. foreign judgments on that subject will not be recognised). 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Security can be enforced by (i) out-of-court enforcement procedure (direct enforcement by the lender or its appointee) if criteria are met or (ii) court enforcement procedure. Under both procedures the real estate can be sold to a third party. If a mortgage is a notarial deed, the mortgage becomes directly enforceable (i.e. the lender does not need to obtain a court judgment first) and there is no avenue for parties to dispute the amount of the secured liabilities, the method of the enforcement and / or any other matters set out in the mortgage). At any time before an event of default has been declared, it is open to the borrower to agree in writing that the lender is permitted to use an out-of-court enforcement procedure. If this applies a minimum sale price, the method of the sale to a third party and deadline for the sale have to be agreed. In the mortgage the borrower and the lender can agree that after an event of default has been declared (i) they together will sell the real estate (ii) the lender will instruct an institution commercially engaged in granting mortgage-backed loans or arranging auctions ( relevant institution ) to sell the real estate or (iii) if the lender is a relevant institution as its main business, it will sell the real estate itself. There is a statutory 30-day notice requirement for the lender to notify the borrower on the proposed sale. Where out-of-court enforcement is not available or the real estate sale failed to take place before the agreed deadline, the mortgage may be enforced only by court enforcement procedure (managed by a court appointed bailiff) by selling the real estate at public auction (conducted by the bailiff). It is not possible to appoint a receiver / liquidator to sell the real estate. Any liquidator / bailiff is appointed by the relevant court, not by the lender. The court generally selects the liquidator using a random computerised selection method but is entitled to appoint a specific liquidator if the circumstances of the borrower need to be taken into account (e.g. complexity, geographical location). 66 CMS Real Estate Finance

67 6.4 Is the lender responsible for the maintenance and insurance of the real estate after default until sale? No. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? Any agreement for foreclosure made before an event of default is declared invalid. After such an event is declared, a lender and mortgagor may agree that the lender acquires ownership title over the real estate, but this is not common, as it requires the co-operation of the mortgagor an enforcement scenario. As such a transaction is a consensual sale and purchase of the encumbered real estate, it does not require the involvement of the court. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? It is arguable that, legally speaking, a relevant institution might need to be regulated / supervised by the Hungarian Financial Supervisory Authority. As foreign lenders might not have appropriate personnel / administrative know-how in Hungary to sell a real estate in an out-of-court enforcement scenario appointing a Hungarian relevant institution to do so might make commercial sense in practice. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? The following security can be taken: (a) pledge over business quotas (similar to shares) of a Kft (limited liability company) and (b) share deposit and / or pledge over shares in a Zrt (private company limited by shares). Pledges over shares are rarely used as the share deposit is preferable. Options to acquire business quotas and shares are also taken. SPVs tend to be Kft companies as financial assistance restrictions do not apply to Kft companies. Second priority security can only be established in respect of a pledge. Quota pledges over business quotas are registered in the company register but the pledges are registered (and have priority) in the order of the date of their registration. The concept of agreeing their respective priorities does not exist. Security deposit is perfected by the handover of the shares (or, in case of dematerialised shares, upon their transfer to a blocked securities account), so no second priority security is available. If multiple option rights are granted in respect of the same asset the parties may contractually agree the order of priority by agreeing the order in which option beneficiaries can exercise their option rights. 3. What are the mechanisms for registering and perfecting security? Quota pledge. Registration in the company register by filing the extract of the pledge agreement with the relevant court of registration. Share deposit shares evidenced by certificates-to be handed over to the lender dematerialised shares-transferred to a blocked securities account in lender s name Quota / share option rights. No perfection requirements. 3.1 Consequences of failure to register? If the relevant perfection requirements are not met, the security is not validly created and cannot be enforced. 3.2 Formalities for execution of security and costs? Generally none but it is advisable that an agreement creating pledges / deposits / options is made by notarial deed to enable it to be directly enforceable. Notary fees See A3.2 above. Quota pledge registration fee HUF 3,000 (approx. EUR 11). 67

68 4. Do the shares need to be transferred into the name of the lender or its nominee? In the case of enforcement of a quota / share pledges, the lender / its nominee would be entitled to sell the pledged quotas / shares to a third party purchaser. The terms of a share deposit can grant the lender the right, on certain conditions, to acquire / appropriate the shares itself. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Quota pledge: the rules in A 6.3 above for mortgages apply to such a pledge. Option rights: rights may be exercised by the option beneficiary (if it chooses to do so) upon the occurrence of an event of default. Share deposits: when the security becomes enforceable, the lender may (where entitled to do so by the deposit terms) either directly acquire the shares itself or sell them. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge, should a default occur? Majority shareholders claims (including loans) rank as unsecured creditors claims in an insolvency situation. Loans from shareholders can be contractually subordinated. Shareholders can agree that repayment of their loans are waived / written off should default occur, but this is not yet customary in Hungary. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The typical lease length for office buildings is 3 to 8 years, with additional extension options for the tenant. It is typical that institutional / commercial leases are concluded for a definite term. In our experience, typical lease lengths for other normal commercial leases generally range between 3 to 10 years, with longer leases for anchor tenants and special-purpose premises. 1.2 Maximum / minimum lease length if any? Not applicable. 1.3 Statutory controls and obligations regarding renewal / termination of leases (does tenant have automatic right to renew or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? There are no statutory controls and / or obligations with respect to the renewal of the lease. The tenant does not have an automatic right to renew the lease. The parties may agree to grant the tenant a right to extend the lease before the expiry date of the fixed term. The additional term is usually either the same or shorter than the original term. Indefinite lease terms are uncommon. If the lease term is not extended, the lease terminates on the expiry of the fixed term. If after the expiry of the fixed term, the tenant remains in the leased premises and the landlord does not object thereto within 15 days, the lease is by law automatically extended and becomes a lease for an indefinite term. This statutory extension is often excluded in institutional / commercial lease agreements. 68 CMS Real Estate Finance

69 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? A fixed term lease cannot be terminated by the parties by notice until the fixed term of the lease has lapsed, unless there are contractual break options in the lease. There are no statutory break-options for tenants in the case of fixed-term leases, other than the case where the leased premises cannot be used for the intended purposes, due to the fault of the landlord. Institutional, investment type lease agreements usually do not contain any contractual break-options for the tenant. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? None. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? Rent is usually payable either quarterly or monthly in advance, without deduction. Rents are now commonly expressed either in the local currency (HUF) or in EUR. 2.2 Periodicity of reviews? The rent review usually takes place annually, with retrospective effect from the agreed rent review date. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? It is customary for the basis of review to be indexation only. The index to be applied depends on the currency in which the rent is set: (a) in HUF, the official Hungarian consumer price index is applied; and (b) in EUR, the harmonised index of consumer prices (HICP) is applied. The indexation is usually upwards-only and the rent cannot fall below the initial base rent. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? None. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Usually the tenant s responsibility. 3.2 External maintenance, decoration and repair? Landlord s responsibility. 3.3 Structural repairs? Landlord s responsibility. 3.4 Insurance? In case of institutional triple net leases, the insurance of the leased premises is usually paid by the landlord, but recharged to the tenant as part of the service charge. 3.5 VAT? A landlord has two options: (i) letting is VAT-exempt, in which case the right of deduction of VAT may not be exercised by the landlord; or (ii) VAT is payable on the rental fee, but VAT is deductible. The current Hungarian VAT rate is twenty five per cent. (25%) 3.6 Rates? The rate of property taxes are established by the local municipalities on a square metres basis (the average annual property tax is HUF 900 / m 2 (approx. EUR 3.3 / m 2 )). 3.7 Other typical outgoings? Property tax is usually paid by the landlord, but recharged to the tenant as part of the service charge. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? In case of institutional triple net leases, the landlord outgoings are part of the service charge. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Hungarian law recognises lease obligations. Although the Hungarian judicial system is not based on case law, the Hungarian courts may refer to published court judgments, especially in connection with disputes over the termination of leases. 69

70 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? The appraisal is only recognised in Hungarian courts if it was prepared by a judicial expert recognised and registered by the Hungarian Ministry of Justice. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Qualified / insured environmental professionals can prepare environmental reports but such reports are not binding on the environmental agency or the courts. In Hungary, the environmental agency (which is independent from local / central government) can declare real estate contaminated. Local government does not prepare environmental reports for the lenders / real estate owners. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? Generally, no. However, if the lender were a shareholder of the mortgagor or directly acquired title to the real estate via enforcement (e.g. by exercising an option right), liability could attach to the lender. Environmental liability would not attach to the lender solely by holding and enforcing any of the Hungarian security referred to above, unless the lender takes title to the assets. 70 CMS Real Estate Finance

71 Italy 71

72 A. Mortgages 1. Can security be granted to a foreign lender? Yes. There is no restriction on the ownership of land by foreign parties in general or a foreign bank taking security over land. However there are some limitations regarding the possibility for a foreign bank which does not have a permanent establishment in Italy to benefit from the substitutive tax, as detailed in paragraph 3.1 below. 2. Can lenders take a mortgage over land and buildings on the land? In general, a mortgage extends to all improvements on the mortgaged land (including any construction realised on the land). In the event that a third party holds a superficies right over the land (that is a right which creates a horizontal split in ownership, enabling a third party to own a building, whilst the land on which such building has been built is owned by a different person), such third party may grant a mortgage over the buildings whose erection has been started, completed or is merely planned and the owner of the land may grant a separate mortgage over the land. 2.1 The distinction between mortgages on land and buildings on the land? With respect to the mechanisms for registering and perfecting a mortgage, there is no such distinction. Any mortgage is granted by the owner of the relevant right (ownership, superfiecies right etc.) by means of an unilateral notarial deed and must be registered in the Land Registry (Ufficio dei registri immobiliari) by filing a notice of registration (see also paragraph 3 below). 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Mortgage certificates do not exist in the Italian system. In order to ascertain whether a real estate is subject to a mortgage or any other charge (e.g. a privilege) it is necessary to obtain an abstract from the Land Registry or a certification by a Notary Public. For this purpose it is necessary to have the assignment registered with the Land Registry, unless the assignment is made pursuant to article 58 of the Italian Consolidate Banking Law (en masse assignment mainly used in securitisation transactions), in which case the assignment of the mortgage is enforceable against any third parties without any need of registration. It is also possible that two or more mortgagees agree to swap their security ranking (subrogation) in respect of a specific asset. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. The Italian law allows creating more than one mortgage over the same asset. Security ranking depends on the date of application for registration of the mortgage. The registration process of second (or subsequent) ranking mortgages is the same as the one for first ranking mortgages (see also paragraph 3 below). 2.4 C an the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? A mortgage is an ancillary instrument and cannot be assigned to a third party separately from the secured obligation. If the third party obtains title to the real estate (which does not need lender consent), the real estate remains subject to the mortgage. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? There can be additional preferred creditors being (i) any creditors who have started enforcement proceedings against the real estate for repayment of the debt and (ii) the Italian State for direct / indirect taxes. 2.6 Can all monies mortgages be taken? All monies mortgages are not available in Italy. Security is available for specific obligations only e.g. all sums due under a facility agreement between the parties dated 30 June The mortgage is considered as an ancillary instrument (principio di accessorietà), meaning it can not be assigned to a third party separately from the secured obligation. Therefore the mortgage is deemed to be assigned together with the relevant secured obligation and / or the secured credit. 72 CMS Real Estate Finance

73 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Generally speaking, the landlord s right to receive his rent could be pledged or assigned to the lender by way of security without the consent of the tenant. A written pledge or assignation in security is taken and needs to be (i) notified to the tenant and (ii) bear a date which has been either (i) notified to a Court Bailiff or (ii) authenticated by an Italian post office to be enforceable against the tenant and any third parties. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. A bank account pledge is customary. Generally, a borrower is entitled to operate the account(s) until it is in default. 3. What are the mechanisms for registering land and for registering and perfecting security? As a general rule any transfer of land must be executed in the form of a notarial deed and must be registered with the relevant Land Registry Office. Mortgages must be notarised and registered in the Land Registry. For registering the mortgage, the creditor has to submit to the register of mortgages the notarial deed and two originals of the notice of registration. 3.1 Consequences of failure to register? If the mortgage is not registered in the Land Registry, it is not enforceable. 3.2 Formalities for execution of security and costs? The notarial deed whereby a mortgage is created must state the maximum secured amount, that is the maximum amount (which is automatically increased by act of law by default and legal interest accrued for a certain period of time) that may be recovered through the enforcement proceedings and subsequent auction of the mortgaged asset. The costs for the creation of a mortgage are as follows: mortgage tax equal to 2% of the amount by which it is created; plus stamp duty equal to 0.5% of the value of the secured obligations (only in the event that the mortgagor is different from the secured debtor); plus notary fees (depending upon the amount of the mortgage). However Italian tax law also provides that a substitutive tax equal to 0.25% of the secured obligations (in lieu of any tax and duty payable in respect of the credit facility agreement and any related securities) applies when the following requirements are met: a) the lender is a credit institution; b) the relevant credit facility is a medium-long term facility (more than 18 months); and c) the transaction is deemed located in Italy. However it must be pointed out that there is a debate if the substitutive tax regime would also apply in the event that a credit facility granted by virtue of an agreement executed outside of Italy (and by a bank which does not have a permanent establishment in Italy) is secured by means of a mortgage created over real estate located in Italy. In the case of an event of default occurring, the mortgagee is entitled to enforce the mortgage through a public sale. In order to enforce the mortgage the mortgagee must obtain a title for enforcement of its credit (e.g. an immediately enforceable decision or payment order, a bill of exchange, a protested cheque etc.). The mortgagee will receive payment out of the sale proceeds up to the maximum secured amount. The cost of enforcement of the mortgage may vary. Normally enforcement proceedings last not less than 2 / 3 years. All security constituted by attending a Notary requires the lender to be represented. Usually the lender grants local Italian lawyers a power of attorney (limited in scope and duly legalised in the lender s own jurisdiction) to enable the lender to be represented before the Notary. It is recommended the power of attorney is put in place ahead of completion. 4. Can the lender use a Security Trustee to hold security on trust for creditors? It is not common that secured creditors appoint a Security Trustee to hold security on trust. In any case, the law allows creditors to appoint a security agent with the power of acting in their names and on their behalf. Such agent can be empowered to carry out any actions in connection with the mortgage. 73

74 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? As mentioned under 2.2 above, the mortgage is automatically transferred to the assignee together with the secured obligation / credit. Consequently no new security needs to be rendered but any change in the secured credit or should be registered and therefore a notarial deed of transfer is needed. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? As a general rule the tenant must obtain the prior consent of the landlord to transfer the lease contract to a third party. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? No. It is necessary that a mortgage is created under Italian law and that any dispute is subject to Italian jurisdiction. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Yes, foreign arbitral awards and foreign judgements are recognised and enforceable in the Italian jurisdiction (by virtue of applicable EC Regulations and international conventions) without any scrutiny in the merits, unless a constitutional right of one of the parties is violated. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? In the event of a default by the mortgagor, the mortgagee is entitled to file legal proceedings in order to sell the mortgaged real estate by auction. The security cannot be sold separately. The law does not allow selling the mortgaged real estate privately. The mortgagee has no authority to appoint receivers or liquidators. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. The lender is not responsible for maintenance or insurance after default unless the lender applies to the court to be appointed as custodian to the real estate by the courts and is subsequently appointed. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? It is not possible to contractually agree that the mortgaged real estate is to be automatically transferred to the lender upon default. A judicial order is always necessary to transfer title to the mortgaged real estate. The transfer of the real estate is ordered if (i) its auction was not successfully carried out and (ii) the lender has filed a request to have the real estate transferred to it. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? In the event that the deed creating the mortgage is executed outside of Italy, it must be legalized before an Italian notary in order to be registered in the Italian Land registry. The mortgage is valid for 20 years starting from the date of its registration and unless renewed before such term, on that date it automatically expires. The Italian Consolidated Banking Law provides specific rules relating to banking loans secured by a mortgage over land or over buildings (credito fondiario). More specifically, mortgages cannot be submitted to clawback actions if they are registered in the Land Register almost 10 days before the adjudication in bankruptcy of the mortgagor and the lender is entitled to enforce the mortgage through a separate public sale in parallel to the liquidation proceedings of the other assets of the mortgagor in bankruptcy. It must be also noted that the transfer of a mortgage created over the assets of a company in bankruptcy is not enforceable against the Receiver of the said company unless it is carried out through the en masse assignment process pursuant to Article 58 of the Italian Banking Law, as specified above. 74 CMS Real Estate Finance

75 B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Generally, no. It might be possible to create a second ranked pledge over shares where the lender is the same but the pledges secure different obligations. It is not possible for the pledge or to assign / transfer its remaining interest in the shares (if any) to another lender. For a pledge of quotas (similar to shares) in a S.r.l. (Società a responsabilità limitata being equivalent to a UK private limited company) it would be possible to create a second ranked pledge on the same quotas but rarely seen in practice. 3. What are the mechanisms for registering and perfecting security? A valid pledge over shares can be created in two different ways:(i) by specific pledge deed duly legalised by a Public Notary, duly annotated as pledged in favour of the lender on the related share certificate and in the shareholders books of the SPV or (ii) by endorsement of the share certificates to the lender, duly legalised by a Public Notary. For a valid pledge over quotas in a S.r.l. method (i) above is required and the deed needs to be filed with the relevant Companies Registry. 3.1 Consequences of failure to register? Without appropriate registration the pledge is not validly created so cannot be enforced. 3.2 Formalities for execution of security and costs? Execution See A.3. Stamp duty 0.5% of the lower of (i) value of shares / quota and (ii) the secured obligations. Notary fees Calculated on a sliding scale depending, of the secured obligations amount, starting from a minimum of EUR 37 up to a maximum of EUR 1, Do the shares need to be transferred into the name of the lender or its nominee? No. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The secured creditor has no authority to appoint a receiver or liquidator. General enforcement is (i) by sale to a third party via relevant Italian Civil Code procedure or (ii) by assignment of the pledged shares to the lender via a competent Court. Enforcement costs of the pledge over the shares may vary. Normally enforcement procedure lasts at least 6 months, and longer if the debtor challenges the procedure. Generally, the law does not allow selling the secured shares / quotas privately, so public auction is necessary. However, if the shares / quota meet the relevant Italian legal criteria (based on the criteria set in the EU financial collateral directive) and the pledge contains appropriate provisions the secured party can (a) provide for the sale in whole or in part of the pledged shares and set off the proceeds of the sale against the secured obligations or (ii) appropriate the pledged shares and set off their value against the outstanding secured obligations. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders are subordinated to other creditors by law and if a shareholder loan is repaid in the year before the declaration of the SPV s bankruptcy, it must be repaid to the SPV s liquidator. Shareholders can contractually agree that their rights to repayment of their shareholder loan(s) are renounced / waived in a default situation but this is not yet a customary provision in Italian law share pledges. 75

76 C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? For residential leases the typical lease length is generally 8 (4+4) years. For non-residential leases it is 12 (6+6) years. 1.2 Maximum / minimum lease length if any? As a general rule, the minimum length for residential leases is 4 years and for non-residential leases it is 6 years. These terms are automatically renewed for a further 4 years and 6 years respectively, unless specific circumstances set forth by law occur 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? The tenant has an automatic right to renewal from 4 years to 4 years and from 6 years to 6 years for residential and non-residential leases respectively, unless specific circumstances set forth by law occur. For residential leases, the termination notice must be sent by the landlord by registered letter at least 6 months before the expiry of the lease. For non-residential leases, the termination notice must be sent by the landlord by registered letter at least 12 months before the expiry of the lease. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? If there are serious reasons, the tenant, by law is entitled to withdraw from the lease agreement at any time by giving the landlord at least 6 month s notice, regardless of any different provision set forth by the agreement. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? There are no relevant provisions frustrating possession or preventing the receipt of market rents, other than those relating to the length of the lease and the review of the rent mentioned above. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? The parties are free to determine the terms and ways of payment of the rent. The most common practice is to have the rent paid monthly or quarterly in advance. 2.2 Periodicity of reviews? The rent can be reviewed yearly. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? With regard to residential leases, the rent can be adjusted each year limited to the percentage of the cost of living index, as published by the National Statistics Institute, whilst the rent for non-residential leases the adjustment is limited by law to 75% of the cost of living index. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? There are no statutory controls in relation to quantum or increase (save for very specific cases). 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The tenant is responsible for the ordinary maintenance and repair deriving from normal wear and tear, whilst the landlord is responsible for extraordinary maintenance. 3.2 External maintenance, decoration and repair? The tenant is responsible for ordinary maintenance and repair, whilst the landlord is responsible for extraordinary maintenance. 3.3 Structural repairs? Structural repairs are usually considered extraordinary maintenance, and therefore fall under the responsibility of the landlord. 3.4 Insurance? There is no obligation to underwrite an insurance policy, which must be agreed between the parties. 3.5 VAT? When applicable, VAT is usually charged to the tenant. 76 CMS Real Estate Finance

77 3.6 Rates? 3.7 Other typical outgoings? Unless the parties expressly agree otherwise, the typical expenses are borne by the tenant. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? The landlord outgoings are usually implicitly transferred to the tenant by having them included in the rent amount, but it is possible to charge further amounts for ancillary services such as cleaning, custody, reception etc. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The terms of the lease contracts are recognised and supported by case law in Italy. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? Should the appraisal be entrusted to the party, it can be carried out by any expert and is freely evaluated by the judge. If the appraisal is required by the judge, the judge shall appoint an expert enrolled in the relevant list held by the competent court. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Environmental reports in such circumstances are not customary in our Jurisdiction. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. 77

78 Luxembourg 78 CMS Real Estate Finance 78

79 A. Mortgages 1. Can security be granted to a foreign lender? Foreign lenders are not restricted from taking mortgages over immovable property located in Luxembourg. 2. Can lenders take a mortgage over land and buildings on the land? Yes in both cases. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction under Luxembourg law between a mortgage over land and a mortgage over the buildings on the land. In both instances the mortgagee would be entitled to the same rights and remedies against the mortgagor. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Luxembourg recognises and regulates Mortgage certificates on the basis of the Belgium model that consists in securities issued by the owner of the real estate through which the certificate owners have the right to a part of the rental income and of the gains of the disposal of the real estate. Mortgage certificates are bearer or registered securities representing a debt. Therefore, they can be transferred without any formality. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Second ranking security can be taken in Luxembourg. It is registered with the Mortgage Office (bureau de conservation des hypothèques). 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. A mortgagee can enforce the mortgage even though the property is no longer owned by the original mortgagor. In practice, a mortgage deed includes an agreement not to sell (or grant rights in or to) the property except with the prior written approval of the lender. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? The preferred creditors are: (a) The seller of the real property for the payment of the price ( b) The persons that have provided the buyers with the money to purchase the real estate (c) The co-heirs ( d) The architects and persons that have built rebuilt and / or repaired the real estate and / or the person that have lent the money to pay the formers. 2.6 Can all monies mortgages be taken? No. The mortgage agreement must specify the secured amount. If the secured amount is subject to a condition future and / or value undetermined the mortgagor will declare an estimative value that the mortgagee could reduce. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes, a landlord s right to receive rent can be charged, assigned or transferred to a lender by way of security. The only requirement will be the mutual agreement of the parties. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes it is customary. Restrictions over the bank account can indeed be agreed by the parties to the relevant account pledge agreement. 3. What are the mechanisms for registering land and for registering and perfecting security? Mortgages should be registered with the Mortgage Office assigned to the immovable property location. The mortgagor should provide Luxembourg authorities with the original document that has created the mortgage. All rights created by real estate-related agreements and listed under Luxembourg law have to be registered. This includes sales of land, creation of ownership splits, certain judgments, leases with a term exceeding 9 years, public expropriations, certain gifts and other operations. 79

80 3.1 Consequences of failure to register? The purpose of the registration of real estate rights is to inform potential buyers of a building or a land who the owner of such building or land is and whether or not there are encumbrances in rem affecting the real estate property. The registrar ( Conservateur des Hypothèques ) makes this information available to the public in a specific format. Since the registration requirement does not create or otherwise affect any real estate rights, one cannot see it as a state guarantee system. Non-registered mortgages will not bind third parties. 3.2 Formalities for execution of security and costs? Formalities for execution Mortgages must be signed and authenticated by two notaries or by a notary and two witnesses Costs relating to execution The notary fee varies depending on the principal amount lent to the borrower, in general terms it would amount to 1.6 percent of the property value. The cost of property registration is 6 percent of the property value. An additional 1 percent mortgage tax (transcript tax) is also required. There is also a 6 percent transfer tax. Finally, an annual property fee that will range from less than 1 per cent to around 8 per cent of the purchase price (depending on the commune). 4. Can the lender use a Security Trustee to hold security on trust for creditors? Contractual mortgages are frequently general types of security interest over real estate. Contractual mortgages are valid for ten years and must be renewed before the expiry of that period in order to continue to be valid for another period of ten years. Mortgages must be enacted by notarial deed (acte authentique) and registered with the Administration de l Enregistrement et des Domaines and the Mortgage Office (bureau de la conservation des hypothèques) of the judicial district where the real estate is situated. The legal possession of the immovable property stands with the mortgagor during the lifetime of the mortgage. There is no transmission of the ownership to the mortgagee or to an agreed upon third party. Luxembourg security interest cannot exist in the absence of a secured obligation. Difficulties may arise when the third party holding the security interest as trustee does not itself have a Claim against the issuer. Luxembourg is a member state of the Hague Convention on the law applicable to trusts and their Recognition. Hence, trusts settlements subject to foreign laws will be recognised as such in Luxembourg. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? The modification of the lenders security system relies upon the method used for such modification. Therefore, if the transfer is made by novation, then according to normal practices the parties have to be notified that the existing security remains in place and bears the same priority rank. If they develop a more complicated system, the documentation for the transfer will contain provisions enabling the new lenders to take over the rights (including security) granted to the former lenders. In this event, the mortgage agreements will only be modified to exhibit the replacement of the former mortgagee. Loan agreements secured by mortgages over Luxembourg real estate must be registered according to Luxembourg laws. Consequently, any subsequent change must be registered. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? In the absence of agreement to the contrary, the landlord / borrower has no control over changes in tenants. So, if the tenant wishes to transfer the lease to a new tenant he can do it. However, the landlord could have entered into an agreement with the tenant in order to restrain the transfer of the lease. It is usual in commercial leases to restrict the transfer of the lease by a tenant. When the leasing contract has been assigned, the former tenant cannot be bound by the leasing contract terms. Hence, if the original tenant assigns the lease to a new tenant, the landlord will have no claim against the original tenant. 80 CMS Real Estate Finance

81 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Luxembourg law recognises foreign courts and/or arbitration tribunals jurisdiction even if Luxembourg parties are involved whenever the subject matter of the dispute does not involve: (a) immovable property located in Luxembourg; (b) insolvency proceedings of Luxembourg companies. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Luxembourg is a member of the Brussels I Regulation, therefore recognition and enforcement of foreign court decisions from European Union members will be granted automatically provided that: (a) the decision does not in contradiction with Luxembourg public policy; (b) the necessary requirements and guaranties have been given to the defendant in order to enable him to defence himself such a s serving of documents in sufficient time, unless the defendant has failed to commence proceedings to challenge the judgment when it was possible for him to do so; (c) the decision is not irreconcilable with a judgment given in a dispute between the same parties in Luxembourg; (d) the decision is not irreconcilable with an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, when the earlier judgment fulfils the conditions necessary for its recognition in the member state addressed. Luxembourg Courts are willing to recognise and enforce arbitral awards and/or foreign judgements provided that: (a) the judgment is final according to the law of the state where it was rendered; (b) the court that rendered the judgment had jurisdiction to do so; (d) the right to seek enforcement of the foreign judgment has not expired under Luxembourg laws; (e) the courts of the country that has rendered the decision will reciprocally enforce Luxembourg Court decisions; and (f) there is evidence that the legal proceedings have been properly served in accordance with the laws of the state where the decision was rendered. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? A mortgage is considered as a judgment of possession; a court decision that determines who is entitled to possession of the property. So, enforcement of a mortgage is issued as a writ of execution. Therefore, Luxembourg courts will order the enforcement officer or a (private) bailiff to take possession of the real estate owned by the judgment debtor. No private sale or appropriation is possible, recourse to Luxembourg courts is always necessary when enforcing mortgages over Luxembourg real estate. The mortgagee can apply to the court in order to obtain the enforcement order and directly enforce the mortgage without further examination on the merits of the fundamental claim. Luxembourg judges will attach the enforcement order ( seal ) to the judgment and the court s enforcement order will be delivered to a court enforcement officer or a (private) bailiff. The real estate subject to the mortgage will be sold through public auction and the mortgagor will have to reimburse the mortgagee s enforcement fees The outcome of the enforcement procedure is that the mortgagor loses title to the mortgaged property. The title to this property is then either: (a) transferred to the mortgagee as a result of its appropriation of such asset; or (b) transferred from the mortgagor to a purchaser as a result of the sale of the mortgage property by public auction. (c) the judgment can be enforced as a matter of law in the state of the court that has rendered the judgment; 81

82 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? If the lender takes title in the mortgaged property, it will be bound to meet all obligations attached to that property. The position is not clear however where the lender takes possession of the mortgaged property in order to sell it by public auction. Normally, in such circumstances, the mortgagor would remain liable for those obligations until the title in the relevant property is transferred. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? There are certain concerns of general interest regarding enforcement of security (whether real or personal). Specifically: (a) enforcement of a mortgage in Luxembourg is subject to Luxembourg procedural laws and has to be done under the Luxembourg court supervision; (b) there are certain spoiling tactics the borrower can use such as (i) opposition to enforcement, (ii) application to open insolvency proceedings, (iii) starting fiscal enforcement proceedings; and (c) under Luxembourg law loan agreements, documenting loans granted by Luxembourg banks are deemed writs of execution. As such, a Luxembourg bank can apply directly to enforce the claim documented in the writ of execution without any examination by the court on the merits of the claim. However, it is not clear whether a loan agreement governed by a foreign law and documenting a loan granted by a foreign bank to a Luxembourg borrower would be recognised as a writ of execution in Luxembourg. Therefore there is the possibility examination by the court on the merits of the referred claim is required before it will be enforced in Luxembourg. B. Security Over Shares In Luxembourg, real estate is held regularly by vehicles incorporated as public limited liability companies (S.A.) and private limited liability companies (S.à r.l.). We highlight here below the specific issues that arise in the context of enforcing a security interest taken over the shares of a Luxembourg real estate company. 1. Can security be granted to a foreign lender? Security over the shares in a Luxembourg company can be granted to foreign lenders. 2. Can second ranking security be taken? If so, how is it registered? Second ranking security over shares in a Luxembourg company can be taken. A second ranking security over shares is registered in the shareholders register of the company. 3. What are the mechanisms for registering and perfecting security? A security over shares shall be perfected by way of its registration in the shareholders register of the company. 3.1 Consequences of failure to register? The enforceability of the security over shares is subject to its registration to the shareholders register of the company. The failure to register results in the invalidity of the security over shares. 3.2 Formalities for execution of security and costs? Upon the occurrence of an event of default, the pledgee is immediately able to enforce the security over the shares without any prior notice to the pledgor or other formalities. There are, therefore, in principal, no particular costs for the execution of the security over the shares in Luxembourg. 4. Do the shares need to be transferred into the name of the lender or its nominee? A security over the shares of a Luxembourg company is a charge allowing direct appropriation by the lender in the event of the borrower s default. Therefore, the creation of such security does not require any transfer of title to the lender or its nominee. 82 CMS Real Estate Finance

83 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Upon the occurrence of an event of default of the borrower, the lender can opt to enforce a security over shares as follows: ( a) it is entitled to sell all or part of the shares in a private transaction at arms length terms (conditions commerciales normales); or ( b) it is entitled to appropriate the shares further to the valuation of the shares at their fair market value, as determined by an independent external auditor (réviseur d entreprises), appointed by the parties of the security agreement or alternatively, by the president of the Luxembourg Institut des Réviseurs d entreprises on the basis of the last published accounts and/or any recent interim accounts of the company and any other relevant documents as deemed appropriate by such auditor; or (c) it is entitled to realise the shares in any manner as provided for, or permitted by Luxembourg law or to request attribution by the competent court, in all cases without prejudice to any rights of appropriation in relation to the shares arising under the relevant security agreement or any applicable laws; or (d) it is generally entitled to act in relation to the shares in any such reasonable manner as it shall determine. There is a lack of established decisions regarding the possibility of a lender to transferring a security over shares to a third party. Therefore, the general view is that a security over shares may be transferred to a third party with the prior consent of the security provider in the absence of any contractual arrangements prohibiting such transaction. Upon the occurrence of an event of default of the borrower, the lender may appoint liquidators subject to the following conditions: 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders are always subordinated in Luxembourg. Also, it is common practice that deeds of subordination are entered into between the borrower, its shareholder(s) and the lender(s) of a facility agreement providing subordination of the shareholders loan(s) to the loan granted by the lender to the borrower. The parties may decide contractually to waive or write off such loan(s) from shareholders as part of an enforcement of a share pledge, but this is not currently common practice in Luxembourg. C. Lease Structure 1.1 Typical lease length? There are no provisions under Luxembourg legislation providing for specific lease length. They are usually concluded for a period of nine years. In practise both, the tenant and the landlord have an option to terminate the lease at the three years intervals, the so-called lease. 1.2 Maximum / minimum lease length if any? There are no provisions under Luxembourg legislation with regard to maximum/minimum length of a lease. 1.3 Statutory controls and obligations renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? The fixed term lease is terminated automatically when the term lapses. However, the tenant of the commercial lease may under certain conditions be entitled to preferential renewal. This preferential treatment is limited up to 15 years. The Luxembourg courts may grant lease extensions. As a result, at the end of the lease the commercial tenant may further be allowed to remain in the lease for two consecutive periods of six months each. (a) the liquidation must be voluntary; and (b) the lender must be entitled to exercise voting rights and to have the sufficient quorum of required majority. 83

84 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? Unless otherwise specified, all so-called leases contain a six months notice period. In other cases the lease is tacitly extended. According to Luxembourg case law, the tenant may terminate a fixed term lease with immediate effect if: (a) the building or the land is partly occupied by the previous tenant involving late delivery of the leased premises (a) the competent authority refuses to approve the electric connection because of a failure of the landlord; (a) there is an impossibility of the peaceful enjoyment resulting from the landlord s refusal to make any repairs. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? Exceptio non adimpleti contractus is unanimously accepted by Luxembourg case law and as such applicable on the commercial leases. In the case of a landlord s serious failure, the tenant may refuse to pay the rent. Nevertheless, this exception is strictly interpreted by the courts and recognised only when the peaceful enjoyment of the leased premises was breached. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Rent is usually paid monthly or quarterly in advance. 2.2 Periodicity of reviews? Periodicity of reviews depends on the contract s conditions but in practice the rent is generally reviewed annually. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? In order to prevent the risk of rental income losses, the landlord may expect the indexation of the rent. The parties may also provide for the linear adjustment of the rent. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Rent reviews of the commercial leases are not subject to the statutory control. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The landlord has the legal obligation to ensure urgent and necessary repairs of the leased premises. However, in the absence of further precisions, it is difficult to pin down the scope of such obligations. In general, the landlord is bound to repair the heating system, major repairs as the roof, necessary repairs resulting from force majeure etc. The tenant has to be prudent and diligent ( en bon père de famille ) with regard to the leased premises. The leasehold repairs as doors, windows, electrical installations etc. are payable exclusively by the tenant. 3.2 External maintenance, decoration and repair? See point 3.1 depends on contractual terms 3.3 Structural repairs? The landlord is bound by law to ensure the peaceful enjoyment by the tenant of the leased premises. Therefore, the landlord is under the obligation to provide the structural repairs. 3.4 Insurance? The Luxembourg Civil Code provides the tenant s presumption of blame in case of fire or of degradation or losses occurring during its enjoyment unless he proves it is not his fault. The obligation of the tenant in order to purchase insurance for fire and rental damage has become a standard provision in lease contracts. 3.5 VAT? In principle, leases are exempt from VAT. However, this exemption is not applicable to specific leases such as hotels, parking spaces, machines and tools etc. In practise, if the tenant and the landlord are subject to VAT, they can opt for the application of VAT to the rent. 84 CMS Real Estate Finance

85 3.6 Rates? In the event the tenant and the landlord opted for VAT option, the applicable VAT rate varies depending on the type of each leased property. 3.7 Other typical outgoings? See point The ability to recoup any landlord outgoings (including management costs) by way of service charges? The landlord may opt for Double or Triple Net Rent. A net lease means that the tenant will have to pay, in addition to the fixed rent, some or all of the property expenses. With a single netlease, the tenant must pay property taxes and fixedrent. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Access to any registers and lists of environmental information established and maintained under Luxembourg law is provided upon request. The above mentioned access to the information understands the distribution of held environmental information, free on-site or online consultation, supply of copies and report s publication. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. For double net leases, there will be supplementary real estate taxes and building insurance in addition to the fixed rent. A triple net lease sees the tenant being responsible for all real estate taxes, building insurance and maintenance costs on the property. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The Luxembourg courts recognise and support the terms of leases being enforced in accordance with applicable law. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? The recognition of the appraisal report depends on the approval of the Luxembourg courts. 85

86 The Netherlands 86 CMS Real Estate Finance

87 A. Mortgages 1. Can security be granted to a foreign lender? Yes. There are no restrictions on the ownership of land by foreign parties in general and the taking of security over land by a foreign bank. 2. Can lenders take a mortgage over land and buildings on the land? Yes. Security over land and the buildings is created by a mortgage. A mortgage is drawn up in the form of a notarial deed and should be registered in the real property register (hypotheekregister), which is a part of the Land Register (kadaster). 2.1 The distinction between mortgages on land and buildings on the land? In general, a mortgage will be created over the land itself and also the buildings on the land. Generally, the owner of the land will also be the owner of the buildings on the land, unless a right of superficies (recht van opstal) exists. A right of superficies is a so-called limited right (beperkt recht), which creates a horizontal split in ownership, enabling a party to own a building, whilst the land on which such building has been built is owned by a third party. In that case a distinction may also be made between a security interest in the land and an interest in the buildings on the land, enabling e.g. two different finance institutions to have a right of mortgage on the right of superficies (to finance e.g. the construction of the building) and a separate right of mortgage on the land (to e.g. finance the acquisition of the land). 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? It is mandatory that the notarial deed of mortgage states the maximum amount for which the right of mortgage may be enforced against the mortgaged good (which is normally real estate). Usually this amount consists of a principal amount, to which e.g. a 35% additional amount is added for interest and costs. The total amount then is the maximum amount that may be recovered from the proceeds of a (voluntary or public) sale of the mortgaged goods. The costs of the establishment of a right of mortgage normally are related to the value of the mortgaged good (either fixed amounts or a percentage system), to which registration fees should be added. Under Netherlands law a right of mortgage is an accessory right (afhankelijk recht), meaning it cannot be transferred separately from the claim it secures. If the secured claim is transferred, in general (but also depending on the wording of the mortgage deed), the right of mortgage, by the operation of law follows the secured claim and therefore the acquirer of the claim can enforce the right of mortgage against the owner of the mortgaged good. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? It is possible to create more than one mortgage over assets. In general, on enforcement of the security interest, the second ranking creditor will only be paid if the proceeds of the mortgaged asset exceed the secured claim of the first ranking creditor. Mortgages are registered in the real property register. This means any person can verify with the Land Register whether a real property has been mortgaged and, if so, who the mortgage is being granted to, for what type of debt and the maximum amount for which the mortgage provides security. The civil law notary involved with the creation of the mortgage will register the mortgage. Under Dutch law there is no obligation to register a priority deed. Priority will be determined by the time of registration of each deed of mortgage in the real property register. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes, but the real estate will still be subject to the mortgage, and a disposal without the lender s consent will usually constitute a breach of contract. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Yes, for example, a creditor who has a right of retention (retentierecht). In certain cases this allows a creditor who is in possession of real estate (e.g. builder) to suspend the release of such real estate to the debtor until the creditor s claim is fully paid. In some cases a right of retention can also be invoked against other third parties who have previously established other rights before the creditors right of retention. Other examples would be creditors of charges incurred to preserve the real estate from loss and tenants that seek compensation because they are evicted from the real estate pursuant to a letting clause in the deed of mortgage. 87

88 2.6 Can all monies mortgages be taken? No. The deed of mortgage must state the amount secured by the mortgage and if this amount has not yet been established, a maximum amount to be secured by the mortgage must be specified. In practice the maximum amount stated in the deed of mortgage comprises the principal sum of the loan and a substantial margin for interests and costs. Within that however, the mortgage can secure any and all claims of a creditor against the debtor. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. Security over receivables, such as rent, can be created by a disclosed pledge (openbaar pandrecht) or an undisclosed pledge (stil pandrecht). A disclosed pledge requires a written contract and a notice of the pledge to the tenant. An undisclosed pledge is established either by a deed executed before a civil law notary or a registered private instrument, and notification of the tenant is not necessary. 2.8 Is it customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. Bank accounts can be pledged in favour of a lender. It is also possible to agree and impose certain limitations in relation to payments or withdrawals from such bank account. Usually such limitations would not apply to payments being made in the ordinary course of business unless there has been an event of default. 3. What are the mechanisms for registering land and for registering and perfecting security? The notarial deed creating the mortgage over immovable property needs to be registered with the Land Register. There are no notice requirements. In general no stamp duty or other fees need to be paid for the creation of the security interest. The costs involved with the execution of a notarial deed will be substantially higher than the cost of creating other security and will normally depend on the value of the mortgaged good. 3.1 Consequences of failure to register? The security is invalid and therefore not enforceable against third parties. 3.2 Formalities for execution of security and costs? In the case of an event of default by the debtor of the secured claim, the mortgagee is entitled to enforce the right of mortgage. Basically, enforcement of the right of mortgage should be effected through a public auction (veiling). The mortgagee will receive payment out of the sale proceeds (up to the maximum secured amount, see 2.2, first paragraph above) via the civil law notary, before whom a public auction should be effected. However, it is also quite common that the debtor and the mortgagee agree on a voluntary sale of the mortgaged good (normally resulting in a higher price for the real estate). In that case, the mortgagor sells and transfers the real estate and the mortgagee is prepared to release the right of mortgage, subject to receiving the net purchase proceeds via the civil law notary (again up to the maximum secured amount) (see also below under 6). The cost of execution of the right of mortgage may vary. Normally the civil law notary has a system of fixed amounts to be paid by the mortgagee, linked to the value of the underlying real estate. 4. Can the lender use a Security Trustee to hold security on trust for creditors? There is no concept of a trust in the Netherlands. To create a trustee-like structure it is common in the Netherlands to create a so-called parallel debt. This is an additional agreement between the party acting as security agent, other lenders and the borrower. Pursuant to that agreement the borrower agrees to an independent obligation to pay an amount equal to the outstanding amount under the loan documentation to the various creditors, to the security agent. This creates a claim of the security agent against the borrower. Furthermore, in the relation between the various creditors and the borrower, it is agreed that any payment against the parallel debt will decrease the outstanding amount under the loan documentation. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? In general if a claim is being transferred to a third party, the security interest attached to that claim will follow that claim. Therefore no new security needs to be granted. However, if the security interest has been created to secure any and all outstanding claims of a certain creditor (therefore not securing a specified claim) there is debate in legal literature as to whether the security interest will be transferred to the transferee of the claim. In that case it is advisable to create a new security interest. 88 CMS Real Estate Finance

89 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Under Dutch law, in general a tenant cannot transfer a lease-contract to another tenant without the permission of the landlord or the court, unless it has been agreed in the lease-contract that the tenant is allowed to transfer the lease to a new tenant. In general, the tenant will not be allowed to sublet the premises. If the tenant has no authority to transfer the lease, but sublets it to another party, the original tenant is still bound by the lease. He will be liable for damages and it is common that the landlord will terminate the lease agreement as a result of the default of the tenant. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? The validity and binding effect of the submission by a company to the exclusive jurisdiction of the competent court of a foreign country may be limited by article 6 and article 22 of the Council Regulation (EC) No 44 / 2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters of 22 December 2000, as amended. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Article 431 of the Netherlands Code of Civil procedure (Wetboek van Burgerlijke Rechtsvordering) provides that foreign judgements are not enforceable in the Netherlands except by virtue of a treaty or act. No such treaty or act exists with respect to judgements of the court in the United States of America. If a judgement is unenforceable due to the lack of a treaty or an act, new legal proceedings must be initiated before a Netherlands court to obtain a judgement that is enforceable in the Netherlands. In rendering such a judgement, the courts of the Netherlands may take the initial judgement of a foreign court into account, but are not obliged to do so. Especially in a case where considerable damages are awarded by a court in the United States of America, the courts of the Netherlands may come to a dissenting conclusion. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? In the event of a default by the mortgagor the mortgagee is entitled to start proceedings to have the mortgaged property sold publicly or privately. In principal, the enforcement sale of mortgaged assets has to be effected by means of a public auction. However within certain limits, a private sale of these assets is possible and this will usually result in better sale proceeds. In the case of a private sale, the mortgagor has to submit to the president of the district court (voorzieningenrechter) a sale / purchase agreement with a purchaser for the property. This agreement should be unconditional, except as to the approval to be obtained from the president of the district court. A public auction is effected by a civil law notary. A secured party has no authority to appoint receivers or liquidators. If a secured party considers that a receiver or liquidator would be required, it would have to follow the bankruptcy procedure for its debtor. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? The owner of the real estate will remain responsible for maintenance and insurance. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? A lender is entitled to foreclose on the property if it has security over the property and the borrower is in default. The main ways of foreclosing on a mortgage in the Netherlands are described under question 6.3. These do not include a method in which a lender can obtain title to the real estate. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? There are some special provisions relating to Dutch insolvency law that touch upon the position of a lender with a right of mortgage on real estate. 89

90 Pursuant to Sections 63a (in case of a bankruptcy) and 241a (in case of a suspension of payment) of the Dutch Bankruptcy Act a so called cooling off period for a maximum of two periods of two months (four months in total) can be determined by the court or the Supervisory Judge (rechter-commissaris). In such an event, third parties cannot, save with the explicit prior authorisation of the Supervisory Judge, enforce security rights (e.g. a right of mortgage) on goods, which are owned by the bankrupt debtor or are in his actual possession. Although the right of mortgage itself, of course, is not affected by the cooling off period, the latter could result in a certain delay in the enforcement of the right of mortgage. Pursuant to Section 58 of the Dutch Bankruptcy Act a trustee in bankruptcy further may determine a (reasonable) time period, within which the mortgagee should enforce the right of mortgage. Should the time period lapse, without the mortgagee having enforced its right of mortgage, again, such right itself is not affected. However, the trustee then is entitled to sell and transfer the real estate. The mortgagee remains entitled to the sale proceeds, but is now obliged to contribute to the bankruptcy costs (including costs not relating to the mortgaged real estate). Often this means that the mortgagee will not receive any payment under the deed of mortgage, thereby effectively rendering the right of mortgage worthless. Specific caution therefore is advisable in cases where a trustee in bankruptcy invokes his rights under Section 58 of the Dutch Bankruptcy Act. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. There are no restrictions on the ownership of shares in a Dutch company by foreign parties in general and the taking of security over shares in a Dutch company by foreign lenders. Shares in a Dutch company may be pledged if the articles of association of the company do not provide otherwise. 2. Can second ranking security be taken? If so, how is it registered? It is possible to create more than one pledge over assets. In general, on enforcement of the security interest, the second ranking creditor will only be paid if the proceeds of the pledged asset exceed the secured claim of the first ranking creditor. There is no public register in which security over shares can be registered. 3. What are the mechanisms for registering and perfecting security? Any right of pledge over shares can be established by executing a notarial deed of pledge before a civil law notary in the Netherlands. There is no requirement for the perfection of such security. Nevertheless, usually a pledge over shares will be registered in the shareholder s register (aandeelhoudersregister), but failing to do so will not affect the validity of the pledge. 3.1 Consequences of failure to register? Registration is not needed. 3.2 Formalities for execution of security and costs? In the case of an event of default by the debtor in relation to the secured claim, the lender, as pledgee, is entitled to enforce its right of pledge. Enforcement of the right of pledge should be effected through a public auction (veiling). The sale is undertaken by a civil law notary. The lender, as pledgee will receive payment out of the sale proceeds (up to the maximum secured amount). A lender who has become entitled to enforce by way of a sale may also agree with the debtor to a method of sale other than a public auction. Alternatively, the court (voorzieningenrechter) may determine, at the request of either party, that the pledged shares should be sold in another manner than by public auction. There are no fixed costs of enforcing a pledge over shares. Such costs also vary depending on the different methods of enforcement. 4. Do the shares need to be transferred into the name of the lender or its nominee? No. The shares do not need to be transferred into the name of the lender or its nominee. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Under Dutch law a pledge on shares is enforced by means of a public auction (veiling) or, following court approval, by private sale or following an agreement between the pledgor and the pledgee after the pledgee has become authorised to foreclose its security right. 90 CMS Real Estate Finance

91 The enforcement of a pledge on shares in a Dutch limited liability company (besloten vennootschap) is subject to compliance with the share transfer restrictions (blokkeringsregeling) in its articles of association. A public auction of pledged shares is very rare. In most cases the pledgee prefers a private sale to a third party (either following court approval if the pledgor does not co-operate or by way of agreement with the pledgor). Rather than forcing pledged shares to be sold, the ability to be able to control the company which shares have been pledged to a certain extent is a more important feature of a share pledge. Provided that the articles of association are sufficient, a deed of pledge of shares can provide for a (conditional) transfer of the voting rights attached to shares. In general, such rights will be transferred to the pledgee upon the occurrence of an event of default or enforcement event, following which the pledgee is authorised to exercise the voting rights attached to the shares. The pledgee will not have authority to appoint receivers or liquidators. If a secured party feels a receiver or liquidator would be required, it would have to file for the bankruptcy of the debtor. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? In general, shareholder loans are not subordinated to any other indebtedness unless this is agreed and provided for contractually. Usually shareholder loans and any other intercompany claims are subordinated to any senior indebtedness of the debtor. In general, such loans will not be written off or waived once enforcement of a share pledge has started. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure Dutch law recognises a number of lease structures. The form of this structure is usually linked to the type of object, which will be leased. Regarding real estate it is standard market practice in the Netherlands to rent (huur) real estate. This traditional way of leasing constitutes no (conditional) transfer of title over the property. Rent will just enable the tenant to use the property in accordance with the provisions of the lease agreement. The following answers will therefore only reflect rental of real estate. 1.1 Typical lease length? The length of rental of real estate is determined by the (economic) needs of the parties to the rental agreement. 1.2 Maximum / minimum lease length if any? A standard rental agreement is not limited to any maximum or minimum length, save for the rental of industrial premises. Such rental agreements have a minimum length of 5 years. There is no maximum to these agreements. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Fixed term rental agreements will terminate, without notice, when the rental period has ended. If the tenant continues to use the property with the consent of the lessor after the rental period has ended, the rental agreement is deemed to be extended for an indefinite period. Rental agreements entered into for an indefinite period will only terminate by a termination notice of a party to such agreement. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? If the rental agreement does not provide for such abilities to terminate a fixed term lease, the Dutch Civil Code allows any party to an agreement to terminate the agreement if the other party is in default / not complying with its obligations under such agreement. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? If defects of the property result in less use / enjoyment of the property than the tenant expected or could have expected, the tenant can demand a decrease of the rental fee, starting from the day the lessor is informed of such defects. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? The rental income is payable as agreed by parties to the rental agreement. 91

92 2.2 Periodicity of reviews? The increase of rental fees is as agreed by parties to the rental agreement. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? In general rent is indexed annually. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Yes, but only in case of residential premises. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Save for defects due to acts / negligence of the lessor of its obligations to repair all defects, the tenant is obliged to repair, at his own expense, small defects to the property. 3.2 External maintenance, decoration and repair? Subject to 3.1 above, the lessor is obliged to repair all defects to the property, unless reparation is impossible or the costs of repair are under the given circumstances in such order that it is unreasonable to request reparation from the lessor. 3.3 Structural repairs? See 3.2 above. 3.4 Insurance? Real estate owners are obliged to take out an insurance regarding the building (opstalverzekering). In general the lessor is the owner of the real estate and will take out the insurance. Parties to the rental agreement can implement provisions regarding the payment of insurance fees. 3.5 VAT? Real estate owners (i.e. landlord) will be responsible for VAT. 3.6 Rates? See 3.5 above. 3.7 Other typical outgoings? If a lessor does not comply with its obligations to repair defects (as mentioned in 3.2) the tenant is authorised to repair the defects at the lessor s expense and the lessor shall be liable for any damages the defects have caused the tenant. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Service charges should reflect costs for provided assets and services. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Yes, subject to statutory provisions. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? We are not aware that this is the case. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? If e.g. soil pollution is known and reported, an entry is made on the land register (kadaster). However, it is not automatically possible to obtain the underlying reports of a governmental agency. 5.3 I s it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. Liability for environmental breaches is limited to the polluter or, in some cases, the owner. Soil pollution can lead to devaluation of the real estate, but damages, fines or cleanup obligations do not extend to financing parties. 92 CMS Real Estate Finance

93 Poland 93

94 A. Mortgages 1. Can security be granted to a foreign lender? Yes. The most commonly used types of security are mortgages (over real estate), registered pledges (over shares, assets, bank accounts, receivables) and security assignments of receivables. All of those forms of security may generally be freely used to secure loans granted by foreign lenders. 2. Can lenders take a mortgage over land and buildings on the land? In Polish law, buildings are generally part of the same real property as the land on which they are erected (the superficies solo cedit rule). In other words, a real property is both the land and the buildings erected on it, and therefore, a mortgage on a real property covers both the land and the buildings on the land. There are, however, exceptions to this rule, the most important of which is the possibility to separate part of a building (such as an apartment) to make it a separate real property. Apart from ownership, Polish law recognises another type of legal title to real property called perpetual usufruct, which is in practice very similar to the right of ownership. Perpetual usufruct applies only to land, but, as a rule, the perpetual usufructee is always, at the same time, the owner of all buildings situated on the land, and any mortgage established over the right of perpetual usufruct to land also extends to the ownership of those buildings. 2.1 The distinction between mortgages on land and buildings on the land? The land and the buildings situated on the land generally form one real property, so a mortgage established over that real property extends to both the land and any buildings situated on it. Separate ownership of premises within a building, where those premises form a separate real property, is most common in residential properties. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Mortgage certificates are not issued in Poland. Local district courts maintain land and mortgage books for virtually every real property within their district (usually in electronic form, although the process of migration of the land and mortgage books to electronic form has not yet been completed in some courts). Ownership of the real property, as well as other rights to property and encumbrances (such as mortgages) are registered in the land and mortgage book. A mortgage must be registered to become effective. In order to find out about the legal status of a real property (ownership, any mortgages, etc.) it is possible to obtain an excerpt from the land and mortgage book maintained for that property. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. Polish law allows more than one mortgage to be created over the same real property. The ranking depends on the date of application for registration of the mortgage. The registration procedure is the same as with first ranking mortgages. This ranking may be altered contractually, which requires the consent of the mortgagees who are to give up higher ranking. Please note that the amendments to mortgage regulations that are due to come into force in February 2011 will allow owners (and perpetual usufructees) of real estate to establish a new mortgage with the same ranking as an expired existing mortgage, without the consent of the lower ranking mortgagees. The owner (or perpetual usufructee) will also have the right to replace an expired mortgage with another existing mortgage, by moving the existing mortgage up in ranking. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. Moreover, it is impossible to deprive the owner of the right to dispose of the property. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? Generally, enforcement proceeds will first be applied towards enforcement costs, remuneration of employees (but only for up to three months, and only at the level of the minimum wage), alimony and child support, as well as disability pensions, before being applied towards the discharge of mortgage-secured obligations. 2.6 Can all monies mortgages be taken? No. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. The most common form of security over rights to receive rent is a security assignment of such rights to the lender. 94 CMS Real Estate Finance

95 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. Pledges over bank accounts are a commonly seen form of security over the borrower s receivables under bank account agreements. It is usual for a loan agreement to contain various provisions on how the borrower s bank accounts can be used. 3. What are the mechanisms for registering land and for registering and perfecting security? Virtually all real properties have land and mortgage books maintained by local district courts, where their legal status (including ownership) is registered. The transfer of ownership of real property requires an agreement signed in the form of a notarial deed. Registration of the new owner in the land and mortgage book is declarative rather than constitutive in nature, meaning that the transfer takes place when the sale agreement is signed (unless the parties agree otherwise), and not when the new owner is registered in the relevant land and mortgage book. On the other hand, third parties acting in good faith may rely on the contents of the land and mortgage register, meaning that, for example, a mortgage established over a property by a person who is disclosed as the owner of the property, but is not in fact the owner, in favour of a bank acting in good faith and relying on the contents of the land and mortgage book, is effective. Therefore, it is in the best interest of landowners to have their title to land properly registered. The above remarks do not apply to perpetual usufruct, which requires a constitutive entry of the new usufructee in the land and mortgage book for a transfer of the perpetual usufruct to be effective. 3.1 Consequences of failure to register? A mortgage begins to exist when it is registered. A mortgage cannot be registered after commencement of insolvency proceedings in respect of the owner or perpetual usufructee of the real property (unless the application to register the mortgage has been filed at least six months prior to the date of the application for the declaration of insolvency). 3.2 Formalities for execution of security and costs? The creation of a mortgage requires signing a notarial deed of establishment by the owner or perpetual usufructee, a written statement by the creditor and registration in the land and mortgage book maintained for the property by the local district court. In practice, the registration process takes up to six months, although there is no legally defined time limit for registration and the process can take even longer than six months. The mortgage is effective from the date of its registration. The principal costs for establishing a mortgage are as follows: The notarial fee The maximum amount of the notarial fee is a function of the value of the mortgage, and it amounts to half of the standard notarial fee, i.e. half of the value calculated on the basis of the following formula: (a) 710 PLN + 1% of the surplus above 30,000 PLN if the value of the property is between 30,000 PLN to 60,000 PLN; (b) 1,010 PLN + 0.4% of the surplus above 60,000 PLN if the value of the property is between 60,000 PLN to 1,000,000 PLN; (c) 4,770 PLN + 0.2% of the surplus above 1,000,000 PLN if the value of the property is between 1,000,000 PLN to 2,000,000 PLN; (d) 6,770 PLN % of the surplus above 2,000,000 PLN, but not more than The court fee There is a court fee for filing an application for registering a mortgage in the land and mortgage register 200 PLN per mortgage. Stamp duty (a) For a regular mortgage 0.1% of the value of the secured receivable; (b) For a capped mortgage 19 PLN. 95

96 4. Can the lender use a Security Trustee to hold security on trust for creditors? The concept of trust is not known to Polish law. However, in practice, when granting loans under the laws of a jurisdiction that allows parallel debt structures to be created, it is generally considered admissible to secure the parallel debt owed to the security trustee / agent with Polish law security. However, in the case of registered pledges, a concept similar to that of the security trustee may be used even under Polish law. Registered pledges, unlike mortgages, can be established in favour of a creditor (a so called pledge administrator ) holding the security for the benefit of other creditors. Furthermore, please note that the amendments to the mortgage regulations that are due to come into force in February 2011 will make it possible to establish mortgages in favour of mortgage administrators, holding the security for the benefit of multiple creditors (subject to the detailed conditions and requirements set out in those regulations). 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Unless the parallel debt structure is used, or security is granted in favour of a pledge administrator (or, starting from February 2011, a mortgage administrator) any transfers of the loan generally require the transfer (and, where applicable, re-registration) of the security (or the creation of new security in favour of the new lender). With further, under Polish law, the transfer of a receivable secured by a mortgage is effective only when the mortgage is transferred as well, and because the transfer of a mortgage requires the registration of the new mortgagee in the land and mortgage book, the transfer of the loan receivable only becomes effective once registration occurs. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? As a general rule the tenant must obtain a prior consent of the landlord to transfer the lease contract to a third party. However, the tenant may sub-lease the premises to a third party, unless it is expressly forbidden in the lease agreement. In case of a sub-lease, both the tenant and the sub-tenant are responsible for using the leased premises in accordance with the original lease agreement. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? A foreign jurisdiction can be chosen to settle disputes between lenders and borrowers, except for all matters relating to mortgages established over real property in Poland. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? There are in Poland general limitations on the recognition and enforcement of judgments issued by foreign state courts or foreign arbitration tribunals. With respect to judgments issued by state courts of the other EC Member States Poland is an EC Member State and thence it is bound by the provisions of the Council Regulation (EC) No. 44 / 2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. Provisions of this Regulation introduce automatic recognition and simple enforcement procedure with respect to judgments issued by state courts of another EC Member States. Recognition and enforcement of judgments issued by courts from non-ec states is subject to certain conditions and is not a simple exercise. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? A mortgage may only be enforced in court enforcement proceedings, by a court enforcement officer (who may not be freely appointed by the secured party). The real property is sold by the enforcement officer at an auction. If the real property is not sold on two consecutive public auctions carried out by the enforcement officer, the secured creditor may take over the title to the real property. Registered pledges can be enforced in court proceedings, but the parties to a pledge agreement may choose from one of the several out-of-court enforcement methods, such as seizure of ownership of the subject of the pledge or sale at a private auction. Security assignments do not require any proceedings to be enforced. 96 CMS Real Estate Finance

97 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? The lender has the option of taking over the real property (for an amount equal to two thirds of the valuation performed for the purposes of the enforcement) only after the court enforcement officers fails to sell the property at two public auctions. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? No. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. The most commonly used type of security over shares is a registered pledge. One registered pledge may secure more than one claim. 2. Can second ranking security be taken? If so, how is it registered? Yes. Polish law allows more than one registered pledge to be created over the same shares. The ranking depends on the date of application for registration of the registered pledge. The registration procedure is the same as with first ranking registered pledges. This ranking may be altered contractually, which, of course, requires the consent of the pledgees whose registered pledges have a higher ranking. 3. What are the mechanisms for registering and perfecting security? Registered pledges have to be registered in a pledge register kept by district courts. The application (made in Polish) to a relevant pledge register has to be filed on a standard form (available in the courts or in the internet) with the registered pledge over shares agreement attached. The agreement should be in Polish and if it is in another language, a sworn translation into Polish must also be attached. Information on existing registered pledges can be obtained from the Central Information on Registered Pledges. 3.1 Consequences of failure to register? The registered pledge begins to exist when it is registered. 3.2 Formalities for execution of security and costs? The creation of a registered pledge requires signing a written agreement between the owner of the shares (pledgor) and the lender (pledgee). The application to the relevant court is also required in order to register a registered pledge in a pledge register. There is a court fee for filing such application 200 PLN for each registered pledge. The registered pledge is effective from the date of its registration. 4. Do the shares need to be transferred into the name of the lender or its nominee? No. The shares do not have to be transferred. However, the establishment of the registered pledge over shares should be noted in the share book kept by the management board of the company. 5. How can the lender enforce its security? The registered pledge may be enforced by way of a court enforcement proceedings, or, if expressly provided for by the pledge agreement, a seizure of the ownership of shares or a sale of shares in a public auction. 97

98 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The shares may not be directly sold by a lender (pledgee) to a third party. The lender has to seize the ownership of the shares before it can sell the shares to a third party. It is not possible for a lender to appoint receivers / liquidators as this is done by a court in court enforcement proceedings. The two non-court methods of enforcement of a registered pledge over shares are seizure of the shares and a sale of shares in a public auction. The private sale of shares is possible only after a seizure of the shares. Sale of the shares in a public auction may be conducted only by a notary or a court enforcement officer. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? If the insolvency of a company is declared within 2 years after a shareholder loan agreement is signed by that company, such shareholder loan granted to the company by its shareholder is treated as if it was a capital contribution to the company. Apart from that, there are no specific provisions regarding the subordination of shareholder loans in Polish law. Loans from shareholders may be contractually subordinated through a written agreement between the company and the junior and senior creditors. The effectiveness of such subordination in insolvency is highly questionable. It is not customary to waive shareholder loans during the enforcement of a bank loan. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The lease length is determined by the parties in accordance with their economic needs, subject to the comments below. 1.2 Maximum / minimum lease length if any? A lease may be created for a definite or an indefinite period of time. The statutory maximum fixed term of a lease is: (a) 30 years with regard to a lease concluded between business entities; and (b) 10 years with respect to all other parties. A lease agreement concluded for a definite period of time longer than respectively 10 or 30 years, after the lapse of such time, is automatically transformed into an agreement for an indefinite period of time, which may be freely terminated by notice by either party. 1.3 Statutory controls and obligations re renewal/ termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? A fixed term lease terminates after the lapse of the period for which it was created. A lease created for an indefinite period is terminated after the lapse of the notice period specified in a termination notice served by one of the parties to the other party. However, the notice periods cannot be shorter than the statutory notice periods. In respect of leases of business premises under which the rent is payable monthly, the lease may be terminated by both parties on 3 months notice counted from the end of the calendar month in which notice is given. If after termination of the lease the tenant is still using the property with the approval of the landlord the lease is deemed to be extended for an indefinite period of time. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? A tenant may terminate the lease agreement with immediate effect if: (a) at the time of being delivered to the tenant the premises had defects which made it impossible to use them in the way indicated in the agreement; (b) such defects arose later, and the landlord, in spite of being notified about those defects failed to deal with them in an appropriate time; (c) if the defects cannot be remedied; or 98 CMS Real Estate Finance

99 (d) the defects of the premises are such that they are health hazards to the tenant or members of his household or persons employed by him. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? If the leased premises have defects that limit their usefulness for the agreed purpose of the lease (and the tenant was unaware of those defects when signing the lease agreement) the tenant may demand that the agreed rent is lowered until the defects are fixed. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? If the dates of payment are not specified in the lease agreement the rent should be paid in advance, as follows: (a) if the lease is to last not longer than one month for the whole period of the lease; (b) if the lease is to last longer than one month or if the lease is created for an indefinite period monthly in advance, not later then on the tenth day of each month. 2.2 Periodicity of reviews? With regard to leases of business premises, the landlord may increase the rent (at any time) by giving the tenant one month s notice. If the tenant does not agree to the increase, the termination period specified in the lease or in the Civil Code will apply. However, it is disputable if the above rule applies to lease agreements concluded for a specified period of time. With regard to other leases the landlord cannot unilaterally increase the rent. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Rent is usually indexed annually. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Yes, but only in case of residential premises. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Small outlays connected with the ordinary use of the leased premises are borne by the tenant. 3.2 External maintenance, decoration and repair? The landlord is obliged to keep the leased premises in a condition suitable for the agreed use and maintain them in such condition throughout the period of the lease. 3.3 Structural repairs? All costs of repairs which are not small outlays connected with the ordinary use of the leased premises must be borne by the landlord. If the leased premises are destroyed as a result of circumstances for which the landlord is not liable, he is not obliged to restore the premises to their former condition. 3.4 Insurance? Insurance is not obligatory. In practice all the expenses connected with the insurances are borne by the tenant. 3.5 VAT? The landlord. However, in practice this obligation falls on the tenant to reimburse the landlord. 3.6 Rates? The landlord. However, in practice this obligation falls on the tenant to reimburse the landlord. 3.7 Other typical outgoings? Perpetual usufruct fee (when the landlord s title to the land is perpetual usufruct) and tax on real estate. In practice this obligation falls on the tenant to reimburse the landlord. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? The common practice in Poland is to execute triple net leases under which the tenant, in addition to the rent, is obliged to pay the costs of maintenance and repair, insurance as well as taxes. Landlords tend to include as many items as possible in the service charge. 99

100 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? No. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? If the valuation is to be recognised by a court, a property valuation must be made by a domestically regulated and qualified expert. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? It is customary to obtain environmental reports from a qualified environmental professional. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. 100 CMS Real Estate Finance

101 Portugal 101

102 A. Mortgages 1. Can security be granted to a foreign lender? Yes. Generally, there are no restrictions on the ownership of land by foreign lenders or in relation to the taking or enforcement of securities by a foreign lender. 2. Can lenders take a mortgage over land and buildings on the land? Yes. Mortgages can be granted over immovable assets and this security will comprise land and all buildings and constructions The distinction between mortgages on land and buildings on the land? Except in the cases of surface right direito de superfície, whereby the owner of the land may be different than the owner of the building (and, therefore, separate mortgages can be granted), according to the indivisibility principle princípio da indivisibilidade, a mortgage over a piece of land is automatically extendable to all buildings that will eventually be constructed over such land Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. Mortgage certificates do not exist under Portuguese law Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. The same property may be burdened by several mortgages. A registered mortgage has priority, as of the date of registration, over any subsequent real estate charges or subsequent registered mortgages. A second ranking mortgage should be registered in the same way as a first mortgage. There are no special registration requirements for second ranking mortgages. Portuguese law does not foresee the concept of priority deed, as ranking and priority of security rights in rem derives exclusively on priority on registration Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. Not only the real estate may be transferred without the lender s consent, but also it is legally forbidden to prevent the owner from selling the mortgaged asset. However, transfer is subject to the mortgage (as long as the mortgage is registered in the relevant Real Estate Registry Office) Are there any preferred creditors (other than a prior ranking mortgage holders)? Yes. On insolvency situations certain classes of preferred creditors will be ranked in priority to the mortgage holders Can all monies mortgages be taken? No. The total amount of the secured liabilities but not the documents under which the obligations arise must be specified in the mortgage at the time it is granted. It is therefore possible to create all moneys security up to the capped amount Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. The right to receive rent can be pledged. The right to receive rent may also be assigned by way of security (cessão de créditos em garantia) It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? It is possible to take a pledge over the accounts, but that is a different security than the mortgage, as the granting of a mortgage does not entail any restriction to withdrawing funds from the accounts of the mortgagor. Therefore, a lender can also restrict the borrower s rights to withdraw funds by means of granting a pledge over the relevant account, but this restriction needs to be agreed in the relevant security document and with the bank institution operating the account. 3. What are the mechanisms for registering land and for registering and perfecting security? In general, all the creation of rights in rem by way of security must be granted in a public deed before a Notary or by means of a private authenticated document. A mortgage must then be registered at the Real Estate Registry Office by filing the corresponding application, combined with the respective mortgage agreement (nowadays, it can be performed via internet) Consequences of failure to register? Registration is required for the security to be effective and enforceable vis-à-vis third parties. 102 CMS Real Estate Finance

103 3.2. Formalities for execution of security and costs? Formalities depend on the type of security and the nature of the asset as do the costs. The key formality on the creation of mortgage rights is registration. Can the lender use a Security Trustee to hold security on trust for creditors? There is no concept in Portuguese law similar to a trust, although the following structure may be used to achieve a similar effect security documents may be entered into directly by each of the lenders or by a security agent duly empowered by the lenders to act on their behalf. Such security agent would accept the granting of security interests in favour and on behalf of the lenders always acting in their names and on their behalf. However, each lender will have to carry out any actions in connection with the loan, its enforcement and the enforcement of the security, exercising its corresponding rights before Portuguese Courts What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Upon the occurrence of a change in the mortgagee, which has to be granted in a public deed before a Notary or by means of a private authenticated document, the correspondent securities are considered to be automatically assigned to the new mortgagee, but such modification needs to be registered at the relevant Real Estate Registry Office and thus no additional security documents have to be signed. 4. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? There are two ways to transfer a lease agreement to a new tenant: either by way of a sub-lease or by an assignment of the lease agreement to the new tenant. In the case of a sub-lease, it shall be authorized in writing by the landlord. However, a non authorised sub-lease is considered to be ratified by the landlord if he recognizes the sub-lessee as such, namely by way of accepting the subsequent payments of the rent carried out by the sub-lessee. The assignment of the contractual position to a new tenant is limited to the following cases: (i) if previously authorised by the landlord or (ii) in case where such authorization is not required by law (in the event of a conveyance of a commercial or industrial establishment - in this case the landlord has a pre-emption right over the referred conveyance - or in the case of the assignment of the contractual position to a new tenant that continues to carry out the same profession in such building, or to a company with an equivalent corporate purpose). Even in the above referred cases, the landlord shall be informed about the sub-lease or assignment within fifteen days as from the execution of the relevant agreement. The temporary and onerous transfer of an establishment located in a leased space does not require the landlord s authorization, but shall be communicated to him within a one month period. In the case of a sub-lease, the original tenant is still bound by the original lease agreement. However, if the lease agreement is assigned to a new tenant, the lease no longer binds the original tenant. 5. How can the lender enforce its security? 5.1. Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? In general terms, a foreign jurisdiction may be chosen to settle disputes whenever such option does not infringe the exclusive jurisdiction of the relevant States. In fact, if the dispute is in respects of rights in rem in immovable property in Portuguese territory the matter must be dealt with by the Portuguese courts, as well as the enforcements of judicial or arbitral decisions over property or assets located in Portuguese territory Does the local law allow for the enforcement of arbitral awards or foreign judgments without review? No. Without prejudice to any international conventions or treaties applicable in each case, both foreign judgments and arbitral awards must be reviewed by the Portuguese courts, but only in what concerns to formal aspects How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Security rights by way of mortgage may only be enforced through a judicial enforcement procedure. It is not possible to enforce security rights directly, without recourse to courts. Except if law determines otherwise, it is up to an enforcement agent, acting under the supervision of the judge, to carry out all measures involved in the enforcement procedure, including summons, notifications and publications. 103

104 Enforcement agents may be specifically appointed by the secured party. The secured party shall be paid from the proceeds of sale of the assets, after the satisfaction of the enforcement costs and of any specially privileged credits. In principle such sale shall be made by sealed bids. In some cases, it is possible to sell directly to an interested buyer. The secured party may propose a buyer and a price. Mortgages may, however, be sold to a third party by means of a credits assignment agreement 5.4. Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. The borrower remains responsible Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? In principle, under Portuguese law lenders may not acquire the secured property without a court order. When pending a judicial enforcement, the secured party may apply for the credit bid/adjudication of the secured asset(s), being in such case applicable the proceedings foreseen for the sale by means of sealed bids. If no higher bid occurs, the assets shall be delivered to the secured party in order to (partially or fully) satisfy the relevant credit. In case of partial satisfaction of the credit, the enforcement may proceed as an unsecured claim, in order to seize other assets capable of assuring the total satisfaction of the credit. A lender may also reach an agreement with the borrower in order to acquire the title to the real estate in lieu of payment (datio in solutum), but such agreements may not be entered into before the date of maturity of the credit, since otherwise the same may be considered as invalid by the court. 6. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? As explained in paragraph B.3.2 below, a foreign lender will require Portuguese Tax Id. B. Security Over Shares 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes. There is no public register of pledges over shares, only shareholdings (quotas) in limited liability private companies. A pledge will be registered (i) in the shareholding register of each company in case of limited liability public companies (sociedades anónimas), (ii) in the case of quoted company, in the accounts of the depositary (iii) in case of limited liability private companies (sociedade por quotas) with the commercial registry office. 3. What are the mechanisms for registering and perfecting security? Security has to be granted by means of a written document. A note of the grant of the pledge must be recorded in the relevant title and included in the share register book of the company in case of shares and filed with the commercial registry in case of shareholdings (quotas) Consequences of failure to register? If it is agreed that certain rights (i.e. voting rights) are attached to the pledge, failure to register could result in the company whose shares are pledged not recognising the rights of the pledgee. Also, registration is required for the security to be effective and enforceable vis-à-vis third parties Formalities for execution of security and costs? Security has to be granted by means of a written document. Due to these requirements and money laundering concerns, foreign entities require a Spanish Tax Id. The notary could refuse to notarise the deed otherwise. Notarial fees are payable and vary depending on the secured amount. 4. Do the shares need to be transferred into the name of the lender or its nominee? In case of bearer shares incorporated in certificates (acções tituladas ao portador) the pledge is granted by means of delivery of such title to the lender. On remaining situations, only a note of the charge needs to be included in the relevant title. 104 CMS Real Estate Finance

105 5. How can the lender enforce its security? 5.1. Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Private sales of pledged shares do not require auction; such sales shall follow the procedures agreed upon by the parties. The security over shares may be sold to a third party. Secured shares may be enforced (i) with recourse to the courts or (ii) directly assigned to the secured party if the parties expressly foresee it in the security document. In relation to the proceedings to be followed in an enforcement procedure, please consider the answer to question A.6.3. Yes. The shares can be sold to a third party by means of a public auction. Security can be enforced without recourse to the courts and private sales are possible if it is for security in a quoted company and it is expressly foreseen as an enforcement method in the relevant security document. If the pledged asset is not qualified as a security (i.e. shares in quoted companies) it has to be sold by auction Are loans from shareholders subordinated? If so how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders are only subordinated if it is expressly agreed in the relevant loan. However, in the framework of insolvency proceedings loans from related parties would be subordinated to the repayment of the remaining debts. Subordination needs to be expressly agreed in the relevant agreement. Subordinated loans are not waived or written off contractually unless the relevant debt may be settled against another one held by the borrower against the lender. C. Leases 1. Lease Structure 1.1. Typical lease length? The lease length is determined by the parties. The most typical lease length is five years in residential leases and five to ten years in non-residential Maximum / minimum lease length if any? In the case of non-residential leases, the lease agreement may not exceed thirty years, but there is not a legal mandatory minimum lease length. If parties do not stipulate its term, the agreement is considered to have a ten year length. In the case of residential leases, Portuguese Law provides a minimum length of five years (except for non-permanent housing leases and for special transitional purposes) and a maximum of thirty years. If the parties agree to a length of less than five years or higher than thirty years, the lease length is automatically considered to be extended or reduced to such limits, as the case may be. Parties may also agree on an indefinite duration lease agreement, which remain in force until any of the parties terminate it in accordance with the terms applicable by law Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? In non-residential leases, parties may freely stipulate the conditions regarding the length of the lease, its termination and opposition to the automatic renewal. If the parties do not stipulate the conditions regarding the contract termination and opposition to its automatic renewal will be applied the legal rules established for residential leases (explained below). In the event that the parties do not stipulate its term, the agreement is considered to have a ten year length and the tenant has the right to terminate the agreement with a minimum pre-notice of one year. In residential leases, once the first six months have passed, the tenant is entitled to terminate the lease agreement with a minimum pre-notice of one hundred and twenty days. The residential leases with a fixed term have an automatic renewal (established by law). However, the tenant can object to such automatic renewal with a minimum pre-notice of one hundred and twenty days. 105

106 On the other hand, the landlord may oppose the automatic renewal of the agreement with a minimum pre-notice of one year. Regarding the indefinite duration residential lease agreements, the tenant is entitled to terminate the lease agreement, at any time, with a minimum pre-notice of one hundred and twenty days. The landlord may terminate such agreements (i) in case of housing need, either by himself or by his descendants in first grade, (ii) to carry out demolition or deep renovation works in the leased space or (iii) with a minimum pre-notice of five years - which has to be confirmed by the landlord in a period ranging from fifteen to twelve months regarding the term of the lease. The termination of the lease agreements by the landlord according to the conditions settled out in points (i) and (ii) of the preceding paragraph, is subject to a minimum pre-notice of six months and may determine some additional obligations/penalties to the landlord. All the communications hereto referred shall be made by letter with acknowledgement of receipt Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? Yes. As explained in the preceding paragraph, the law provides an ability for the tenant to terminate a residential lease agreement, once the first six months of the lease have elapsed, at any time, with a minimum pre-notice of one hundred and twenty days. This possibility is also extendable to a tenant of a non-residential lease agreement, but only in case where the parties have not expressly agreed on the conditions regarding the termination of the lease agreement. If the tenant terminates a lease agreement without complying with the conditions required for such effect, as described in point 1.3 above, such non-compliance is considered a breach of the agreement and entitle the landlord to receive a compensation equivalent to the rents which the latter will cease to receive because of the breach. In the case of a residential lease, the termination of which by the tenant is subject to a minimum pre-notice of one hundred and twenty days, failure to comply with such pre-notice does not affect the validity of the termination, provided that the tenant pays the remaining amounts corresponding to the one hundred and twenty days pre-notice Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? In respect of some residential leases, the execution of deep renovation or demolition works in the leased space by the landlord may determine the eviction of the leased space by the tenant. In this case, the tenant shall be entitled to, alternatively, (i) be compensated by all losses and damages incurred as a result of the repairs, with a minimum amount of at least twenty four monthly rents, (ii) relocate the tenant in the same Municipality under identical conditions or (iii) ensure the temporary relocation of the tenant in the same Municipality in order to ensure the reoccupation of the leased space. 2. Rent / Rent Reviews 2.1. Rental income receivable quarterly / monthly in-advance / in-arrears? Both the rent and the method of payment are determined by the parties. If the parties do not determine this, the payment of the rent shall be monthly and must be made until the first business day of the month prior to the one to which it refers. However, the tenant is given a legal moratorium of eight days in the payment of the rent. Once the tenant is in delay regarding the payment of the rent, the landlord is entitled to receive a compensation of fifty percent of the outstanding amount. Parties may agree on the anticipation of the payment of the rent for a period not exceeding three months Periodicity of reviews? The periodicity of reviews is freely determined by the parties. In case the parties do not expressly agree on this, the rent may be annually updated in accordance with the existing applicable coefficients. Annual rent review depends on formal notice by landlord to the tenant as in paragraph C.2.3 below. The first update may be demanded by the landlord one year after the commencement of the lease and the following, successively, one year after the previous update. The landlord shall communicate in writing to the tenant the applicable coefficient and the new amount of the rent arising from such coefficient. In addition, either the landlord or the tenant may terminate the lease agreements if the other party fails to comply with relevant obligations that, given its significance, make the maintenance of the lease unsustainable. 106 CMS Real Estate Finance

107 2.3. Basis of review (upwards-only or variable, indexation or market rent)? In relation to the matters referred to in the preceding paragraph, the consumer price index (excluding housing), published by the National Statistics Institute, is the formal basis of review. The above mentioned information shall be published in the Official Gazette by 30 October of each year 2.4. Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Apart from unusual cases whereby the rent is calculated in accordance with predetermined conditions ( renda condicionada ), rents are not subject to statutory control. 3. Lease Obligations: Who has responsibility for: 3.1. Internal maintenance, decoration and repair? Unless otherwise determined by the parties, the landlord shall execute all maintenance works, both ordinary and extraordinary, in the leased space, that are required by law or by the purpose of the agreement. Thus, the tenant may only execute works in the leased space if previously authorized, in writing, by the landlord. However, the tenant shall be responsible for minor repairs that are required as a result of wear and tear from the ordinary use of the leased space, being also entitled to execute urgent repairs, the amount of which will then be deducted in the following rents. Unless otherwise agreed, the tenant is entitled, upon the termination of the lease agreement, to be compensated for works lawfully made External maintenance, decoration and repair? Please refer to paragraph C.3.1. above Structural repairs? Please refer to paragraph C.3.1. above Insurance? Insurance is not obligatory, but certain landlords (mostly real estate investment funds) often require the tenants to take out an all-risks insurance policy, including civil liability, in relation to the contents of the leased space, and to maintain the same in place throughout the validity of the lease agreement Other typical outgoings? The parties are free to agree on the responsibility for the payment of other typical outgoings. In the lack of stipulation, the tenant is responsible for the payment of the utility services referring to the leased space (e.g. electricity, gas, water and telephone). On the other hand, in case parties do not agree on this, the landlord is responsible for the payment of all charges and expenses relating to the administration, conservation and use of the common parts of the building The ability to recoup any landlord outgoings (including management costs) by way of service charges? The common practice in Portugal is that the landlord is responsible for the payment of the expenses related to the common areas of the building where the leased property is located (e.g. maintenance of common areas of the building). However, the landlord usually transfers such expenses - including the expenses relating to the management of the leased space - to the tenant, either explicitly, by charging them directly to the tenant, or implicitly, by including such expenses in the rent. 4. Enforceability 4.1. Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Yes. 5. Valuation and Environmental 5.1. To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors) qualified appraisal report accepted and recognised in each jurisdiction? According to the Portuguese law, these appraisals do not have to be necessarily prepared by a specific entity or party in order to be recognized in the courts. However, such appraisals are usually prepared by a qualified expert, previously registered in a specific public entity (Comissão de Mercado de Valores Mobiliários). 107

108 5.2. Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Since January 1st 2009, the Energetic Certification, which serves to certify the performance and energy characteristics of a building, is mandatory in Portugal, either for sale or rental properties, Notwithstanding the above, sales and rentals of properties that have not yet obtained the Energetic Certification have occurred. However, the seller/landlord may incur in a penalty arising from such omission Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? A lender that has the benefit of a mortgage shall not be considered responsible for breach of environmental laws. 108 CMS Real Estate Finance

109 Romania 109

110 A. Mortgages 1. Can security be granted to a foreign lender? Foreign corporate lenders are not restricted from taking mortgages over immovable property located in Romania. 2. Can lenders take a mortgage over land and buildings on the land? Both land and the buildings on the land can be mortgaged to a lender under Romanian law. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction under Romanian law between a mortgage over land and a mortgage over the buildings on the land. In both instances the mortgagee would have the benefit of the same rights and means of redress against the mortgagor. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? In Romania, mortgage certificates (i.e. preliminary mortgage agreements indicating the mortgagor s creditworthiness) are not common in practice. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Second ranking security can be taken over any real property (whether land or buildings). A second ranking mortgage is registered in the Land Book following the same procedure as the registration of a first ranking mortgage. It is possible to change the ranking on the Land Book. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? In practice, mortgagees usually include in the mortgage agreement a prohibition on the mortgagors selling or otherwise disposing of the charged property. This prohibition is registered with the Land Book. Consequently, the transfer of real estate subject to mortgage cannot be performed without the prior written consent of the lender. Importantly, under the new Civil Code of Romania (the New Civil Code ) 1 any transfers (and other acts of disposition as well) of the mortgaged assets to a third party are valid notwithstanding any provisions to the contrary in the mortgage agreement. Such acts are valid even if the transferee was aware of the contractual prohibition on the mortgagor to dispose of the mortgaged assets. Moreover, under the New Civil Code, any provisions in a mortgage agreement that require the mortgagor to make, on the lender s demand, the immediate and anticipated payment of the secured amount by reason of that mortgagor having granted another charge on those mortgaged assets are deemed void. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? The Civil Code of Romania currently in force (the Present Civil Code ) provides for certain privileged security interests in real property. These special security interests arise by operation of law for the benefit of certain type of creditors such as: (a) the seller of a real property to secure the buyer s obligation to make a deferred price payment; or (b) the constructor of a building for securing the beneficiary s obligation to pay its costs; These security interests must be registered in the Land Book. Generally, the registration of a privileged security interest is either made by their holder within a certain time frame (i.e. the constructor s privilege mentioned above) or is made automatically at the time it arises unless the holder has not expressly waived them (i.e. seller s privilege mentioned above). Such a privileged security interest can normally override a mortgage even if that mortgage was registered earlier. Under the New Civil Code, the privileged security interests in real property provided for under the Present Civil Code are regulated as a statutory mortgage. Generally under the New Civil Code mortgages (whether conventional or statutory) acquire their priority depending on the time they are registered. 2.6 Can all monies mortgages be taken? An all monies mortgage (i.e. a mortgage whereby the mortgaged property stands as security for an indebtedness that is not determined at the time the mortgage is created) is not possible under Romanian law. 110 CMS Real Estate Finance

111 The Present Civil Code requires that a mortgage agreement provides for the secured amount (its absence triggers the invalidity of the mortgage agreement). The same requirement shall apply under the New Civil Code. The maximum secured amount is calculated as the sum of the principal amount lent to the mortgagor and an additional amount that is a good faith estimate of all amounts due by the mortgagor to the mortgagee as interest, default interest, fees, charges and any other costs under the loan facility and the related finance documents. This additional amount generally represents up to 50% of the principal amount. It may be varied (upwards or downwards) so as to give the mortgagee the comfort that the claims it may have against the mortgagor can be realised to the maximum extent. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? The landlord s right to receive rent may be charged to a lender by way of a security interest. Such security interest will be registered with the Electronic Archive for Security Interest ( Electronic Archive ) and hence will acquire its priority rank. In the event of enforcement, the lender may direct that the obligations due to the landlord be paid to the lender directly. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Charges may be created over a borrower s bank accounts by way of security interest. Such security interest will be registered with the Electronic Archive and will therefore be ranked in order of registration. In the event of enforcement the lender may direct the bank with whom the charged accounts have been opened to block them and allow no future payments to be made from them. It is also a usual practice that lenders, borrowers and (account) banks enter into accounts agreements setting out the borrowers obligations to collect its revenues in certain accounts and to make payments to the lenders throughout the term of a facility agreement. As part of these obligations, borrowers may be prevented from withdrawing funds or making payments from such accounts to other parties other than the lenders. These restrictions usually last until the scheduled interest and capital repayments are made. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? The position under the Present Civil Code is that a failure to register does not invalidate a mortgage. However that mortgage shall not be binding on third parties and will consequently lose its priority to other mortgages created later. Under the New Civil Code however, a mortgage is created by way of registration in the Land Book. As a result, a failure to register will render that mortgage invalid. 3.2 Formalities for execution of security and costs? Formalities for execution It is a requirement under the Present Civil Code that mortgage agreements be authenticated by a notary pubic. Hence the notary will examine the valid existence of the elements of the mortgage agreement (e.g. title in the mortgaged property, parties identity and their consent to the agreement) and if such requirements have been met, the notary will proceed with authentication of the agreement. The authentication requirement applies under the New Civil Code as well Costs relating to execution The costs relating to mortgages include (a) the notary fees, (b) the Land Book stamp duty and (c) the Electronic Archive registration: (a) the notary fee is variable and usually amounts to approximately 0.1% of the principal amount lent to the mortgagor. 30% discounts are generally granted if the agreement is drafted by a bank s legal counsel. A 24% VAT rate is also applied to the notary fee; (b) the Land Book stamp duty amounts approximately up to 0.1% of the maximum secured amount under the relevant mortgage agreement; and 111

112 (c) the cost for the registration in the Electronic Archive is nominal, amounting to approximately EUR Can the lender use a Security Trustee to hold security on trust for creditors? Equity is not recognised as a source of rights and obligations under Romanian law. As such, Romanian law does not recognise equitable title and the concept of trust. Romania is not a party to the Hague Convention on the Law Applicable to Trusts and their Recognition. Therefore, trust settlements governed by foreign laws may not be recognised as such in Romania. The New Civil Code introduces the concept of fiducia which does not give rise to equitable duties and remedies per se, but it closely resembles to the concept of trust in terms of its effects. Specifically, by means of fiducia one or more settlors transfer rights (i.e. proprietary rights, personal rights or security interests, whether present or contingent, individually or as a pool) to more fiduciaries who administer them for a precise purpose for the benefit of other parties. Importantly, the rights transferred by way of fiducia are not the fiduciary s property. Accordingly, under the New Civil Code, it will be possible that security rights be vested in a fiduciary that will hold them for the benefit of other lenders. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? The effects of a change in the lenders structure on the existing security depend mainly on the means employed for such change. Hence, if the transfer is made by novation, then normally provision must be made that the existing security stays in place and bears the same priority rank. If an assignment is made that the security would normally benefit the new lender as it benefited the original lender. If a more complex mechanism is employed, the documentation for the transfer normally includes provisions enabling the new lenders to acquire the rights (including security) granted to the former lenders. In such circumstances the mortgage agreements will only be amended to reflect the replacement of the former mortgagee. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Such a control mechanism or restriction is not available by law, but it can be set out by contract in the lease. A tenant cannot be bound by the terms of a lease after it ceases to be a party to the lease. Once the original tenant assigns the lease to a new tenant, the landlord will have no claim against that original tenant. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Romanian law generally allows that a foreign court or arbitration tribunal be chosen to settle disputes involving Romanian parties. Romanian courts have mandatory jurisdiction on matters concerning inter alia: (a) immovable property located in Romania; (b) insolvency of Romanian companies; (c) enforcement of a writ of execution on the territory of Romania. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Romanian law allows for the enforcement in Romania of arbitral awards or foreign judgements without a re-examination by a Romanian court of their merits. The Romanian courts will only consider whether that foreign arbitral award or judgement may be enforced in Romania or not. Hence a Romanian court will allow enforcement on condition that: (a) the judgment is final according to the law of the state where it was rendered; (b) the court that rendered the judgment had jurisdiction to do so; (c) the judgment can be enforced as a matter of law in the state of the court that has rendered the judgment; 112 CMS Real Estate Finance

113 (d) the right to seek enforcement of the foreign judgment has not expired under the applicable statute of limitation under Romanian law (currently a period of three years from the date on which the foreign judgment becomes a writ of execution (an enforceable judgment) in the jurisdiction in which it was obtained); (e) enforcement reciprocity exists between Romania and the state of the court which rendered the decision; and (f) there is evidence that the legal proceedings have been properly served in accordance with the law of the state where the decision was rendered. To the extent applicable, a Romanian court may dismiss a petition for the enforcement of a foreign judgment in the following circumstances: (a) the judgment is the result of a fraud in the proceedings that were held abroad; (b) the judgment breaches the public order provisions of Romanian private international law; or (c) the same issue between the same parties has been resolved or is in the course of being resolved by or through the Romanian courts. As regards the recognition and enforcement in the Romanian courts of judgments obtained in the courts of European Union member states, it is a condition pursuant to the Brussels I Regulation that the judgment is capable of being enforced under the law of the state of that court. Such judgment may not be recognised and enforced if: (a) recognition is manifestly contrary to public policy in Romania; (b) where it was given in default of appearance, the defendant was not served with the document which instituted the proceedings or with an equivalent document in sufficient time and in such a way as to enable him to arrange for his defence, unless the defendant failed to commence proceedings to challenge the judgment when it was possible for him to do so; (c) it is irreconcilable with a judgment given in a dispute between the same parties in Romania; (d) if it is irreconcilable with an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in the member state addressed. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? A mortgage agreement is as a matter of Romanian law a writ of execution. Thus the mortgagee can apply to court directly for its enforcement without any examination of the merits of the underlying claim. The enforcement of a mortgage is coordinated by an enforcement officer appointed by the mortgagee under the supervision of an enforcement court. No private sale or appropriation is possible, as recourse to courts is always necessary in the case of mortgage enforcements. The outcome of the enforcement procedure is that the mortgagor loses title to the mortgaged property. The title to this property is then either: (a) vested in the mortgagee as a result of its appropriation of such asset; or (b) transferred directly from the mortgagor to a purchaser further to the mortgage property being sold by public auction. It is up to the mortgagee to decide which of the above routes to pursue. Romanian law still does not allow title to immovable property located in Romania to be held by foreign entities. As such, for the time being, the only practical option a foreign lender may have is to proceed with the sale by public auction. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? If the lender takes title in the mortgaged property, it will be bound to meet all obligations attaching to that property. The position is not clear however where the lender takes possession of the mortgaged property with a view to selling it by public auction. Normally, in such circumstance, the mortgagor would be in charge of those obligations until the title in such property is transferred. 113

114 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? There are certain concerns of general interest regarding enforcement of security (whether real or personal). Specifically: (a) Enforcement of a mortgage in Romania is subject to supervision by courts and governed by rather intricate legislation. As such, there is a risk of a slow down or even a stay in the enforcement process, before a secured lender is able to realize its claim. (b) The New Civil Code and the new Code for Civil Procedure are to come into force next year. In such circumstances, it will take a considerable amount of time for the judicial practice on security taking and enforcement to consolidate. (c) There are certain spoiling tactics the borrower can use such as opposition to enforcement, filing for opening of insolvency proceedings (knowing that this will stay the enforcement), or causing the start of fiscal enforcement proceedings. (d) The legal framework for enforcement has recently been changed and there are grey areas of law and differences in interpretation within the judiciary, making predictions of the outcome of enforcement more difficult. (e) Under Romanian law loan agreements documenting loans granted by Romanian banks are deemed writs of execution. As such, a Romanian bank can apply directly to enforce the claim documented in the writ of execution without any examinations by that court of the merits of the claim. It is not clear however whether a loan agreement governed by a foreign law and documenting a loan granted by a foreign bank to a Romanian borrower would be recognised as a writ of execution in Romania. Therefore there is the risk that a determination on the merits of such claim be required before its enforcement in Romania. B. Security Over Shares In Romania, real estate is held regularly by single purpose vehicles incorporated as limited liability companies. We therefore highlight the specific issues that arise in the context of enforcing a security interest taken over the shares of a Romanian limited liability company. Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Security over shares in a Romanian company can be granted to foreign lenders. 2. Can second ranking security be taken? If so, how is it registered? Second ranking security over shares in a Romanian company can be taken. A second ranking security over shares is registered similar to the registration of a first ranking security over shares. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? Shares (like any other personal property) may be charged by security interest, according to the Security Law. A security interest over shares issued by a Romanian limited liability company is registered with the Electronic Archive and with the shareholders register of that company. The registration with Electronic Archive gives the security interests its priority rank. A failure to register such security interest with the Electronic Archive renders it non-binding on third parties. 3.2 Formalities for execution of security and costs? The agreement creating a security interest is usually made under hand and its execution involves no formalities or costs. The cost for the registration of the security interest in the Electronic Archive is nominal, amounting to approximately EUR CMS Real Estate Finance

115 4. Do the shares need to be transferred into the name of the lender or its nominee? The security interest is a charge allowing appropriation by the lender in the event of the borrower s default. Therefore, the creation of such security interest requires no transfer of title to the lender or its nominee. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? A security interest agreement is a writ of execution. The secured lender can apply to court for its enforcement without examination of the merits of the underlying claim. A lender can opt to enforce a security interest either under: (i) the Security Law which allows the lender to enforce its security privately without any supervision by court in the event of the borrower s default; or (ii) the Civil Procedure Code which provides for a court supervised procedure. Security Law enforcement finalises either in the sale of the shares or appropriation by the secured lender of the charged shares followed, in both cases, by the registration with the Trade Registry of the change in shareholding. The Security Law does not provide in sufficient detail for the means to document the sale / appropriation of shares and the evidence that should be filed with the Trade Registry to this effect. The Law 31 / 1990 ( Company Law ) is also silent as to the means to document passing title to shares following enforcement under the Security Law. Moreover, even if shareholders approve the transfer, the latest amendments to the Company Law require that their resolution be filed with the Trade Registry in order for third parties to be able to state their opposition to the transfer. If no opposition is filed, the transfer of shares takes effect upon the lapse of a 30-day term calculated from the date when that shareholders resolution was published in the Official Gazette. If an opposition has been filed, the transfer takes effect only from the date the judgment dismissing the opposition was communicated to the parties in these proceedings. As a result, a security interest over shares is in practice enforced under Civil Procedure Code. This procedure is organised under the supervision of courts and does not require any actions by the shareholders holding the charged shares. Accordingly, although this procedure is more formalistic and longer than that set out under the Code for Civil Procedure, it may afford the secured lender the certainty that transfer of the charged shares cannot be resisted by the shareholders holding the charged shares. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? It is common practice that deeds of subordination be entered into between the borrower, its shareholders and the lenders of a facility granted to that borrower. These deeds of subordination will provide for the subordination of the shareholders loans to other loans granted to that borrower. It is also customary that shareholders loans be waived or written off contractually as part of an enforcement of a share pledge should a default occur. In this context note should be made that changes to shareholdings in limited liability companies must be agreed upon by the rest of the shareholders. Hence a transfer of shares in such company is usually approved by a shareholders resolution. Shareholders may however attempt to resist the enforcement and refuse to approve the transfer. In the absence of such approval, there is the risk that the Trade Registry will not recognise the validity of the shares transfer to the secured lender and decline its registration as a shareholder. 115

116 C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? Commercial leases are usually made for a term of 5 10 years. 1.2 Maximum / minimum lease length if any? Under the Present Civil Code there are no legal limitations regarding the maximum / minimum term of a lease. Under the New Civil Code, a lease cannot be made for more than 30 years. Under new legislation, leases must be registered in the relevant Land Book, irrespective of their term. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? The renewal and termination formalities for a lease are not subject to statutory control. Generally these matters are dealt with in detail under the relevant lease agreement. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? There are no overriding provisions under the Romanian legislation granting a tenant the ability to break a fixed term lease. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? There are no provisions under the Romanian legislation granting a tenant a legal (i.e. statutory right) to occupy the leased premises following expiry of the lease. If the tenant stays in occupation of the premises following expiry the lease will continue as a tenancy at will. In such circumstances either the landlord or the tenant may terminate the lease without notice. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Rent is usually paid in advance, monthly. 2.2 Periodicity of reviews? Rent is generally reviewed annually. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Generally, the rent is indexed with the Harmonised Index of Consumer Prices (as applied by the European Central Bank). 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? There is no statutory control mechanism applicable to rent reviews. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? In practice, the landlord is responsible for the maintenance, decoration and repair of the common areas of the leased premises while the tenant is liable for the interior of the leased premises. 3.2 External maintenance, decoration and repair? The landlord is responsible for the external maintenance, decoration and repair. 3.3 Structural repairs? The landlord is bound by law to ensure the use by the tenant of the leased premises. As such, the landlord is responsible for the structural repair of the leased premises. 3.4 Insurance? Please see our answers to questions 3.7 and 3.8 below. 3.5 VAT? The applicable VAT rate is 24%. 3.6 Rates? Rates are subject to agreement and vary depending on the type and location of each leased property. 116 CMS Real Estate Finance

117 3.7 Other typical outgoings? Generally, lease agreements provide two types of expenses to be made by the landlord: Fixed (real estate taxes, insurance, security, management fee, elevator services, sweeping services, building repair etc.) Variable or operational (building water, trash removal, HVAC service, pest control, janitorial service, supplies, electricity etc.) 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? Liability for breaches of environmental laws rests on the entity which committed the breach. Hence, a lender holding or enforcing a mortgage cannot be practically held liable for past or present breaches of environmental laws relating to the mortgaged property. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? As commercial leases in Romania are triple-net leases, all the expenses listed at 3.7 are recoupable by the landlord. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The Romanian case law on leases is not as developed as it is in other jurisdictions. There is no legislation addressing specifically the area of commercial leases. Thus, courts generally will look at the terms of a lease by reference to the provisions of the Civil Code when making an interpretation of the terms of a lease. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? In order to be recognised in the courts, appraisal reports have to be prepared by experts registered on the National Register of Experts. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Generally environmental information is public under Romanian law. Various public reports are made by the Ministry of Environment and the subordinated environmental regulators. In addition, there are various professional services providers specialising in environmental compliance that can provide reports on specific matters or geographical areas upon request. 117

118 Russia 118 CMS Real Estate Finance

119 A. Mortgages 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take a mortgage over land and buildings on the land? 2.1 The distinction between mortgages on land and buildings on the land? Yes. Russian law contains a general principle of unity of the land and the buildings located on it and pursuant to this principle a building must be mortgaged simultaneously with the land plot on which it is located. It is worth noting that there are specific limited circumstances in which it is possible to take a mortgage over land without a simultaneous mortgage over buildings on it. However, generally we do not recommend this as being a satisfactory security structure. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Mortgage certificates ( mortgage bonds ) may be issued by the Property Registry (upon application). This document certifies the right of the bondholder to have the issuer perform the secured (i.e. monetary) obligations. The mortgage bond must contain confirmation of the secured amount (or at least the method of calculating or determining the secured amount). The cost for issuing a mortgage bond is included in the state duty (approx. EUR 100) payable for mortgage registration and need not be paid separately. As a mortgage bond is a registered form of interest it can be transferred to any third party by way of endorsement. The party transferring its rights to the mortgage bond makes an endorsement (a record) on the mortgage bond stating in detail the full name of the new holder of such mortgage bond. In addition, to support the transfer, the current bondholder and the new bondholder enter into a simple written agreement assigning the rights to the mortgage bond. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Second ranking security may be taken. Under Russian law registerable security is ranked according to the date on which it is registered. Any subsequent mortgage is possible provided it is not prohibited by a preceding mortgage. There is no concept of priority deeds under Russian Law and there is no provision under Russian law supporting the prioritisation of claims between parties. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? The default position under Russian law is that real estate cannot be transferred to a third party without obtaining any mortgagee s prior written consent. The parties may agree, however, in the mortgage agreement that the mortgagee s consent is not required. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? Yes, under solvent and insolvency liquidation procedures. During solvent liquidation: Creditors claims are satisfied in the following order of priority: (i) personal injury claims; (ii) severance benefits, wages for employees of the liquidated company and copyright royalties; (iii) compulsory payments owing a budget or a non-budget fund; and (iv) claims of other creditors. Creditors claims which are secured by mortgages are satisfied from the sale proceeds of the mortgaged property ahead of other creditors, except for the creditors listed at (i) and (ii) provided that their rights to claim were created before the mortgage agreement was completed. During insolvency liquidation: Russian law applies mandatory priorities under which creditors of the same class will rank equally. In brief these are: (i) current claims (e.g. insolvency costs, liabilities incurred after the start of the insolvency proceedings, (ii) first priority claims (personal injury), (iii) second priority claims (employee related, and royalties) and (iv) third priority claims (secured and unsecured claims of other creditors). Secured creditors are entitled to payments realised from the sale of secured assets, subject to the following thresholds: for secured claims under a facility agreement, the lender is entitled to 80% of the realised proceeds, with the remaining 15% for first and second priority claims, and 5% for insolvency expenses. For other secured claims (other than under a facility agreement) the respective thresholds are 70%, 20% and 10%. 2.6 Can all monies mortgages be taken? No. The scope of the secured obligations should be agreed by the parties in advance and described in detail in the security document. 119

120 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes, there are two ways to grant security over the rental income: (i) under a pledge of rights to receive rent under a lease agreement; and (ii) under an assignment of rights under a lease agreement. To perfect the security under an assignment of rights under a lease agreement a formal notice of assignment must be served on each tenant. Failure to notify a tenant will mean it is not obliged to perform its payment obligations to the assignee (the lender). 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Effective security over Russian accounts is not available. However, it is common practice for an account withdrawal (direct debit rights) agreement to be concluded by the lender, the obligor and the obligor s Russian account bank, in respect of the obligor s account(s). This agreement provides the lender with the right to withdraw funds from such account(s) without notifying the borrower, in the event of a breach by the borrower of its covenants and obligations to that lender. It is not possible for a third party to take a security over bank accounts as the security provider should owe a direct payment obligation to the lender. Any underlying security should contain a direct reference to the lender s power to obtain a direct debit from the borrower or a third party obligor (where a third party is providing the security for the right of the borrower). Despite the respective contractual covenants, Russian law does not impose any restriction on a Russian account holder in the operation or maintenance of its accounts. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? Rights to and encumbrances (ownership, long-term lease, servitude etc.) over real estate are subject to state registration. 3.2 Formalities for execution of security and costs? All Russian law security documents must be executed in written form, be bound and sealed with the parties corporate seals. The lender s legal counsel would usually review the constitutional documents of the Russian obligors, their respective authorisations and corporate approvals prior to execution. Ratification of the agreements by Russian companies is not advisable where there is a threat of challenge. Constitutional documents, relevant resolutions, powers of attorney and other respective authorisations should be filed with the registration authority together with the mortgage agreement. Where the lender / mortgagee is a foreign entity, the relevant documents will need to be legalised for Russia. This will mean the documents are apostilled in the country of the lender s incorporation, then translated into Russian, with the translation being attached to the documents and notarised. 4. Can the lender use a Security Trustee to hold security on trust for creditors? 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Russian law does not recognise the concept of trustees and so the security trustee mechanism is not available for use. To work around this issue, off-shore secured financings often use structures such as the creation of a parallel debt obligation, creation of joint creditor relations and subparticipation through a secured lender. Each of these structures has different characteristics and disadvantages and advantages. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Under provisions of the Russian law the assignment of a tenant s rights does not require landlord s consent unless otherwise stipulated by the lease agreement. Once the rights under the lease agreement are assigned to the new tenant, the original tenant is no longer bound by the lease. A mortgage will only come into existence on registration. 120 CMS Real Estate Finance

121 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? In respect of Russian law security (relating to Russian assets), we would not recommend seeking a resolution in a foreign court as this will cause concerns regarding enforcement in Russia. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? In respect of foreign law documents, this mainly concerns proof of debt as regards any action against a Russian obligor. There are few jurisdictions with which Russia has an agreement for reciprocal enforcement of court judgments, or in relation to which principles of reciprocity apply. Russia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as a result an arbitral award obtained in another signatory jurisdiction should be enforceable by a Russian court. For this reason it is common to designate in credit agreements that disputes will be subject to the jurisdiction of international arbitration. Although consideration of the jurisdiction of foreign courts may still be relevant, in particular if the Russian obligor has assets abroad. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? As a general rule, a Russian pledge / mortgage would be enforced by the Russian courts with a subsequent sale by public auction. Recent changes to legislation provide for the possibility of certain self-help (or out-of-court ) remedies. Out-of-court enforcement of Russian pledges is possible if a prior written Enforcement Agreement is concluded between both parties to the pledge. The parties can agree: (i) to sell the assets at auction (to be arranged by an auction organiser); (ii) to sell an asset to a third party (to be arranged by a commissioner under a commission agreement); and (iii) to allow the pledgee to repossess the pledged assets in certain circumstances. The parties can agree the procedure for determining the starting / repossession price and other conditions in the Enforcement Agreement. A certain level of co-operation from the pledgor / mortgagor will be required to implement the self-help remedy. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? After an event of default and until the sale of the mortgaged real estate, the mortgagor is the owner of the real estate and is responsible for the insurance and maintenance of it. The lender / mortgagee is responsible for maintenance and insurance after sale if it is the purchaser of the mortgaged real estate. The lender / mortgagee can, in a few cases, also be responsible for insurance and maintenance even before the event of default has occurred if the mortgage agreement requires this. In such circumstances the lender / mortgagee will continue being responsible until the mortgaged real estate is sold to a third party. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? Under current mortgage legislation the mortgagee and mortgagor may enter into an agreement in relation to non-judicial enforcement. Such an agreement could stipulate that the mortgaged real estate may be repossessed by the lender without the lender holding an auction. The scope of such agreements is limited by certain restrictions relating to cultural, historical and other such properties. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? Rights to deal with / acquire or dispose of certain buildings and other legal assets can be restricted, when these assets have foreign owners (e.g. mortgage over the historical property). 121

122 B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. Anyone can hold the local security. However, the security holder must be prepared to translate and notarise any documents that the local authorities may require in case of dispute or otherwise. 2. Can second ranking security be taken? If so, how is it registered? A second ranking pledge (including in respect of real estate) can be taken. A relevant entry of a subsequent pledge will be made in the respective register (if applicable). 3. What are the mechanisms for registering and perfecting security? Pledge over shares in the Russian joint stock companies. A record of pledge should be entered into either: (i) the pledgor s respective depository account maintained by an independent registrar (custodian); or (ii) the company s internal share register. As a belt and braces approach our advice would be to follow option (i) and have the shares deposited into an account with a custodian. Pledge over participatory interest in a Russian limited liability company. A pledge agreement needs to be signed in the presence of a notary and notarised. After that, a notary files an application (signed by the parties in the presence of the notary) with the State Register of Legal Entities, and a relevant entry of the pledge is made in the register. 3.1 Consequences of failure to register? Failure to register the pledge with the custodian or in the internal shareholders register will not affect the validity of the share pledge. 3.2 Formalities for execution of security and costs? An obligor would usually bear all related costs. If the company s shares are recorded by an independent registrar (custodian), the custodian would usually require that the pledgee (lender) opens a depository account with it. However, the relevant record of the pledge is made on the pledgor s depository account. Under the Civil Code, the lender may take possession of the pledged shares from day one (the concept of Zaklad ), but in practice this rarely occurs. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? As a general rule, a Russian share pledge would be enforced by the Russian courts with a subsequent sale at public auction (at an organised stock exchange, in the case of a public company). Recent changes to the legislation provide for the possibility of a self-help remedy out-of-court enforcement of a Russian pledge is possible if a prior written Enforcement Agreement in respect of the same has been concluded between both parties to the pledge. The parties can agree: (i) to sell the shares at auction (to be arranged by a auction organiser); (ii) to sell shares to a third party (to be arranged by a commissioner under a commission agreement); and (iii) to allow the pledgee to repossess the pledged shares in certain circumstances. The parties can agree the procedure for determining the starting / repossession price and other conditions in the Enforcement Agreement. A certain level of co-operation from the pledgor will be required to implement the self-help remedy. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? The loans of shareholders are not subordinated. It may be contractually agreed that the shareholders write off or waive their respective rights under the loans upon occurrence of certain circumstances, but these provisions may not be enforceable under Russian law or against a Russian obligor. 4. Do the shares need to be transferred into the name of the lender or its nominee? If the company maintains the shareholders register internally, the relevant entry is made in the internal register. 122 CMS Real Estate Finance

123 C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? This can be classified by type. A class A lease typically relates to premises with excellent location, high-quality infrastructure and excellent professional management. A class B lease typically relates to premises with good (versus excellent) locations, management, and construction. Often class B buildings will become class A after 5 7 years of use. Leases of office premises are usually for a term of: For class A: 5 to 7 years (10 years is rare) For class B: 1 to 3 years or 5 years Leases of trade premises are usually for a term of 3 to 5 years. Leases of warehouse premises are usually for a term of: For class A: 5 years or more For class B: 3 to 5 years For residential premises, the typical term varies from 2 to 5 years. However, lenders will often consider lease terms of 5 years as a sufficient length for secured lending. 1.2 Maximum / minimum lease length if any? There are no statutory limitations at a federal level and the general rule is that the parties can agree any length of term, but subject to maximum in some cases, e.g. for land-plots in Moscow, the maximum term is capped at 49 years. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Under the default provisions of Russian law, unless otherwise stipulated under a lease agreement a tenant that has duly complied with its obligations under a lease has a pre-emption right to enter into a lease agreement for a new term. Should the landlord refuse to enter into the new lease agreement but enters into a lease with a third party for the same term, the former tenant may judicially request a transfer of the rights under the new lease agreement from the third party. The pre-emption right of the tenant to enter a new lease is often expressly excluded by the parties. If the tenant holds over (remains in occupation) after the expiry of a fixed term without any objections from the landlord, the lease agreement is deemed to be extended for an indefinite period and on the same terms and conditions of the current agreement. Such a lease can be terminated by either party on 3 months written notice. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? None, save where the landlord is in breach or the lease does not accord with the general provisions of the Russian Civil Code. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? As mentioned above, unless otherwise provided for in the lease, a tenant who is not in breach of the lease has a priority right to a new lease ahead of any third parties. If the tenant notifies the landlord within the statutory period that it wishes to enter into a new lease and the landlord nevertheless leases the premises within one year from the expiry to a third party, the old tenant has the right to demand that its lease be renewed and claim compensation. This statutory tenant protection is invariably expressly excluded in a lease agreed on market terms. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Monthly in advance. 2.2 Periodicity of reviews? Usually annually. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Reviews are linked either to a fixed index rate (e.g. 3%), or to the Consumer Price Index. Our experience is that reviews are upwards only. 123

124 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? No. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Under the Russian Civil Code default provisions, the landlord is responsible for capital repairs and the tenant is responsible for running repairs maintaining the property in a proper state, remedying any wear and tear. Parties may agree otherwise in the lease agreement. 3.2 External maintenance, decoration and repair? Under the Russian Civil Code default provisions, the landlord is responsible for capital repairs and the tenant is responsible for running repairs maintaining the property in a proper state, remedying any wear and tear. Parties may agree otherwise in the lease agreement. 3.3 Structural repairs? Under the Russian Civil Code default provisions, the landlord is responsible for capital repairs and the tenant is responsible for running repairs. 3.4 Insurance? The lease usually provides that the landlord insures and the tenant pays or contributes to the insurance policy premium. 3.5 VAT? Rental payments are normally subject to VAT (currently at the rate of 18%). This is paid by the tenant. 3.6 Rates? Property tax is payable by the landlord. 3.7 Other typical outgoings? These are usually agreed between the parties. Usually the tenant pays or reimburses the landlord for any such costs. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Generally yes, although there is inconsistency in the application of law by the Russian courts and on occasion court decisions and judgements are questionable. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? There are no requirements that an appraisal report be prepared by a domestically regulated / qualified party or an RICS person or entity. The Russian court will treat any such report as it deems fit in accordance with principles of court process. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? As part of the construction / planning permitting process, the relevant authorities commission expertisa on various environmental aspects. Generally a purchaser or lender will require an additional environmental report from a qualified insured environmental professional. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? Prior to taking any enforcement action while a lender has a mortgage over real estate, it is not deemed to be the legal owner and is not liable for any environmental breaches of the borrower (either past or present). However, if in enforcing a mortgage the lender subsequently becomes the owner of the real estate, the lender will then become liable for past or continuing environmental breaches. This liability is subject to limitation periods imposed by legislation. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? This would be agreed between the parties. Usually the tenant pays or reimburses the landlord for the costs of maintenance and utilities (in proportion to the area leased by the tenant). 124 CMS Real Estate Finance

125 Scotland 125

126 A. Security 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take security over land and buildings on the land? Yes. A fixed security (standard security: see A3) is taken over (i) owned land and (ii) a lease of land with a term of 20 years or more. If buildings are sufficiently attached to the land the standard security would cover both land and those buildings. 2.1 Is there distinction between securities on land and buildings on the land? Generally, no. The buildings will normally be deemed to be part of the land due to the degree of attachment to the land. Also a floating charge (see A3) is generally taken over a company s whole assets which gives a security interest over buildings / plant and machinery owned by the company on those premises which are insufficiently attached to the land to be covered by the standard security. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. 2.3 Can second ranking security be taken? If so, how is it registered? Generally, yes. However, advice should be taken on restrictions contained within any first ranking security documents which restrict the granting of further securities (negative pledge provisions). It is registered in substantially the same way as a first ranking security would be registered. A ranking agreement is usually needed to regulate the ranking and enforcement of securities. In some cases such agreement will contain debt subordination. Ranking agreements relating to standard securities need to be registered at the relevant Scottish property register (Registers of Scotland) to be binding on receivers, administrators and liquidators. Prescribed particulars of a ranking agreement which varies the ranking of a floating charge need to be filed with the Registrar of Companies in Edinburgh within 21 days of the date of the agreement (Form 466). 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Theoretically real estate could be transferred subject to a standard security but finance / security packages are drafted so that transfers of, or interests in, the real estate are not permitted without the lender s prior written consent. If such restrictions are breached the lender is generally entitled to accelerate payment of the debt and enforce its security. Third parties are aware of these restrictions and are unlikely to purchase real estate which is subject to security. In addition, transfers of real estate for inadequate consideration might be potentially be reversed by the courts under applicable insolvency laws. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? Once the standard security is registered as a first ranking standard security, no. However, sums due to the person taking enforcement action against the chargor (where it is not the lender who is carrying out / administrating the enforcement exercise) are preferred in the sense that the lender receives the net proceeds of sale. See also A 6.4 regarding the statutory fund apply to the proceeds realised from floating charge assets. 2.6 Can all monies mortgages be taken? Yes. Standard securities can secure all monies owed to a lender. If a standard security is granted to a security trustee acting for a syndicate of lenders the security is limited to sums due under an identified credit agreement(s) (as amended from time to time) and related finance documents. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. Transfer (assignation) of rights to rents in security is also a regular feature of a lender security package. This is a form of fixed security. To create the security a written assignation is granted by the chargor (creating contractual rights) and the tenant must be notified of the transfer to create the security right. Notice is usually served via the UK recorded delivery mail service. The notice to the tenant specifies the account (which is often a blocked / restricted access account) with the lender into which rents are to be paid. We suggest that prescribed particulars of the security (on the appropriate form together with a certified copy of the security and fee) should be filed with the Registrar of Companies in Edinburgh within 21 days of creation of the security by the chargor (when notice is given to the tenant, evidenced by the recorded delivery slip). It is 126 CMS Real Estate Finance

127 arguable that such a security falls within the categories of security which need to be registered to avoid it being void against any creditor, liquidator and administrator of the company granting the security. Some lenders prefer to take a transfer of rents absolutely but do not give the tenant notice of that transfer until enforcement time. This arrangement does not create security and third parties could potentially obtain good title to the rents in certain circumstances, leaving the lender with only personal contractual rights against the chargor. Rental income would be subject to the all-assets floating charge (where taken) (see A3). 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Opinion is divided on whether rights to an account with a fluctuating balance can be assigned in security (i.e. be subject to a fixed security). Generally, lenders either (1) rely on the security provided by a floating charge over that account and take extended contractual set off rights in respect of that account (often in a pledge document); or (2) (preferably and where practicable) open a bank account in an English branch and take an English fixed charge over the account and seek to operate that account in such a way to maximise the likelihood that it will be recognised as a fixed security, rather than a floating security. Rights to a Scottish deposit account are generally thought to be capable of being transferred in security but cash is seldom locked up in this manner for commercial reasons. 3. What are the mechanisms for registering land and for registering and perfecting security? Standard security (similar to an English law legal mortgage over real estate): registration in the relevant Scottish property register is done as soon as possible after completion (see A3.1 for background) followed by filing prescribed particulars of the security (on the appropriate form together with a certified copy of the charge and fee) with the Registrar of Companies within 21 days of the date lodged with the relevant Scottish property register. Floating charge (similar to an English law floating charge) over all the whole assets: filing prescribed particulars of the security (on the appropriate form together with a certified copy of the charge and fee) with the Registrar of Companies in Edinburgh within 21 days of execution by the chargor. For completeness security over insurances and collateral warranties often are included in a lender s financing package for real estate transactions. Insurances in the UK market tend to be governed by English law so English law security can be taken over such insurances if that is the case. Collateral warranties are contractual rights, rather than security, giving a lender (amongst other things) the option to step into development contracts in a default situation and will generally be taken on development funding transactions from building contractors, consultants and sub-contractors with design responsibility. 3.1 Consequences of failure to register? A standard security is not effective as a security right until registered in the relevant Scottish property register. Unless and until a lender registers its standard security in the relevant property register the lender could lose its priority if the chargor grants (or has granted) a standard security or other transfer (disposition) (whether voluntary or by operation of law) or interest in the property in favour of another party which is registered before the lender s standard security in time (Race to the Registers). A letter of obligation is issued by the chargor s lawyers on behalf of its clients to give the customary comfort on this issue (the chargor will not register anything for a period of 14 days). Failure to register a security with the Registrar of Companies, where required, will mean that the security will be void against any creditor, liquidator and administrator of the company granting the security. 3.2 Formalities for execution of security and costs? Documents are unable to be signed in counterpart in Scotland. Instead every party must sign the same original, in accordance with the Requirements of Writing (Scotland) Act 1995, for the document to be validly executed. Scottish execution requirements might impact the timing of completion. It costs 13 to register the particulars of a charge with Companies House and 30 to register the security with the relevant Scottish property register. 127

128 4. Can the lender use a Security Trustee to hold security on trust for creditors? Yes. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? The Security Trustee will be holding the security on behalf of all syndicate lenders. However care should be taken if the security trustee / agent changes or the lending transaction changes significantly, beyond the contemplation of the original security trust deed. Specific advice should be taken if there is a proposal to transfer a bi-lateral loan and related security. 4.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Generally, yes. A subordination agreement is entered into between the lender, the shareholder and the chargor. If the shareholder loan is security a ranking agreement is required (see A3). It is not customary but is becoming more common for provisions to be included in these agreements providing for shareholder loans to be written off in the event of enforcement of a share pledge. However, this type of enforcement is not common, as administration tends to be the lender s preferred enforcement route (see A7.3). 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Open for negotiation. Often there is a letting strategy agreed between the parties where the company has a good track record of managing investment real estate: leases / tenants meeting the agreed criteria can be granted without needing specific lender consent. Specific advice should be taken if the tenant becomes insolvent, as there are particular difficulties. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Yes. A court in Scotland has power to sist (stay) an action where it is shown that there is some other forum, having competent jurisdiction, which is more appropriate for the trial of the action, (being more suitable for the interest of all the parties and the ends of justice) provided it is not inconsistent with the local legislation implementing the EU Convention on Jurisdiction and the Enforcement of Judgements in Civil Commercial Matters and Lugano Convention on Jurisdiction and the Enforcement of Judgements in Civil and Commercial Matters of Each finance transaction needs to be considered in the context of the Civil Jurisdiction and Judgments Act 1982 if there is a non-local element. Generally those matters which are currently reserved matters are those which would be expected e.g. certain proceedings concerning immoveable property (including real estate), status / legal capacity of natural persons, residence of children, rights in property arising out of matrimonial relationship, wills or succession, certain proceedings in relation to companies, public registers etc. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? A foreign judgment issued in a State which is a party to the Brussels, Lugano and San Sebastian Conventions may not be reviewed as to substance, but there are circumstances in which the Scottish Courts may refuse to recognise it: (a) if its enforcement contrary to public policy; (b) where judgment was obtained by default and the defendant has not been served with the document instituting proceedings in sufficient time to arrange a defence; (c) if the judgment is irreconcilable with a Scottish decree (judgment) resulting from a dispute between the same parties; (d) if the judgment proceeded upon a preliminary decision concerning the status or legal capacity of natural persons, rights in property arising out of matrimonial relationship, wills or succession, where that decision conflicts with the Scottish law rules of International Private Law, unless Scottish law would have reached the same conclusion; (e) if there is already in existence a judgment given in a State which is not a party to the Brussels, Lugano and San Sebastian Conventions which is capable of being enforced in Scotland; or (f) if the foreign court has issued a judgment based upon a ground of jurisdiction which is in conflict with specific provisions of the Brussels, Lugano and San Sebastian Conventions in relation to jurisdiction in disputes concerning insurance, consumer contracts and in those matters where the Conventions otherwise provide for exclusive jurisdiction. 128 CMS Real Estate Finance

129 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Enforcement is generally by the lender appointing an administrator to the company on the basis of a floating charge over the whole (or substantially the whole) of the assets of a company (a qualifying floating charge). There is an out-of-court appointment procedure requiring specified criteria to be met. The directors can also appoint an administrator via an out-of-court procedure and this is often done in a default situation. In either case, an administrator s primary objective is to rescue the company as a going concern. The administrator s costs in realising a fixed security asset are deducted from the proceeds realised from that asset prior to the balance being payable to the fixed security holder. The general costs of the administration and preferential creditors (generally, sums due to employees, pension scheme contributions and coal / steel levies) are paid before the floating chargeholders. A statutory fund (with a current maximum of 600,000, calculated according to a formula) is deducted from the floating assets fund in order that unsecured creditors receive something out of the administration. There are circumstances where a lender might potentially attract liability if it takes certain enforcement steps in relation to charged property, such as becoming mortgagee in possession of real estate or the legal holder of shares, and detailed legal advice should be taken before that type of enforcement is started. Often the lender has the benefit of other helpful rights, such as (where included in lending documents) a contractual right of set-off and (if applicable) the right to appropriate financial collateral. Due to the administration regime, enforcement of other securities tends to be of less practical relevance. Standard Security: A receiver, liquidator or an administrator cannot be appointed under a standard security. A standard security is enforced by the lender itself. It can be enforced without applying to court (see (a) and (b) below), however enforcement procedures must be carried out correctly (e.g. the serving of a calling up notice in the prescribed form). In practice, where enforcement is not via administration route but by enforcing the standard security, a court order is usually sought to confirm the lender s right to sell. In general terms: (a) Calling up calling up notice: the lender requires repayment where no default or irremediable default; chargor has 2 months to comply, failing which lender has power of possession and sale without court action. (b) Default notice chargor has failed to comply with a condition of the standard security and that failure is remediable; notice requires remedy within 1 month, failing which the lender has the power of sale (not possession) without court action but can be challenged by the chargor. (c) S24 Court Order chargor s failed to comply with any requirement of the standard security or the chargor is insolvent; the lender applies to court for a warrant to exercise any right under the standard security including the power of sale; timings on obtaining a warrant are not fixed as depends on court s workload. The lender can sell by (i) private bargain or (ii) by exposure to sale. In either case the lender has statutory duty to advertise the sale and to take all reasonable steps to ensure that the price at which all or any of the subjects are sold is the best price that can be reasonably obtained. If this is not done the lender could be found to be liable for damages so enforcement via administration is usually the preferred enforcement route. There are extremely limited rights to foreclosure via the courts in specified (rare) circumstances. If the secured subjects contain any residential property or dwellings this may prolong enforcement proceedings. Specific advice should be taken if the standard security is likely to be in place for a period of 20 years or more. 129

130 Floating Charge: A qualifying floating charge is enforced in substantially the same way as an English law qualifying floating charge. The holder of a qualifying floating charge is entitled (subject to certain criteria) to appoint an administrator to the company (see above). Generally, a receiver cannot only be appointed under a floating charge (but there are certain limited exceptions). It is possible to take a floating charge over specified assets but taking a qualifying floating charge is the usual approach. Assignation of Rents / Insurances: The tenant / insurer are already under instructions that payment is to be made direct to the lender (not the chargor). The lender may notify the tenant / insurer to pay monies to a suspense or similar realisation account. A creditor can apply to a relevant court to have a liquidator appointed to a company to wind up that company provided certain statutory criteria are met. It would be unusual for a secured lender to apply to a court to appoint a liquidator where there are other preferred enforcement routes available. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? Foreign lenders with a particular requirement for having confirmation of registered first ranking security being in place before advancing funds might encounter difficulties on certain properties moving from one property register to another as there is a blind period as a result of this exercise. Taking specific advice on the rules on signing and dating of Scottish documents is recommended. For example, Scottish law does not recognise signing in counterpart. The English Law of Property Act does not apply in Scotland. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Generally, no. Once the shares are pledged the pledgor only retains the reversionary interest in the shares. Although it is considered possible for a pledgor to assign this reversionary interest it is rarely done in practice. It is unusual for less than 100% of the issued share capital to be pledged, although certain jurisdictions require that only a certain percentage of shares can be pledged to a lender (e.g. 65% for US lenders). Registration requirements will depend upon the jurisdiction of incorporation of the pledgor and whether the pledgor has a place of business or establishment registered in the UK. For example, if the pledgor is an English registered company this will mean (in practice) filing prescribed particulars of the security (on the appropriate form together with the charge and fee) with the Registrar of Companies within 21 days of the creation of the security. 3. What are the mechanisms for registering and perfecting security? Shares written assignation in security (share pledge); amend articles of association to allow a free transfer of shares; stock transfer forms in respect of each class of shares assigned (signed, dated and appropriately certified on the rear for stamp duty purposes); registration of the name of the lender (or its nominee) in the Register of Members of the company as holder of the shares in security; *filing prescribed particulars of the share pledge (on the appropriate form together with a certified copy of the charge and fee) with the Registrar of Companies within a prescribed time limit; 130 CMS Real Estate Finance

131 *The Registrar of Companies in Edinburgh generally take the view that a share pledge is not registrable but some practitioners prefer to file prescribed particulars of a share pledge when granted by a UK company or a foreign company which has registered place of business or establishment in the UK as there does not appear to be uniform practice on acceptance and rejection of share pledges for registration. Scottish law does not recognise equitable charges, you either meet the security requirements or you do not have a security right. At best, a lender would only have personal contractual rights against the pledgor under any payment obligation if the security has not been perfected. The date of creation starts the clock running for registration. The date of creation varies depending on the category of assets being charged / assigned. In much the same way as one would do in taking a legal mortgage over English shares, lenders should consider tax and accounting treatment, defined pension scheme liabilities, any corporate structure issues (Enviroco case), carbon reduction commitment liabilities and whether there are issues arising from the lender s local jurisdiction in taking security of this nature. 3.1 Consequences of failure to register? Failure to register with the Registrar of Companies, where required, will mean that the security will be void against any creditor, liquidator and administrator of the company granting the security. Failure to enter the name of the lender (or its nominee) in the Register of Members as holder of the pledged shares means that a security right is not created. Where security is not properly completed, a third party purchaser for value (acting in good faith) can obtain good title to assets which were supposed to be charged, leaving the lender with only personal contractual rights against the debtor rather than security rights. 3.2 Formalities for execution of security and costs? Documents cannot be signed in counterpart in Scotland. Instead every party must sign the same original, in accordance with the Requirements of Writing (Scotland) Act 1995, for the document to be validly executed and for schedules, descriptions and plans to be properly incorporated. There is no requirement for notarisation. Companies House registration: 13 per share pledge. The certificate on the rear of the stock transfer forms needs to be completed to confirm stamp duty is not payable. 3.3 Do the shares need to be transferred into the name of the lender or its nominee? Yes. It is also crucial that the lender s or its nominee s name is entered in the Register of Members of the Scottish registered company which issued the shares. Failure to register in this manner means no security is created. Please note that the lender should be checking that all the shares are fully paid up to avoid any liability to pay calls in respect of pledged shares. 4. How can the lender enforce its security? 4.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? See A7.3: As the sale of real estate is generally procured by the appointment of an administrator to the company it is relatively unusual for a lender to enforce its share pledge. The share pledge would usually include agreed nature / power of sale provisions backed up by underlying Scottish common law rules and powers. Court orders are often sought to confirm the power of sale has arisen. A receiver, liquidator or an administrator cannot be appointed under the terms of a share pledge. The lender would enforce in its own name. The share pledge can include assignment provisions allowing for the security to be assigned to another lender. The debt and the security should be assigned at the same time: the mechanics of transfer can be complex so specific advice should be taken to avoid pitfalls. The pledged shares do not have to be sold at auction but a lender may choose to do so in order to avoid suggestion that the price obtained was not market rate. 131

132 C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The lease length is determined by the parties in accordance with what is commercially agreed. 1.2 Maximum / minimum lease length if any? There is no minimum length of lease and this depends on commercial negotiation. However there is a maximum lease length of 175 years in commercial leases and 20 years in residential leases. Retail leases in the current market would typically be for 5 10 years with office leases for a typical term of years. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? There are no statutory rights. The parties can agree a contractual (as opposed to a statutory) right of renewal to be incorporated within the lease. There is an implied term in every lease in Scotland, that if the parties take no action to the contrary, they are deemed to have agreed that following the natural expiry of the lease it will continue for a further year on the same terms and conditions, or, for a period equivalent to the original period of the lease if less than a year. This principle is known as tacit relocation ( silent renewal ). To be absolutely certain that the lease does not continue on that basis an appropriate notice should be served prior to the natural expiry of the lease (minimum of 40 days). As a result of the operation of tacit relocation a landlord could require the tenant to remain in occupation up to a further year or the tenant can insist on remaining in occupation for that additional period even if the landlord wants the property back (as applicable). 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? None, other than those which apply upon insolvency (or near insolvency). 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? There is limited statutory protection for shop tenants which allows (in general terms) a shop tenant to apply to the sheriff (local judge) within 21 days of receiving a notice to quit the premises to continue in occupation. If authorised to continue in occupation by the sheriff this creates a new statutory tenancy and not a renewal of the old lease. Court action is required to eject tenants who do not voluntarily leave. See also C Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Rent is typically paid either monthly or quarterly in advance, but can be in arrear and depends on what is commercially agreed between the parties. Unless made expressly otherwise, the payment quarter dates are the Scottish quarter dates (28 February, 28 May, 28 August and 28 November). 2.2 Periodicity of reviews? To be determined commercially between the parties. Typically on office leases, reviews would be five yearly. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? As agreed between the parties. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? No. 3. Lease Obligations: Who has responsibility for: 132 CMS Real Estate Finance

133 3.1 Internal maintenance, decoration and repair? This depends on what is agreed between the parties and what kind of tenancy is granted. If an internal only tenancy is granted, then the landlord would usually retain obligations for external maintenance, decoration and repair and may recharge any costs incurred to the tenant through service charge. Where a lease of whole is granted, it would be usual for a tenant to be responsible for all internal and external repairs and maintenance. 3.2 External maintenance, decoration and repair? See C3.1 above. Note there is an implied landlord s obligation to keep the premises wind and watertight but the landlord can, and usually does, contract out of this. 3.3 Structural repairs? See C3.1 and C3.2 above. 3.4 Insurance? Either party can insure the premises, although it is usual in a lease of part for the landlord to insure the whole with the tenant contributing to the cost of such insurance. 3.5 VAT? If the property has been VAT elected the landlord charges VAT on top of rent, service charge and insurance. 3.6 Rates? These are usually the responsibility of the tenant. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Yes. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? Yes. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? Yes, depending on the liabilities of the current owner. For example, where there are past breaches the current owner may have indemnified a previous owner against all environmental liabilities and a lender, when enforcing its security and entering into possession, would assume this liability. Again, where there are present breaches of environmental law, it is assumed that any owner, including a lender in possession, would be liable. Specific advice should be taken before enforcing security. 3.7 Other typical outgoings? Dependent on what is commercially agreed between the parties but would usually include utilities. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Where the premises form part of a larger building or estate, it would be usual for the landlord to reserve the right to charge a service charge. 133

134 Serbia 134 CMS Real Estate Finance

135 A. Mortgages 1. Can security be granted to a foreign lender? Yes. Security over real estate can be granted to a foreign lender. 2. Can lenders take a mortgage over land and buildings on the land? 2.1 The distinction between mortgages on land and buildings on the land? Lenders can take a mortgage over the buildings and the land provided that the land and buildings are privately owned. Most of the construction land in Serbia is still stateowned and therefore this can not be the subject of a mortgage. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Serbian law does not provide for the issuing of mortgage certificates. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Serbian law provides for the possibility of establishing multiple mortgages over the same real estate. It also provides for the ranking of such mortgages, whereby a mortgage which is registered first has the priority over any mortgage which is registered later. The registration procedure requires submission of the mortgage registration request to the Land Registry. The mortgage is perfected upon registration at the Land Registry. The same registration procedure applies to all mortgages irrespective of their ranking. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. Real estate that is subject to a mortgage can be transferred to a third party without the lender s consent. Under the Serbian Mortgage Act the mortgage attaches to the property rather than being personal to the owner of the property and specifically provides for the right of the mortgagee to enforce the mortgage irrespective of any subsequent transfer(s) of title to the mortgaged property to a third party. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? The costs incurred in the sale of the real estate and third party costs (e.g. costs of the official appraiser) will rank before the claims of the other preferred creditors. 2.6 Can all monies mortgages be taken? No. An all monies mortgage cannot be taken; mortgage over real estate must secure a specific claim of the lender. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Serbian law allows for the assignment and pledge of the rent in favour of the lender as security under a loan agreement. In order to assign the rent to the lender, it is necessary that the landlord as the assignor and lender as assignee enter into an assignment agreement. Also, a landlord may grant a pledge over the rent in favour of the lenders as security under a loan agreement by concluding a pledge agreement. A pledge agreement should be registered with the Serbian Pledge Registry pursuant to the procedure described below. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? It is customary for a lender to take a pledge over the borrower s bank accounts. In order to grant a pledge over the accounts, it is necessary for the lender as pledgee and the borrower as pledgor to enter into an account pledge agreement. In addition, Serbian law allows the borrower to grant a lender authority for account withdrawal which enables the lender to debit the borrower s accounts in case of non payment or default. It is possible to contractually restrict the borrower s rights to withdraw funds in its accounts until the scheduled interest and capital repayments are made. In such case the account bank should be party to an account agreement / escrow agreement which will set out restrictions on the borrower s withdrawal rights. 135

136 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? Under Serbian law, a mortgage over real estate is created on registration in the respective public registry and the registration has constitutive effect. Proper registration is generally taken as prima facie evidence of a mortgage over the real estate. A mortgage over real estate does not exist unless it is registered with the Land Registry. 3.2 Formalities for execution of security and costs? Under Serbian law, a mortgage deed must be notarized by the court. Notarization charges are up to approx. EUR 300. The charges for registering the mortgage in the Land Registry are up to EUR 100. Certified translations of underlying agreements are required for the registration of the mortgage in the Land Registry. Translation costs are approx. EUR 10 per page. 4. Can the lender use a Security Trustee to hold security on trust for creditors? Serbian law does not recognised any concept of security agent or security trustee for a mortgage over the real estate. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Where a loan is being transferred, the agreement for the transfer of the mortgage to a new lender must be concluded between the existing lender and the new lender. Please refer to points 2.3 and 3.2 for details regarding the registration procedure and formalities for execution of security. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? A tenant requires the consent of the landlord / borrower for any transfer of the lease to a new tenant. If the landlord / borrower consent to the transfer of the lease agreement to a new tenant, the original tenant will no longer be bound by the lease agreement. 6. How can the lender enforce its security? Serbian law prescribes the following enforcement procedure in respect of a mortgage over real estate: a) upon the mortgagor s default, the secured lender must notify the mortgagor prior to commencing a forced sale of the mortgaged property; b) the borrower is then allowed a further period of 30 days to repay the secured debt; c) in the event that the mortgagor fails to repay the secured debt within that 30 day period, the secured lender shall register a note of the forced sale at the Land Registry; and d) following a further 30 day period after the registration of the note at the Land Registry the secured lender may then proceed to a forced sale of the mortgaged property (note that the registering of the note may be challenged, but Serbian law sets an aggregate limit of 30 days for filing an appeal and obtaining a second instance decision). 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Generally, a dispute may be subject to a foreign jurisdiction if at least one of the parties to the dispute is domiciled outside the Republic of Serbia. If one party to the agreement is domiciled outside the Republic of Serbia, a choice of foreign jurisdiction would be upheld by the Serbian courts. However, disputes relating to real estate and mortgages are subject to the exclusive jurisdiction of the local Serbian courts. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Foreign arbitral award Enforcement of a foreign arbitration award against a party within the territory of the Republic of Serbia is subject to the recognition procedure carried out before a Serbian court. Once recognised, a foreign arbitration award will be treated as a Serbian arbitration award and can be enforced. A foreign arbitration award may not be recognized and enforced in the following circumstances: 136 CMS Real Estate Finance

137 (a) where the arbitration clause is invalid; (b) where the party against whom the arbitration ruled has not been properly informed of the appointment of the arbitrators or commencement of the arbitration proceedings, or was otherwise impeded in the exercise of its procedural rights; (c) where the arbitration tribunal exceeded the powers granted by the arbitration clause; (d) where the arbitration award has been awarded in contravention of the arbitration clause or without an arbitration clause; (e) where the arbitration award has not become binding upon the parties or the competent court has suspended or cancelled the arbitration award; (f) where the matter in which the judgment has been awarded is not suitable for arbitration; or (g) where the effects of the arbitration award are in contravention of public order. Foreign judgment Enforcement of a foreign judgment against a party within the territory of the Republic of Serbia is subject to the recognition procedure carried out before a Serbian court. Once recognised, a foreign court judgment will be treated as a final and un-appealable Serbian court judgment and can be enforced. A foreign judgment may not be recognised and enforced in the following circumstances: (a) where the party against whom a recognition is sought has not been properly served with the summons, or was otherwise prevented from exercising its procedural rights; (b) where the matter in which the judgment has been awarded is within the exclusive jurisdiction of the court of law or other state body of the Republic of Serbia; (c) where the court of law or other state body of the Republic of Serbia has already awarded or recognised another judgment having the same subject-matter as the judgment for which the recognition / enforcement is sought; (d) where the judgment is in contravention of public order (as defined by the constitution of the Republic of Serbia); or (e) where there is no reciprocity in recognition / enforcement of judgments with the country in which the judgment has been awarded. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Contrary to the previous legislation, a secured lender does not need to turn to the court to procure a forced sale of the mortgaged property. The mortgagor and the secured lender may enter into an agreement allowing the secured lender to organise a private sale of the mortgaged property (thus avoiding the lengthy procedure of a court-ordered sale). The secured lender may execute the forced sale of the property by way of either (i) a public auction or (ii) a direct deal. It is not possible for a secured lender to appoint receivers / liquidators in an enforcement procedure. In the event of a forced sale of the mortgaged property, Serbian law provides that the mortgagor must be able to off-set at least 75% of the appraised value of the mortgaged property against the total amount of the secured debt (i.e. in the event that the secured lender sells the mortgaged property for less than 75% of the appraised value thereof, it shall be deemed that the mortgaged property has been sold for 75% of the appraised value). 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? The borrower retains the title to the mortgaged asset until the sale. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? The secured lender may enter into an agreement with the mortgagor to take a transfer of the title to the mortgaged property from the mortgagor. However, this agreement may only be entered into upon maturity of the secured debt. In the event of repossession of the mortgaged property by the secured lender, the secured debt is deemed to have been fully repaid. 137

138 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? In practice, the recognition procedure required for foreign arbitral awards and foreign judgement against Serbian entities tends to be extremely protracted. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Security over shares can be granted to a foreign lender. 2. Can second ranking security be taken? If so, how is it registered? Serbian law provides for the possible creation of multiple pledges over the same shares. It also provides for the ranking of such pledges, whereby the pledge which is registered first has the priority over any pledge which is registered later. However, the law does not provide any specific mechanism to enforce the rights of the holder of the first-ranking pledge over those holders of pledges that are subsequently registered. In practice the Central Registry of Securities (CRS), refuses to enforce a second-ranking pledge before the holder of the first-ranking pledge has requested the enforcement of his pledge. The only exceptions to this general practice are the cases in which a secondranking pledge holder obtains a court decision entitling him to collect his receivable from the sale of the pledged shares before the first-ranking creditor. 3. What are the mechanisms for registering and perfecting security? A pledge over shares is established by the registration of the pledge with the CRS. The registration of the pledge is carried out by transferring the shares from the share account of the pledgor to the pledge sub-account of the pledgor s share account. The procedure for the registration of the pledge should be initiated by the pledgor who gives an instruction to the CRS, through his broker, to transfer the shares from his ownership account to his pledge sub-account. The written instruction should be signed and stamped by the pledgor, and forwarded to the CRS by his broker. Together with the signed instruction, the broker should also submit to the CRS the pledge agreement, or some other document evidencing the legal base for the establishment of the pledge. 3.1 Consequences of failure to register? According to Serbian law, a pledge over securities is created on registration in the CRS and the registration has constitutive effect. A pledge over shares does not exist unless it is registered with the CRS. 3.2 Formalities for execution of security and costs? Serbian law does not prescribe any specific formalities for execution of a share pledge agreement between a pledgor and a pledgee. The charges for the registration of a pledge over securities are EUR 5 for the registration of the pledge in CRS and brokerage fees. Certified translation of underlying agreements are required for registration of the shares in the CRS. Translation costs are around EUR 10 per page. 4. Do the shares need to be transferred into the name of the lender or its nominee? The pledge over the shares is created by the transfer of shares from the pledgor s share account to the pledge sub-account. Therefore, the shares do not need to be transferred into the name of the lender or its nominee. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The secured lender does not need to apply to the court to procure a forced sale of the pledged shares, since Serbian law allows the secured creditor to sell the pledged shares on the Belgrade stock exchange market. Serbian law requires the following activities for the enforcement of the pledged shares: a) upon the pledgor s default, the secured lender must give the pledgor 8 days prior notice before commencing a forced sale of the pledged shares; b) the pledgor is allowed the 8 days to repay the secured debt; c) if the pledgor fails to repay the secured debt within the 8 days, the secured lender, as pledgee shall notify the pledgor of the date and mode of sale of the pledged securities; d) the secured lender may then proceed to a forced sale of the pledged shares on the Belgrade Stock Exchange market. 138 CMS Real Estate Finance

139 The secured lender has to engage a broker or licenced bank to organize the sale of the pledged shares on the Belgrade stock exchange market. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Shareholders loans are not subordinated to the senior debt by operation of law. The Serbian Companies Act is inconsistent in the application of the concept of equity equivalent shareholder loan / subordinated debt. It provides that a shareholder loan granted to a company at the time of financial crisis will be treated as unsecured instead of subordinated to the claims of other company s creditors. According to the Serbian Companies Act, if a shareholder of a company has granted the company a loan at a time when the company was in a financial crisis, rather than increasing its equity in the company such shareholder shall be treated as an unsecured creditor in the bankruptcy proceedings. The Serbian Companies Act prescribes an exception from the rules described above for shareholders who (i) do not hold more than 10% of the company s registered capital and (ii) are not directors in the company. Is it not customary for the shareholder loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur. Usually, the subordination of the shareholder loans to the senior debt is achieved by means of a subordination agreement entered into between the creditor, the borrower and its shareholder. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The typical length for business leases is 5 years. 1.2 Maximum / minimum lease length if any? Serbian law does not impose any maximum / minimum duration of lease. In practice however, leases exceeding 10 years are still rare. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? A tenant does not have a statutory right to renew the lease. However, a lease concluded for a definite period of time may automatically continue indefinitely, if the tenant continues to use the premises following the end of the original term, provided the landlord does not object. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? A tenant may invoke some change in circumstances (rebus sic stantibus) as a reason for early termination of a fixed term lease. In the absence of any contractual break right. However a contractual waiver of the right to invoke the change of circumstances provisions may be subject to judicial scrutiny and quashed if found contrary to the principle of good faith. A tenant may terminate a fixed term lease if the demised premises have become unfit for purpose or where there is interference by a third party that significantly derogates from the grant of the lease. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? No. 139

140 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? If not determined otherwise, rent is paid bi-annually for leases of a term of one year or longer, or at the expiration of the lease period if the lease period is less than a year. In practice, however, it is common to provide for monthly advance payments. 2.2 Periodicity of reviews? Serbian law does not provide for any automatic rent review provisions in practice rent is adjusted in accordance with the contractual terms. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Serbian law does not provide for any rent review provisions and rent is adjusted in accordance with contractual terms. In practice it is common to determine the rent in EUR and provide for indexation with reference to HICP (Harmonized Index of Consumer Prices) or other official EU standard. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? No. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The tenant must hand over the leased premises in the condition in which the tenant took the premises, allowing for usual wear and tear. Unless otherwise specified in the lease agreement, the tenant is responsible for minor repairs and maintenance work required for the day-to-day use of the premises. 3.2 External maintenance, decoration and repair? The responsibility for external maintenance would depend on the extent of the demised premises. These would normally fall to the tenant unless they were of a structural nature and not excluded by the lease. 3.3 Structural repairs? 3.4 Insurance? The landlord is responsible for insurance of the premises, unless agreed otherwise in the lease agreement. 3.5 VAT? The landlord is responsible for payment of VAT on rent receipts. 3.6 Rates? These are not applicable. 3.7 Other typical outgoings? The landlord is responsible for other typical outgoings, unless agreed otherwise in the lease agreement. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? There are no legal provisions that prohibit the charging of other costs to the tenant. However some costs can not be recharged in excess of the amount actually paid to the service provider. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Lease contracts are regulated under the Law on Contracts and Torts (1978) and regularly enforced before the Serbian courts. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? In order to the recognised in the court, the appraisal has to be prepared by the court appointed sworn court expert. All sworn court experts are locally qualified and listed in the Register of Sworn Court Experts held with the Ministry of Justice. Unless agreed otherwise in the lease agreement, the landlord is responsible for carrying out all the necessary repairs in order to keep the premises fit for purpose and he must ensure the maintenance of the building and of all essential equipment. 140 CMS Real Estate Finance

141 5.2 I s it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? It is possible to obtain an environmental report from a local government agency or qualified environmental professional and such reports would be commonly obtained when the subject matter of a lease would involve industry specific objects (such as factories or infrastructural objects) or property in the vicinity of some environmental resorts or protected cultural monuments. Such reports are not usually obtained for ordinary business leases. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? It is not possible for environmental liability in respect of past or present breaches of environmental laws to attach to a lender by virtue of it holding a mortgage over real estate. In the case of foreclosure the liability for breaches of environmental laws would attach to the person buying the property on sale. They would be held jointly and severally liable with the mortgagor. In this limited exception the lender will incur the liability as consequence of its foreclosure. It is otherwise not possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it enforcing a mortgage. 141

142 Slovakia 142 CMS Real Estate Finance

143 A. Mortages 1. Can security be granted to a foreign lender? Foreign corporate lenders are not restricted from taking mortgages over immovable property located in Slovakia. 2. Can lenders take a mortgage over land and buildings on the land? Both land and the buildings on the land can be mortgaged to a lender under Slovak law. However, the principle of superficies solo cedit is not applicable in Slovakia. It is therefore possible that the mortgage over the land plot differs from the mortgage over the construction built on it. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction under Slovak law between a mortgage over land and a mortgage over the buildings on the land. In both instances the mortgagee would have the benefit of the same rights and means of redress against the mortgagor. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Mortgage bonds (mortgage certificates) in Slovakia are commonly used and governed by special acts. The total value of the certificates, including the yields, must not exceed the value of the secured property for which they have been issued. The mortgage bonds are transferable and can be traded on the stock exchange. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? The Slovak Civil Code refers to the existance of second ranking mortgages over one property. This is also used in practice. A second ranking mortgage is created when a multiple claims are secured by a lien on one and the same real property. The amount of satisfaction from the proceeds from enforcement of the second ranking mortgage is the remainder of the realization proceeds of the first-ranking mortgage. The rank of the mortgage is indicated in the Cadastral registry by the entry in Part C of the ownership deed of the real properties to which the mortgage relates. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? In practice, the mortgage agreements usually include a prohibition on the selling or otherwise disposing of the encumbered property. This prohibition is registered with the Cadastral registry and is stated on the deed of ownership. In such a case, the transfer of real estate subject to mortgage cannot be performed without the prior written consent of the lender. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? In Slovakia the system of priority is established. It means that the creditor whose security is registered first, is the prior ranking creditor. The prior ranking creditor is obliged to inform the other creditors in writing about the enforcement of the mortgage. 2.6 Can all monies mortgages be taken? The Civil Code requires that a mortgage agreement provides for the secured amount (its absence triggers the invalidity of the mortgage agreement). The maximum secured amount is calculated as the sum of the principal amount lent to the mortgagor and an additional amount that is a good faith estimate of all amounts due by the mortgagor to the mortgagee as interest, default interest, fees, charges and any other costs under the loan facility and the related finance documents. This additional amount generally represents up to 50% of the principal amount. It may be varied (upwards or downwards) so as to give the mortgagee the comfort that the claims it may have against the mortgagor can be realised to the maximum extent. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Under Slovak law, also receivables can be pledged in order to secure a debt. However, the value of the receivables must be certain or at least be ascertainable during the existence of the pledge. It means that also a landlord s right to receive rent may be charged to a lender by way of a pledge. In the event of enforcement, the receivable is paid directly to the lender. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? It is possible and common for the lender to enter into a pledge agreement in relation to receivables from bank accounts with the borrower. The pledge usually applies not only to the receivables, but also covers any parts, benefits, interest due and other appurtenances of the pledged receivables. The pledge comes into existence only after its registration in the Pledge register. In the event of default, the lender may have recourse to the 143

144 receivables from the bank accounts. In the absence of such a pledge agreement, the only way for the lender to take charge of the borrower s bank accounts is to request a preliminary court order to freeze the bank accounts. However, this procedure is not widely used due to its legal intricacy. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? Mortgage security must be perfected by the registration in Cadastral registry. A failure to register a mortgage agreement will prevent the mortgage from coming to existence. 3.2 Formalities for execution of security and costs? For the transfer of ownership of real property, Slovak law requires a written contract with signatures of the parties verified by a public notary or other authorized person. When the signing and the verification of the signature happens outside of Slovakia, Czech republic or Austria the documents need to be apostiled (legalized). Furthermore, the transfer of the title must be registered in the Cadastral registry. The transfer of ownership is perfected when recorded in the Cadastral registry. The costs relating to mortgages include (i) the notary fees, (ii) the Cadastral registry stamp duty: (i) the notary fee is EUR 4.38 for verification of signatures. A 19% VAT rate is also applied to the notary fee; (ii) administrative fees for registration of the mortgage is EUR 66 in stamps (60 days) or EUR 265 also in stamps in accelerated procedure (8 days) 4. Can the lender use a Security Trustee to hold security on trust for creditors? Security trustees are not used in Slovakia with regard to holding security, but security agents can be involved provided they act also as lender. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? It is possible to change lenders, for example by way of assignment, but there is no obligation to sign new security, because all securities are transferred automatically with the assigned receivables. There are two conditions for a valid assignment of receivables in Slovakia. The law requires that the assignment be in written form and for notification of the debtor. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? The tenant is bound by the lease agreement with the landlord and may not unilaterally transfer the lease to another person. Any changes in tenants is subject to the prior consent of the landlord. Without the prior consent, the tenant may not even sub-let the premises. A unilateral assignment of the lease on the part of the tenant constitutes a breach of the lease agreement. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? No. A foreign jurisdiction cannot be chosen to settle disputes in relation to real property in Slovakia pursuant to Art. 22 of the Council Regulation (EC) No 44 / 2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. The above mentioned regulation establishes exclusive jurisdiction for rights in rem (immovable property or tenancies of immovable property) of the state in which the property is situated, regardless of the domicile of the parties to the proceedings. The same applies for arbitration awards relating to real property. Although Slovak Republic is the contractual party of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NY Convention), the provisions about immovable property cannot be used, as Slovak Republic has made a reservation with regard to immovable property. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Please refer to section 6.1. It is not possible to allow the enforcement of arbitral awards or foreign judgements without judicial review, because only Slovak Courts have exclusive jurisdiction in disputes over rights in rem in immovable property or tenancies of immovable property. 144 CMS Real Estate Finance

145 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? There are two legal options how the security can be enforced. First, as part of the mortgage enforcement, the mortgagee can enforce its security as provided in the mortgage agreement. In the case of property sale other than by auction, the creditor is obliged to exercise due diligence, so that the proceeds from the pledge enforcement are equal or higher to proceeds usually obtained from the sale of similar property in the same area at the same time. Secondly, the mortgagee can sell the property in a public tender (auction), which is regulated by a special act on public tenders. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? The person in possession of the real property during the enforcement of the mortgage must not doing anything which could depreciate the value of the property, other than normal wear and tear. As regards the insurance, the mortgagor is only obliged to take on insurance if it is provided for in the mortgage agreement. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? In the case of default the automatic transfer of ownership title to lender is prohibited. The lender can only use methods which are outlined in section Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? Since 2009, there is an option to have a property transfer agreement authorized by a notary or an attorney. This procedure has been introduced in order to both speed up the process of registration with the Cadastral registry and to prevent fraud. If property transfer agreement has been concluded in this manner, than some of the obligations of the Cadastral registry with regard to registration are transferred to the attorney / notary. The attorney / notary is liable for the due registration of such an agreement. Also, except for Czech documents, for which bilateral international agreements have been concluded, all documents submitted to public authorities in Slovakia have to be in Slovak language or an authorised translation. B. Security Over Shares 1. Can security be granted to a foreign lender? Yes. Security over shares in a Slovak company can be granted to foreign lenders. The same applies to security over an ownership interest in a limited liability company. 2. Can second ranking security be taken? If so, how is it registered? Second ranking security over the shares in Slovakia cannot be taken. Shares which are already pledged cannot constitute the subject of a share pledge agreement. 3. What are the mechanisms for registering and perfecting security? Shares evidence by certificates A pledge is created on its registration in the Central Securities Depository of the Slovak Republic (Central Depository). Upon registration of the pledge, the Central Depository records on the share certificates that each share is on pledge. If the share certificates are transferred by endorsement (registered shares certificates), the written declaration of the owner of the share certificate to be made on this share certificate is the requirement for creating the pledge. The written declaration must contain the name, business seat, business identification number of the pledgee and the signature of the pledgor. Registration can be undertaken by the pledgor or the pledgee. For registration certain confirmations regarding the share pledge agreement must be delivered to Central Depository. Dematerialised shares A pledge is perfected by its registration in Central Securities Depository of the Slovak Republic. Registration can be undertaken by the pledgor or the pledgee. For registration certain confirmations regarding the share pledge agreement must be provided to Central Depositary. 145

146 Ownership interest in a Limited Liability Company A pledge is perfected by its registration in the Commercial Register. 3.1 Consequences of failure to register? If the relevant perfection requirements in B3 have not been met, the security is not validly created and cannot be enforced. 3.2 Formalities for execution of security and costs? The share pledge agreement and the required confirmations of the content of the share pledge agreement must be provided to the Central Depositary together with the registration form. The cost for registration itself is calculated by reference to the amount of the secured receivables. For the registration of a pledge over the ownership interest the pledge agreement as well as the resolution of the General meeting must be submitted to the Commercial Register, if the consent of the General Meeting is required according to the memorandum of association of the limited liability company. The registration form needs to be delivered to the Commercial Register. The fee for the registration is EUR Do the shares need to be transferred into the name of the lender or its nominee? No. For the creation of security over shares or ownership interest no transfer is required. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Yes. Shares as well as the security interest can be sold to a third party, and recourse to the courts is not required, as the security may only be enforced based on the valid share pledge agreement / pledge agreement regarding the ownership interest. Private sales of pledged shares are not possible. The shares may only be sold by the Securities Trader and at the highest price that may be achieved subject to exercising due diligence. The ownership interest may be sold in direct sale, in a public tender, auction, or in any other way agreed in the agreement on pledge of ownership interest. It is possible to agree any way of enforcing the pledge, therefore we are of the opinion that private sale of ownership interest is possible, however the lender must exercise due care and the ownership interest must be sold at the price usually quoted for identical or comparable ownership interests under comparable conditions and at the time and place similar to those of the ownership interest sale. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders can be contractually subordinated and this is common practice. Shareholders can agree that repayment of their loans is waived / written off should a default occur. C. Leases 1. Lease Structure 1.1 Typical lease length? Although lease lengths may vary according to the business strategy of the landlord, geographic location, age of the leased premises and type of property, our experience shows that commercial leases are generally entered into for a specific period of time (as opposed to indefinite periods) and their usual length is approx years. 1.2 Maximum / minimum lease length if any? None. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Tenants of non-residential premises do not have any statutory rights for renewal or extension of the lease period. The landlord need not serve any notice to avoid an extension of the lease. Upon change of ownership of their leased premises, a tenant is entitled to be relieved of its obligations owed to a previous owner as soon as he has been notified or received evidence of the change in ownership. In the event that there is a change in the ownership of the landlord, a tenant is entitled to terminate the lease 146 CMS Real Estate Finance

147 agreement (including premature termination where the lease is for a definite term); however, the tenant s termination notice must be served in the next closest notice period, unless provided otherwise by law. Sale of the building does not affect leases of commercial units. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? The statutes include a number of reasons for which a tenant may terminate a fixed term lease. The reasons typically relate to a breach of contract by the landlord. However, some of the reasons for termination can be excluded by contract. The overriding reasons for termination of fixed term leases by tenants are: (a) where the premises are not suitable for use according to the lease agreement; (b) if the building or land is transferred; (c) if the tenant loses its licence for activities carried out in the leased premises (non-residential premises only); (d) if the landlord grossly breaches its statutory obligations (non-residential premises only). The provision on the termination of the lease agreement executed for definite term in case of lease of non-residential premises before expiration of the term agreed does not unambiguously indicate whether it is mandatory and whether some of the parties may exclude or amend some of the termination events subject to their agreement or whether further termination events may be added. The applicable case law provides that the provision in question is mandatory in the sense that the termination events provided by the Act cannot be excluded by the parties. However, it is possible to add further events authorising termination or provide for other ways of agreement termination (such as withdrawal). 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? If the tenant does not vacate the premises after termination of the lease, the landlord cannot remove the tenant from the premises, but must seek a court order and, eventually, enforce the order in execution proceedings. The proceedings may be lengthy. However, failure to vacate the premises may be sanctioned in the contract and the landlord s rights may be well secured by contractual penalties etc. In the case of tenant bankruptcy, the bankruptcy administrator may terminate the lease. Any receivables of the landlord would be settled in the bankruptcy proceedings on a pro-rata basis. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Rent is usually paid in advance. Monthly or quarterly payments are usual. 2.2 Periodicity of reviews? Most leases are subject to indexation on an annual basis usually by reference to the HICP Eurozone index for EUR rent. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Often the indexation is upwards only, depending on the strength of the position of the landlord. Review is usually based purely on indexation, not on market rent levels. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Not in commercial leases. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The landlord must provide premises suitable for the purpose of the lease. Internal maintenance, including demising walls, ceilings, floors, all equipment, doors, windows, electrical, mechanical, plumbing, heating, ventilating, air conditioning, security systems, fire prevention, sprinkler systems, is usually the responsibility of the tenant. 3.2 External maintenance, decoration and repair? Landlords are usually responsible for maintenance and repair of the building structure, exterior walls, roof, main common utilities and ventilation systems, and surroundings of the building (gates, communications, etc.), unless the damage is caused by tenant. 3.3 Structural repairs? Landlords are usually responsible for structural repairs. The tenant may not modify structural parts of the premises / building without the landlord s prior approval (mainly written). 147

148 3.4 Insurance? In the case of a lease of commercial premises, the landlord usually maintains property insurance for replacement costs of the building. Landlord insurance costs are usually recovered through outgoings payments. The tenant is usually required to have all risk property insurance for its property installed in the premises and liability insurance for certain minimum coverage. In the case of a lease of entire buildings, tenants are asked to provide full coverage for all risk insurance and liability insurance. 3.5 VAT? If the landlord is a registered VAT payer, 19% VAT is charged on rent and service charges. With respect of partial / repeated deliveries of goods or services, if a delivery is partial / repeated, the goods or services are considered delivered (i.e. tax obligation occurs) on the last day of the period (according to the previous version of the relevant Act the delivery was made no later than on the last day ), to which the payment for the repeatedly or partially delivered goods or services applies. If, for instance, under a lease agreement the tenant pays rent on a quarterly basis, according to the new regulation, the date of delivery is the last day of the relevant quarter and the rent payment made for instance before the start of the relevant quarter is then considered a payment made before delivery - i.e. the landlord will be obliged to issue an invoice for such accepted payment, based on which invoice the tenant can apply tax deduction. The second alternative is that the landlord will not issue the invoice and the tenant will be entitled to apply the tax deduction, but no sooner than on the last day of the relevant quarter. 3.6 Rates? In good commercial leases (triple net leases), landlords include all payments in connection with the lease into the service charges / outgoing payments. 3.7 Other typical outgoings? In good commercial leases (triple net leases), tenants are required to pay for all outgoings, including utilities (water, sewage, power, lighting in common areas), reception services, security services, landlord s insurance, costs of repairs, replacements, modifications, administration and management costs and general maintenance, repair and replacements. Tenants often pay advance payments on a monthly or quarterly basis, based on the landlord s estimate of the cost of outgoings. Usually once a year, the landlord provides for reconciliation of the advance payments and actual cost of outgoings. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Landlords usually include outgoings in the service charges. The payments for outgoings / service charges are usually paid in advance on the basis of the landlord s estimate. After reconciliation is made, the tenant must immediately pay any outstanding amounts; in case of overpayments by the tenant, the overpayments may be set off against the next outgoings payment. The tenant s financial obligations (including rent and outgoings) are secured by a security deposit, bank / corporate / parent company guarantee or, if necessary, other sanctions (e.g. right of the landlord to terminate the lease). 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? The terms of the lease agreements are recognized and enforceable by the courts (if in compliance with mandatory provisions of law). However, due to the time-consuming nature of the court proceedings, commercial leases usually include an arbitration clause. As arbitration is used in most disputes and arbitration awards are not public, available case law is not extensive. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? No. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. PI insurance cover for these professionals (if any) can vary significantly so should be checked when the professionals are being engaged. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. 148 CMS Real Estate Finance

149 Slovenia 149

150 A. Mortgages 1. Can security be granted to a foreign lender? Foreign corporate lenders are not restricted from taking mortgages over immovable property located in Slovenia. 2. Can lenders take a mortgage over land and buildings on the land? Pursuant to the principle superficies solo credit generally only land can be mortgaged. However, there are exemptions to this rule. Lenders may establish a mortgage over a share in the co-ownership and over a building which is built on land encumbered with a right of superficies. 2.1 The distinction between mortgages on land and buildings on the land? There is no distinction under Slovenian law between a mortgage over land and a mortgage over the buildings on the land. In both instances the mortgagee would have the benefit of the same rights and means of redress against the mortgagor. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? In Slovenia, mortgage certificates do not exist. However, under Law of Property Code (Official Gazette of the Republic of Slovenia, No. 87 / 2002 and 18 / 2007, hereinafter referred as SPZ ) a land debt is envisaged. A lend debt is a right to demand repayment of specified cash sum from the value of an immovable ahead of other creditors with an inferior ranking. A land debt is created on the basis of a unilateral contract in the form of a notarial deed, with an entry in the Land Register and the issuing of a land letter, which is issued to the founder by the Court after the land debt has been entered in the Land Register. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Second ranking security can be taken over any immovable property (whether land or buildings). A second ranking mortgage is registered in the Land Register following the same procedure as the registration of a first ranking mortgage. Change of the ranking in the Land Register is possible. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Real estate subject to a mortgage may be transferred to a third party without the lender s consent. However, a lender and borrower may agree to a prohibition on disposal of property by means of a legal transaction or testament. Such prohibition shall be binding only on the first owner and not on his legal successors. Please note that a prohibition against disposal may only be entered in the Land Register if it is agreed between spouses or cohabiting partners, parents and children, and adopted children and adoptive parents. In this case the prohibition also has effect against third persons. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? The Execution of Judgments in Civil Matters and Insurance of Claims Act (Zakon o izvršbi in zavarovanju, Official Gazette of the Republic of Slovenia, No. 100 / 2006 et al.) provides for certain privilege security interests in real property, such as: (a) compensation claims for mental distress suffered owing to a reduction in life activities or reduction or loss of working capacity; (b) maintenance claims; (c) claims for damaged suffered because of the loss of maintenance; (d) claims for social security insurance. Such a privileged security interest overrides a mortgage even if that mortgage was registered earlier. 2.6 Can all monies mortgages be taken? An all monies mortgage is possible under Slovenian law. The all monies mortgage may secure an individual claim originating in a specific legal relationship whose amount at the moment the mortgage is established is not determined. With all monies mortgage all the interest and costs of the secured claim are also secured up to the agreed maximum amount. However, if the value of the claim exceeds agreed maximum amount up to which mortgaged property stands as a security, the lender cannot sue the mortgagor for the balance. 150 CMS Real Estate Finance

151 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? The landlord s right to receive rent may be assigned to a lender by way of a security where the landlord assigns a right to receive rent to the lender (fiduciary assignment). The landlord and the lender shall conclude an agreement assigning landlord s existing and future claims towards a tenant (claims that shall the landlord gain in respect of lease agreement). In the event of borrower s default the lender may be directly repaid from the assigned claim. Please note that in the event of the lender s insolvency the landlord may argue inadmissibility of execution against the lender s creditors. In the event of the bankruptcy or compulsory composition of the landlord the lender has a separation right if the fiduciary agreement is concluded in the form of notarial deed. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? In Slovenia security over the borrower s bank account is not possible. Generally, the borrower and the bank shall define in the loan contract that the bank has a right to repay any borrower s debts towards the bank. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? A mortgage established on the basis of a written contract or on the basis of the court decision must be entered in the Land Registry to become effective. Failure to register a statutory mortgage does not invalidate a mortgage, since it is established at the moment when all conditions prescribed by law are met. 3.2 Formalities for execution of security and costs? If the debtor fails to pay a claim within the deadline the creditor may demand in a suit that the pledged real estate is sold and if final judgment is issued, this is a executory title enabling an execution of security. However, if the mortgage was created on the basis of a directly executable notarial deed the creditor may directly propose execution before a competent court. SPZ provides an option of notarial sale, under which the creditor may demand that the notary establishes that the claim has matured and sell the pledged real estate and repay the creditor. A notarial sale of pledged real estate has been impossible insofar, because the relevant provisions governing notarial sale have not been adopted yet. Therefore the execution procedure before a competent court is necessary (see point 7(b)). Costs relating to mortgages include (a) the notary fees, (b) costs for entry in the land register, (c) court fee for the proposal of execution proceeding, (d) costs for the court appraiser. (a) The notary fee for directly executable notary deed is variable and depends on the amount lent to the mortgagor (e.g. for EUR 100,000 the notary fee amounts approximately EUR 450). A 20% VAT rate is also applied to the notary fee. (b) Court fee for the entry of the mortgage in the land register amounts EUR 50. (c) Court fee for the proposal of execution proceeding amounts EUR 45. (d) Costs for the court appraiser are variable and depend on the complexity of the matter. 4. Can the lender use a Security Trustee to hold security on trust for creditors? Slovenian law does not recognise the concept of trust. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? If the transfer is made by assignment of claims the security shall be transferred to the new lender together with the claim. According to Article 148, paragraph two SPZ transfer of a mortgage shall take effect only upon its entry in the Land Register. Therefore the documentation for the transfer has to include land register permission (registration clause) entitling the new lender to enter the security in the Land Register. 151

152 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Unless otherwise agreed in the lease contract the tenant does not have the right to lease the leased business premises to a new tenant without a prior approval of the landlord. In case of sublease the original tenant is still bound by the lease and he also guarantees to the landlord that the sublessee will use the business premises according to the lease. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Pursuant to Slovenian Private International Law and Procedure Act (Official Gazette of Republic of Slovenia, Nr. 56 / 1999) a foreign court or arbitration tribunal may be chosen to settle disputes involving Slovenian parties only, if one of the parties is a foreigner and Slovenian courts have not exclusive competence. Slovenian courts have exclusive competence on matters concerning inter alia: (a) immovable property located in Slovenia; (b) proceedings which have as their object the validity of entries in public registers; (c) proceedings concerned with the registration or validity of patents, trademarks, designs, or other similar rights required to be deposited or registered; (d) enforcement of a writ of execution on the territory of Slovenia. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgments without review? Arbitral awards or foreign judgments are recognised without any special procedure being required by Slovenian courts. The Slovenian courts will only consider whether foreign arbitral award or judgments may be enforced in Slovenia or not. However foreign judgment may not be recognised and enforced if: (a) recognition is manifestly contrary to public policy in Slovenia; (b) where it was given in default of appearance, the defendant was not served with the document which instituted the proceedings or with an equivalent document in sufficient time and in such a way as to enable him to arrange for his defence, unless the defendant failed to commence proceedings to challenge the judgment when it was possible for him to do so; (c) it is irreconcilable with a judgment given in a dispute between the same parties in Slovenia; (d) if it is irreconcilable with an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in the member state addressed. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? If the debtor fails to pay a claim within the deadline the creditor demands in a suit that the pledged real estate is sold. Final judgment issued on the basis of the filed suit shall be an executory title enabling an execution of security before a competent court. However, if the mortgage was created on the basis of a directly executable notarial deed the creditor may directly propose execution before a competent court. SPZ provides an option of notarial sale, under which the creditor may demand that the notary establishes that the claim has matured and sell the pledged immovable and repay the creditor. A notarial sale of pledged immovable has been impossible insofar, because relevant provisions governing notarial sale has not been adopted yet. Therefore execution procedure before a competent court is necessary (see answer under point 7(b)). The enforcement of a mortgage is coordinated by an enforcement officer appointed by the enforcement court. An immovable is sold by auction. Nevertheless, an immovable may also be sold by a direct contract. No private sale or appropriation is possible, as recourse to courts is always necessary in the case of mortgage enforcements. The outcome of the enforcement procedure is that the title to mortgaged property is directly transferred from the mortgagor to the purchaser and entered in the Land Register. 152 CMS Real Estate Finance

153 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? If the lender takes possession of the mortgaged property it will be bound to meet all obligations attaching to that property. Until such property is transferred to a lender the mortgagor would be in charge of those obligations. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? Pursuant to Slovenian law a mortgage agreement is not a writ of execution, unless concluded in the form of directly executable notarial deed. In the latter case, the mortgagee is entitled to directly propose execution before a competent court. In all other cases the mortgagee has to obtain final judgment before commencing an execution procedure. In case of borrower s default the ownership over the mortgaged property does not automatically transfer to the mortgagee. Such contractual provision agreed prior to maturity of the claim is null and void. Through sale of the mortgaged property the mortgagee does not automatically acquire ownership over it, but nevertheless he is allowed to purchase mortgaged property. No private sale or appropriation is possible, as recourse to courts is always necessary in the case of mortgage enforcements. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? We would specifically like to point out that: (a) enforcement of a mortgage in Slovenia is generally lengthy, since the court has to issue a set of decisions before a secured lender is able to realize its unpaid claim; and (b) pursuant to the Article 275 SPZ notarial sale of a pledged immovable shall be applied as from the enactment of a law setting out the rules governing a notarial sale of a pledged immovable. Please note that such law has not been enacted yet, therefore a notarial sale of a pledged real estate has been impossible insofar and execution procedure before a competent court is necessary. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: We shall highlight the specific issues that arise in the context of enforcing security interest taken over the shares in a limited liability company. 1. Can security be granted to a foreign lender? Security over shares in a Slovenian company can be granted to foreign lenders. 2. Can second ranking security be taken? If so, how is it registered? Second ranking security over shares in a Slovenian company can be taken. A second ranking security over shares is registered similar to the registration of a first ranking security over shares. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? A security interest over shares issued by a Slovenian limited liability company is registered with the Court Register and with the shareholders register of that company. Pursuant to established Slovenian court practice registration of such security interest in the Court Register has only declaratory effect. Therefore, failure to register such security interest with the Court Register renders it non-binding on third parties. 3.2 Formalities for execution of security and costs? Pursuant to ZIZ execution of security shall be effected by note of write of execution, sell of shares and repayment of the creditor. Costs relating to execution include (i) court fee for the proposal of execution procedure; EUR 45, (ii) costs of execution are determined according to the value of the shares; however maximum costs for the court enforcement officer are approximately EUR Do the shares need to be transferred into the name of the lender or its nominee? Creation of security interest requires no transfer of title to the lender or its nominee. Only registration in the Court Register is required. 153

154 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? If the debtor fails to pay a claim within the deadline the creditor demands in a suit that the pledged shares are sold. Final judgement issued on the basis of the filed suit shall be an executory title enabling an execution of security before a competent court. However, if an agreement is concluded in form of a directly executable notarial deed the creditor may directly propose execution before a competent court. SPZ provides an option of notarial sale, under which the creditor may demand that the notary establishes that the claim has matured and sell the pledged immovable and repay the creditor. A notarial sale of pledged immovable has been impossible insofar, because relevant provisions governing notarial sale has not been adopted yet. Therefore execution procedure before a competent court is necessary. The enforcement is coordinated by an enforcement officer appointed by the enforcement court. The outcome of the enforcement procedure is that the title to shares is directly transferred from the mortgagor to the purchaser and entered in the Court Register. Please note, through the sale of the pledged shares other shareholders have pre-emption right of shares ahead of third persons. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Shareholders who, during the period when the shareholders, acting as a good managers, should have provided their own capital to the company gave instead a loan to the company may not pursue a claim against the company for repayment of the loan in an insolvency proceeding. In this case a loan shall be considered to form a part of the assets of the company. Shareholders have a secondary ranking security. It is customary that such loans are waived or written off contractually as a part of an enforcement of a share pledge should a default occur. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? Commercial leases are usually made for a term of 5 10 years. 1.2 Maximum / minimum lease length if any? There are no legal limitations regarding the maximum / minimum term of a lease. Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Commercial leases regulated under the Act of Business Buildings and Premises (Zakon o poslovnih stavbah in poslovnih prostorih, Official Gazette of the SRS, No.18 / 1974, hereinafter ZPSPP ) are terminated by a competent court with a minimum notice period of one year. If the commercial lease was concluded for fixed term and the tenant continues to use the premises following the expiry of the lease and the landlord does not file an action for eviction of the business premises it shall be deemed that a new lease contract for an indefinite period is concluded. 1.3 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? The tenant has the right to withdraw from the lease contract at any time, if the landlord fails to perform its obligations under the lease contract and it is not stipulated otherwise. 1.4 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? Generally, under Slovenian law there are no provisions empowering a tenant to occupy leased premises following the expiry of the lease. However, pursuant to Article 615 in connection with Article 616 of the Code of Obligation (Obligacijski zakonik, Official Gazette of the Republic of Slovenia No. 83 / 2001et al., hereinafter referred as OZ ) where 154 CMS Real Estate Finance

155 a tenant continues to use the premises following the expiry of the lease and the landlord does not oppose this, a new lease contract for an indefinite period shall be deemed to be concluded with the same terms and conditions as the previous contract. In such circumstances both parties may terminate the lease through notice of termination, observing the stipulated period of notice of termination. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? Rent is usually paid in advance by the fifth day in the current month for the upcoming month, unless agreed otherwise. 2.2 Periodicity of reviews? Rent is generally reviewed annually. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Generally, the rent is yearly adjusted to the Slovenian consumer price index. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? There is no statutory control mechanism applicable to rent reviews. In case of commercial leases concluded with the same tenant for the first time before 31 December 1993 an annual rent shall not amount to more than 6.68% of the total value of the leased business premises. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? In practice, the landlord is responsible for the maintenance, decoration and repair of the common areas of the leased premises while the tenant is liable for operational costs. 3.2 External maintenance, decoration and repair? The landlord is responsible for the external maintenance, decoration and repair. 3.3 Structural repairs? The landlord is bound by law to ensure the use by the tenant of the leased premises. As such, the landlord is responsible for the structural repair of the leased premises. 3.4 Insurance? The tenant is obliged to cover costs of insurance. 3.5 VAT? The leasing of immovable property is exempted from VAT. However, a lessor may agree with the lessee (i.e. a taxable person having the right to full deduction of VAT) to charge VAT for the leasing of immovable property, which should be exempted from VAT, at the required rate 20%. 3.6 Rates? Rates are subject to an agreement between parties and vary depending on the type and location of each leased property. 3.7 Other typical outgoings? Generally, lease agreements provide two types of expenses: (a) fixed (real estate taxes, insurance, security, elevator services, building repair etc.) (b) operational (building water, trash removal, pest control, janitorial service, supplies, electricity etc.) 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? All expenses listed are recoupable by the landlord. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Yes. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? Generally, appraisal reports are prepared by experts registered in the court appraisals directory kept by Ministry of Justice. However, the valuation may also be entrusted to a special institution (i.e. Slovenian or foreign institution). 155

156 A litigating party can also submit an appraisal report of a foreign expert, however the probative value of such evidence is judged freely. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? A local government agency does not keep a public register or database on environmental land status. However, there are various professional services providers specialising in environmental compliance (i.e. a land surveyor) that can provide reports on specific matter or geographical area upon request. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? The person who committed the breach of environmental law is held liable. Thus, a lender holding or enforcing a mortgage cannot be practically held liable for past or present breaches of environmental laws relating to the mortgaged property. 156 CMS Real Estate Finance

157 Spain 157

158 A. Mortgages 1. Can security be granted to a foreign lender? Yes. Generally, there are no restrictions on the ownership of land by foreign parties or in relation to the taking or enforcement of securities by a foreign bank. 2. Can lenders take a mortgage over land and buildings on the land? Yes. Mortgages can be granted over immovable assets and this security is accessory to the primary obligation. 2.1 The distinction between mortgages on land and buildings on the land? There is a distinction between an interest in land and an interest in the buildings over the land, however generally, the owner of the land becomes the owner of the buildings on the land under the principle of superficies solo cedit. In this sense, buildings on land which is mortgaged are also considered to be mortgaged. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? No. Mortgage certificates do not exist under Spanish law. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes. The same property may be burdened by several mortgages. A registered mortgage has priority, as of the date of registration, over any later real estate charges or subsequent registered mortgages, following the Spanish law principle prior tempore, potior iure. A second ranking mortgage should be registered in the same way as a first mortgage. There are no special registration requirements for second ranking mortgages. A priority deed is also registered. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? Yes. However, it would be transferred subject to the mortgage (as long as the mortgage is registered in the relevant Land Registry). 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? Yes. The Tax Authorities may be a preferred creditor in relation to certain taxes relating to the land / building during a 4 year period. This means that taxes payable due to the mortgage granted (1% over the secured amount as a general rule) or other taxes related to the land, in case of enforcement of the mortgage, would be paid prior to the secured obligation. 2.6 Can all monies mortgages be taken? No. The total amount of the secured liabilities must be specified in the mortgage at the time it is granted. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. The right to receive rent can be pledged. The right to receive rent may also be assigned but an assignment would not be considered as a security. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? It is possible to take a pledge over the accounts, but that is a different security than the mortgage, as the granting of a mortgage does not entail any restriction to withdrawing funds from the accounts of the mortgagor. Therefore, a lender can also restrict the borrower s rights to withdraw funds by means of granting a pledge over the relevant account, but this restriction needs to be agreed in the relevant security document. 3. What are the mechanisms for registering land and for registering and perfecting security? In general, all Spanish securities must be granted in a public deed before a Spanish Notary. A mortgage must be registered at the Property Registry (to perfect it) by filing the corresponding notarised agreement. Generally there is no need to serve notice of the mortgage on anyone. 3.1 Consequences of failure to register? Registration is required for the security to be effective and enforceable vis-à-vis third parties. 158 CMS Real Estate Finance

159 3.2 Formalities for execution of security and costs? As explained above, security has to be granted by means of a public deed before a Public Notary. Due to this requirement and money laundering concerns, foreign entities need to have a Spanish Tax Id. Without this a notary will not notarise the deed. Notarial and registry fees are payable and vary depending on the secured amount. Additionally, transfer tax would be payable (1% over the secured amount as a general rule), although some exemptions depending on the type of entity granting the mortgage could apply. 4. Can the lender use a Security Trustee to hold security on trust for creditors? There is no concept in Spanish law similar to a trust, although the following structure may be used to achieve a similar effect security documents may be entered into directly by each of the lenders or by a security agent duly empowered by the lenders. Such security agent would accept the granting of security interests in favour and on behalf of the lenders. Always acting in their names and on their behalf. In addition, such an agent can also be empowered to carry out any actions in connection with the loan, its enforcement and the enforcement of the security, exercising the corresponding rights of the lenders but always acting as their representative. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? Upon the occurrence of a change in the lenders, the security agreements are considered to be automatically assigned to the new lender, but it needs to be recorded at the Property Registry by means of filing the relevant assignment agreement duly notarized. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? There are two ways to transfer a lease agreement to a new tenant, either by way of a sub-lease or an assignment of the lease agreement to the new tenant. In both cases, if the property is used as housing, the landlord s consent in writing is required and in the event of sub-leasing it is only possible to do so over part of the property (it is not possible to totally sub-lease the premises). If the property is used as business premises, the original tenant does not need the landlord s consent to sublease or assign the lease, unless this has been expressly agreed in the lease (although the landlord needs to be informed about the sublease or assignment within a month term as from the execution of the relevant agreement). The landlord however has the right to increase the rent. In the event of a sublease, the original tenant is still bound by the original lease agreement. However, if the lease agreement is assigned to a new tenant, the lease no longer binds the original tenant. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Generally, a foreign jurisdiction may be chosen to settle disputes but in relation to real estate issues, regarding rights in rem over Spanish real estate or assets must be dealt with by reference to the rules of the Spanish courts. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Usually yes, although this may depend on any specific treaties applicable in each case. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? There are two ways to enforce security interests over a property: (a) Judicial enforcement of security interests Only deeds and notarised documents are directly enforceable. The enforcement of private contracts is only feasible following judicial proceedings, where the existence and content of the agreement must be evidenced prior to enforcement. The enforcement of mortgages over properties requires a summons to the debtor in respect of payments owed. The summons can be made either judicially, simultaneously to the enforcement order, or out of court. (b) Out of court proceedings Out of court proceedings to enforce security interests are possible for mortgages over properties. 159

160 Such out of court proceedings are feasible only if: (i) the mortgage covers a given amount corresponding to principal, interest accrued in accordance with the provisions of the deed and expenses for the enforcement; and (ii) the deed expressly forsees the extra-judicial sale of the mortgaged asset in an independent provision along with the price of the real estate properties for public auction enforcement purposes and some other formal provisions. Out of court proceedings are supervised by a public notary in the place where the mortgaged real estate is located. Once proceedings are initiated, payment to the debtor will be required. If payment is not made, the public notary will organise a public auction. On enforcement, it is not possible to appoint a receiver or a liquidator. Subject to judicial discretion, the Judicial Administrator, who is appointed by the court, will replace the management of the debtor in the case of necessary insolvencies and will have supervisory powers over the debtor s management in the case of voluntary insolvencies. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. The borrower remains responsible. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? In principle under Spanish law, lenders cannot acquire the secured property. A lender may reach an agreement with the borrower to acquire the title to the real estate in satisfaction of the debt (dación en pago), however, this agreement may be declared invalid and ineffective by courts. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? As explained above a foreign lender will require Spanish Tax Id. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes, except if the company is located in Catalonia, where Catalonian law applies and no second ranking pledges are permitted. There is no public register of pledges over shares. A pledge will only be registered in the shareholding register of each company and in the case of quoted company, in the accounts of the depositary. 3. What are the mechanisms for registering and perfecting security? Security has to be granted by means of a public document before a public notary and a note of the grant of the pledge must be recorded in the relevant title. 3.1 Consequences of failure to register? If it is agreed that certain rights (i.e. voting rights) are attached to the pledge, failure to register could result in the company whose shares are pledged not recognising the rights of the pledgee. 3.2 Formalities for execution of security and costs? Security has to be granted by means of a public document before a Public Notary. Due to these requirements and money laundering concerns, foreign entities require a Spanish Tax Id. The notary could refuse to notarise the deed otherwise. Notarial fees are payable and vary depending on the secured amount. 4. Do the shares need to be transferred into the name of the lender or its nominee? No. A note of the charge needs to be included in the relevant title. 160 CMS Real Estate Finance

161 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? Yes. The shares can be sold to a third party by means of a public auction. Creditors may request a declaration of bankruptcy of a company in certain cases (and therefore, the appointment of receivers). Security can be enforced without recourse to the courts and private sales are possible if it is for security in a quoted company and it is expressly foreseen as enforcement method in the relevant security document. If the pledged asset is not qualified as a security (i.e. shares in quoted companies) it has to be sold by auction. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Loans from shareholders are only subordinated if it is expressly agreed in the relevant loan. However, in the framework of bankruptcy proceedings loans from related parties would be subordinated to the repayment of the remaining debts. Subordination needs to be expressly agreed in the relevant agreement. Subordinated loans are not waived or written off contractually unless the relevant debt may be settled against another one held by the borrower against the lender. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? The lease length is determined by the parties. 1.2 Maximum / minimum lease length if any? None in the case of non-residential leases. In the case of residential leases, Spanish Law provides a minimum length of five years. If the parties agree to a length of less than five years, once the lease reaches its expiration date, it shall automatically extend for successive one-year periods up to a total duration of five years. If after the period of five years, neither of the parties notifies the other (at least one month in advance of the five year expiration date) of its desire not to renew the agreement, the lease shall automatically extend for successive one year periods up to a total duration of three additional years. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? As previously stated, in residential leases, the tenant is entitled to avoid the automatic renewal of five years if he notifies the landlord of his desire not to renew the agreement at least 30 days in advance of the expiration date or any other renewal date. Otherwise, within the automatic renewal term of three years, the tenant can notify the landlord of his desire not to renew the agreement at least one month in advance of the expiration date of any of the one year terms. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? In the case of a non-residential lease, the parties to the agreement may freely regulate the terms of the agreement. If the parties agree to a fixed term and the tenant does not comply with this term, this will be considered a breach of the agreement and the regulations set out in the agreement for noncompliance should be followed. 161

162 Usually, the tenant will have to compensate the landlord in an amount equal to the rents which the latter will cease to receive because of the breach, except where the landlord re-lets the property to a third party, in which case the amounts which will be received from the new tenant should be deducted from the amount to be paid by the previous tenant. In the case of a residential lease, if the parties have signed a lease agreement with a term of more than five years, once the first five years have passed, the tenant is entitled to terminate the lease agreement if he notifies the landlord a minimum of two months in advance. In the case of both non-residential and residential leases, if the landlord does not comply with his obligations as stated in the lease agreement, the tenant is entitled to demand that either the landlord fulfils the obligations as stated in the lease agreement or the lease be terminated. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? In respect of residential leases, if the landlord decides to carry out repairs in order to improve the premises, he must notify the tenant of his desire to carry out said repairs three months in advance. Then, within a period of one month from said notification, the tenant is entitled to terminate the lease agreement except where the tenant is able to have use of the premises throughout the duration of the repairs. In this case, he may demand that the agreed rent is reduced until the repairs are completed and he may demand a sum of damages in respect of any loss incurred as a result of the repairs. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrears? Both the rent and the manner of payment are determined by the parties. In residential leases, where the parties do not determine this, the payment of rent shall be monthly and must be made within the first week of each month. 2.2 Periodicity of reviews? In non-residential leases, this is freely determined by the parties. In residential leases, within the first five years of the lease agreement, the parties may annually revise the rent in order to align it with variations (reductions or increases) in the Retail Price Index (IPC) which is published by the National Statistics Institutes during the twelve calendar months immediately prior to the date of each revision. Beginning in the sixth year, the rent may be revised freely by the parties. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? In non-residential leases, the Retail Price Index (IPC), published by the National Statistics Institute, is the formal basis of review. It is also usual to agree extraordinary reviews (usually 5 / 7 years each) to align the price to variations in the lease market. In residential leases (and in non-residential leases, except where otherwise agreed) after the first five years if the landlord has carried out any works in order to improve the premises, he may increase the rent in proportion to the money invested in said works. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? Rents are not subject to statutory control. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? In non-residential leases, the parties are free to agree whatever they deem convenient. In residential leases, the following rules will apply (which will also be applied in non-residential leases where nothing has been otherwise agreed by the parties (as is the case in 3.2 and 3.3 below). The landlord is obliged to keep the leased premises in a condition suitable for its use and maintain it in said condition throughout the period of the lease. The tenant shall be responsible for minor repairs that are required as a result of wear and tear from the ordinary use of the premises. Where the landlord decides to carry out repairs in order to improve the premises, he must notify the tenant of his desire to carry out said repairs three months in advance. Then, within a term of one month from said notification, the tenant is entitled to terminate the lease agreement except where the tenant is able to use the premises throughout the duration of said repairs. In this case, he may demand that the agreed rent is reduced until the repairs are complete and he may demand damages for any loss incurred as a result of the repairs. 162 CMS Real Estate Finance

163 3.2 External maintenance, decoration and repair? The landlord is responsible for it. 3.3 Structural repairs? All costs of repairs which are not small outlays connected with the ordinary use of the leased premises must be borne by the landlord. 3.4 Insurance? Insurance is not obligatory. If the landlord decides to purchase insurance, the insurance costs are not usually transferred to the tenant explicitly, but they shall be taken into consideration by the landlord when calculating the rent amount. 3.5 VAT? Leases for residential use are VAT exempt. Leases for non-residential use are charged at 18% VAT. 3.6 Rates? Please be referred to 2.2. above 3.7 Other typical outgoings? The parties agree who is responsible for the payment of other typical outgoings. The common practice in Spain is that it is the tenant who pays the utilities (water, power, lighting in common areas, etc). 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Yes. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors) qualified appraisal report accepted and recognised in each jurisdiction? The appraisal is normally prepared by a qualified appraiser. Where an appraisal has to be prepared, it should be entrusted to an expert on the subject (e.g. an architect, a builder, etc), who will have to declare that, when making the appraisal, he is acting as an independent expert. Such expert can be selected by the party or the Judge may make the appointment. In the latter instance, the Judge will select someone from the corresponding professional bar. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? It is not customary. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? A lender that has the benefit of a mortgage shall not be considered responsible for breach of environmental laws. The common practice in Spain is that it is the tenant who pays expenses related to the common property of the building where the leased property is located (e.g. maintenance of common facilities of the building). However, the expenses relating to the management of the lease shall be paid by the landlord, and are not usually transferred to the tenant explicitly, but implicitly included in the rent. 163

164 Switzerland 164 CMS Real Estate Finance

165 A. Mortgages 1. Can security be granted to a foreign lender? Yes. Security over interests in real estate can be granted to foreign lenders. Generally a foreign lender in favour of whom a security interest is granted does not require any authorisation under the laws on the acquisition of real estate by foreign persons (Lex Koller). However, a foreign lender may in particular require an authorisation regarding the security interest, if it participates in an excessively highly leveraged financing of restricted real estate (i.e. granting a loan in excess of the usual maximum limit applied by Swiss banks). In the case of any doubt as to whether any authorisation is required under the excessive leverage test a ruling of the competent authority confirming that there is none should be obtained. 2. Can lenders take a mortgage over land and buildings on the land? 2.1 Is there a distinction between mortgages on land and buildings on the land? A lender can take a security interest over real estate. Such security interest can be granted in the form of a mortgage certificate (Schuldbrief) or an actual mortgage (Grundpfandverschreibung; whether as regular actual mortgage or as actual mortgage with issued bearer deed). Mortgage certificates are most commonly used in the real estate finance context. As of 1 January 2012, mortgage certificates no longer have to be physically issued in paper form, it is now also possible to have a mortgage solely registered in the Real Estate Register (Registerschuldbrief). Subject to the exception referred to at 1 above, the taking of a security interest is not subject to an authorisation requirement under Lex Koller. Pursuant to the principle of accession (Akzessionsprinzip) the buildings on land share the legal fate of the land itself. Therefore, any security interest over the land normally also encumbers the buildings erected on it. Only if the buildings are subject to an independent and permanent building right registered with the Real Estate Register can land and buildings legally be separated from each other. This being the case the two distinct property interests in the land and the buildings can also be separately encumbered with differing security interests. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? The creation of a mortgage certificate establishes a personal claim against the debtor in the amount of the mortgage certificate value, which is secured by a property lien. The mortgage certificate is thus issued for a certain value. Further, the mortgage certificate constitutes a negotiable security, which can be pledged or transferred for security purposes. As to the costs, see Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Yes, a second ranking security may be taken. The rank of the security may be agreed between the parties when the security is granted. However, the parties cannot agree on a ranking which would affect the security of a third party whose rights are already entered in the register, unless the third party gives its consent. To be effective, any agreed new ranking must be entered in the Real Estate Register. If there is no such agreement as to the ranking between the parties, the order of priority is determined pursuant to the date of registration with the Real Estate Register. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? If real estate which is subject to a mortgage is transferred to a third party, the security interest and the obligation of the borrower generally do not change unless otherwise agreed. If the new owner has assumed the debt, however, the previous borrower is discharged unless the lender, within one year, declares to him in writing that he intends to retain his rights against him as borrower. 2.5 Are there any preferred creditors (other than prior ranking mortgage holders)? There are statutory security interests which do not require registration with the Real Estate Register for perfection (in particular regarding real estate related taxes). These are (i) invisible and (ii) take priority even over first ranked mortgage certificates of the lenders. Unlike these statutory security interests, other preferred interests are only perfected upon registration (in particular the craftsmen s and contractor s lien). 2.6 Can all monies mortgages be taken? No. All monies mortgages cannot be taken in Switzerland. Under Swiss law, a real estate security interest may only be established for a specific amount in Swiss currency. 165

166 If this amount cannot be determined in advance, the parties still have to fix a maximum amount up to which the real estate shall be liable for all claims of the lender. An all monies mortgage would violate the personal rights of the borrower. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. Under the title of assignment of security (Sicherungsabtretung), a landlord may assign future rent to a lender by way of security. An assignment of security is created by a collateral agreement (Sicherungsabrede) and a written contract to assign the security. There is no requirement to notify the tenants but this is recommended. 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. It is possible for a lender to take security over a bank account of the borrower. However, the Swiss banks business terms usually provide that the bank has a first ranking security interest over its client s account. Therefore, a third party is usually only granted a second ranking security interest over a Swiss bank account. The bank must be given notice to create and perfect the second ranking security interest. The right to withdraw funds is not usually restricted as long as no event of default has occurred. 3. What are the mechanisms for registering land and for registering and perfecting security? 3.1 Consequences of failure to register? Failure to register the interest will neither transfer an ownership interest nor perfect a security interest. The registration is thus legally essential to transfer an ownership interest or to perfect a security interest. 3.2 Formalities for execution of security and costs? Transfer / creation of an ownership / security interest requires: (a) a valid agreement regarding the sale and transfer of ownership in the real estate respectively regarding the mortgage to encumber it. Such agreement has to be in the form of a public deed issued by the competent notary public; and (b) registration of the interest with the Real Estate Register. The ownership interest will transfer and the security interest perfect upon registration of the respective transaction in the Real Estate Register. The registration of such interests with the Real Estate Register requires a prior written declaration by the owner of the real estate requesting the Real Estate Register Officer to register the transfer and / or encumbrance (Grundbuchanmeldung). The issuance of the deed (mortgage certificates) by the Real Estate Register is, however, not a perfection requirement. Such issuance can, in practice (in some parts of the country), take quite a long time (up to a year). As of 1 January 2012, the parties can waive the issue of a physical mortgage certificate, i.e, they can establish a so called registered mortgage (Registerschuldbrief). Apart from the lack of a paper certificate, the registered mortgage has largely the same effects as a traditional mortgage certificate. The entries in the Real Estate Register are legally presumed to be true and correct. Therefore, the reliance by a party acting in good faith on an incorrect entry is fully protected by law. The costs for registering and perfecting security interests are regulated by cantonal law and vary across the 26 Swiss Cantons. In the Canton of Zurich the following costs arise: (a) notary fees are set at 0.1% of the amounts secured; and (b) registry fees are set at 0.15% of the amounts secured. Each time at least a minimum amount of CHF is due. 4. Can the lender use a Security Trustee to hold security on trust for creditors? Under Swiss law there are no trusts. Thus the purpose of this structure has (so far as possible) to be achieved by similar means available under Swiss law. Customarily this is done by having the Security Trustee act as direct representative of the finance parties. Under certain circumstances such structure may, however, lead to difficulties in case of syndication. 4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed? If a lender assigns any of its rights under a (syndicated) loan agreement to a third party (new lender), accessory security rights such as mortgages will automatically extend to such new lender. Accordingly, no new security has to be signed. 166 CMS Real Estate Finance

167 In all other cases, in particular (i) if the lenders structure changes based on novation, or (ii) if nonaccessory securities such as mortgage certificates transferred by way of security are involved, securities do not automatically i.e. ex lege extend to a new lender. In these cases, in order to prevent the new lender from having to sign new security documents (disadvantages being further costs, and, in the case of real estate securities, the risk of not obtaining equal ranking), the finance documents (in particular the syndicated loan agreement, the syndicate agreement and the respective security agreements) will have to include provisions that ensure that the securities will extend to a new lender. Please note that in case a mortgage is created in the form of a registered mortgage (Registerschuldbrief), the new creditor has to be registered with the Real Estate Register. 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Yes, in principle, the landlord has control over changes in tenants but this is subject to the rules governing subleasing and assigning, and: (a) although a tenant is required to obtain the landlord s consent to an intended sub-lease, such consent may not be withheld except under certain restrictive conditions. Upon completion of a sub-lease the original tenant will still be bound by the original lease agreement; (b) although the tenant may assign a lease over business premises in whole with the landlord s consent, such consent may only be withheld for valid reasons. Upon completion of the transfer the original tenant is no longer bound by the original lease agreement. However, he will be jointly and severally liable with the third party until the lease ends or is terminated (either by law or agreement), in any event no longer than for a maximum period of two years. 6. How can the lender enforce its security? 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? In general, in an international context, the parties to an agreement may agree upon a foreign jurisdiction to settle their disputes. In practice, however, it is usual to choose a local court. Whether the choice of court is recognised by the foreign jurisdiction is up to international private law of the jurisdiction which was chosen by the parties. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Switzerland is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 ( New York Convention ). Accordingly, recognition and enforcement of arbitral awards is subject to a certain degree of review. Enforcement of a foreign judgment in a Swiss court depends on the country in which the judgment was handed down. These countries can be split into two categories: (a) countries which are signatories to the EC EFTA Convention on Jurisdiction and the Enforcement of Judgements in Civil and Commercial Matters of 16 September 1988 ( Lugano Convention ): if the judgment has been given in a country which is a signatory to the Lugano Convention, the enforcement of the judgment is governed by the principles set in that convention. This also means that the merits of the judgment are not reassessed in the course of the enforcement. (b) Countries with which Switzerland has no conventions or treaties: if the judgment was handed down by a country with which Switzerland has no treaty or convention, the recognition and enforcement of the foreign judgment is governed by the provisions of the Swiss Private International Law Act of 18 December Court decisions from these countries are thus subject to a limited review. 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? As a general rule, official debt enforcement proceedings must be initiated, in the course of which the debt enforcement officer will ultimately auction off the real estate and distribute the net proceeds to the creditors secured by it. Within such official enforcement proceedings, the debt enforcement officer may also carry out a private sale (Freihandverkauf) provided that (i) all parties concerned so agree and (ii) at least the amount of the valuation is offered. The proceeds of realization of the security are applied to satisfy the secured lenders claims; only if such realization results in an amount exceeding the secured lenders claim, may such amount be returned to the security grantor or applied in favour of other enforcing creditors, respectively. 167

168 Upon the opening of bankruptcy proceedings, generally, all debt enforcement proceedings are stopped, and the bankruptcy trustee will realise the security interest and distribute the proceeds substantially in the same manner as the debt enforcement officer in an out of bankruptcy enforcement. If provided for in the security agreement, a lender can enforce its security interest by private sale, i.e. outside of the official enforcement proceedings, or even acquire the security interest for its own account. Upon opening of bankruptcy proceedings such private enforcement option can no longer be exercised. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No, during a debt enforcement proceeding, the lender is not responsible for maintenance and insurance of the real estate. The debt enforcement officer will take care of the necessary tasks. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? No, under Swiss law, it is not possible for a lender to obtain good title to the real estate in satisfaction of all / part of its debt, except if it obtains the real estate at the public auction or in the context of a private sale (Freihandverkauf). However, such private sale is subject to several requirements. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? Inter alia, the following other issues are of interest for a foreign lender: 7.1 Lex Koller As mentioned above, Lex Koller can, under limited circumstances, restrict the taking of security over Swiss real estate by foreign lenders. However, this law only applies to residential real estate and not to real estate used or reserved exclusively for commercial purposes. If real estate is used for residential purposes, a case-by-case analysis is required. The lender can generally either: (a) seek a decree confirming that a transaction is exempted from the application of the Act (Nichtunterstellungsverfügung); or (b) structure the transaction to ensure compliance with the Act without obtaining such a decree. 7.2 Certain tax issues Interest payable to foreign creditors on loans secured by Swiss real estate is subject to federal and cantonal withholding taxes in the aggregate amount of approx. 13% to 33%, depending on the Swiss Canton where the property is located. There are various countries, including the U.K., which have concluded double taxation treaties with Switzerland under which such withholding tax has been reduced or entirely eliminated. To avoid (or at least minimise) the withholding tax for real estate secured loans, it is crucial to ensure that the lenders are domiciled in countries that have concluded the appropriate double taxation treaties with Switzerland. Loans to Swiss entities, whether or not secured by Swiss real estate, may be subject to the federal withholding tax of 35%. This can be avoided under certain criteria to be regulated in the loan agreement. Under the federal withholding tax law, it is questionable whether gross-up clauses are valid. This risk can be reduced by using specific Swiss tax wording. B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes, in respect of security over shares, there are generally no limitations on granting such security to a foreign lender, save where pursuant to the articles of association of the company, the company must have a majority of Swiss shareholders. Further, a foreign lender may require authorisation under Lex Koller (see 7.1 above). 2. Can second ranking security be taken? If so, how is it registered? As a rule, the ranking of a security over shares is determined by the chronological order in which the security was granted. Consequently security granted earlier in time generally ranks higher than security granted over the same asset later. The parties, however, are free to agree upon a different ranking. 168 CMS Real Estate Finance

169 Nevertheless, a higher-ranking security of a third party can only be lowered in its ranking if the holder of that higher-ranking security agrees to the new ranking. It is possible to rank several securities over the same asset equally. In such case, the amount realised in the enforcement of the security is applied proportionally to these secured claims. A registration of security over shares is not required. There is no respective register. With respect to nominal shares, the pledge may be registered in the share register. This, however, is not a requirement for the pledge to become effective. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? There are no special registration requirements for security over shares. However, please see 3.2 in relation to formalities. 3.2 Formalities for execution of security and costs? In order to take security over certificated shares, the security provider and the security holder must conclude a valid agreement and the secured party must obtain physical possession of the relevant shares. Indeed, the security holder does not have a security interest over the collateral as long as the security provider retains possession and control over it. Further, with regard to nominal shares, it is advisable that the owner endorses the shares in blank in order to facilitate the enforcement. Under the new Federal Intermediated Securities Act of October 3, 2008 (FISA), a securities interest in uncertificated shares held through an intermediary may be created in two ways: either by a transfer of the intermediated securities to the account of the secured party (security interest by transfer) or by an irrevocable agreement between the provider of security and the intermediary holding the shares that the intermediary will follow the directions of the secured party (security interest by control agreement). (a) For the creation of a security interest by transfer, it is required that the security provider instructs the intermediary to transfer the intermediated securities to the secured party s account and that the intermediated securities are credited to the securities of the secured party. (b) The creation of security interest by control agreement requires an irrevocable agreement between the security provider and the intermediary holding the intermediated securities stating that the intermediary will follow the secured party s instructions without the need for any prior approval by, or consent of, the security provider. The costs of creating a security interest in shares are not regulated and thus depend on the parties involved. 4. Do the shares need to be transferred into the name of the lender or its nominee? See 3.2 above. 5. How can the lender enforce its security? 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? In case of a security over certificated shares, there are two main forms of enforcement: (a) Private enforcement is only permitted where the parties have agreed to it in advance in the security agreement. In relation to shares, the value of which can be objectively determined (e.g. listed securities), the pledgee itself generally purchases the pledged assets, and applies the proceeds to satisfy its claims (Selbsteintritt). If security is privately enforced, the pledgee must protect the interests of the pledgor and must obtain the best price possible in the sale of the pledged assets, fully document the enforcement and provide documentation to the pledgor and return any surplus remaining after the application of the proceeds to the secured debt to the pledgor. (b) Enforcement pursuant to the rules of the Act on Debt Enforcement and Bankruptcy. If there is bankruptcy and the parties have not agreed to private enforcement, the usual form of enforcement pursuant to this Act is the sale of the pledged assets in a public auction. Shares may, however, also be sold without public auction (freihändige Verwertung) by the debt enforcement officials, if the shares have a market price (e.g. if they are traded on a stock exchange). The enforcement of security over uncertificated shares held through an intermediary is governed by FISA. Pursuant to article 31 FISA, the secured party may privately enforce its security under the terms of the security agreement by (i) selling the shares and settle the claim with the proceeds or (ii) obtaining the shares and settle the claim with their value. The right and 169

170 modalities of the private enforcement is subject to the security agreement and different variations may be agreed upon. Both as regards certificated and uncertificated shares, however, a foreign lender who intends to acquire the pledged shares always needs to ensure that such acquisition does not need an authorization under Lex Koller (see 7.1. above). If the shares are transferred by way of security, enforcement in a strict sense is not required, as the ownership has already been transferred to the secured party. In this context, enforcement means that the obligation to return the transferred assets under the security agreement expires. Again, the secured party is obliged to fairly value the transferred assets, document the valuation, apply the proceeds to the secured claims and return any surplus remaining after the application of the proceeds of the secured debt to the party that granted the security. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? A shareholder loan is usually not subordinated. However, the lenders in general (and not only the shareholder) may subordinate their claims to those of all other company obligees to the extent of insufficient coverage of the claims of the company s obligees and may also waive or write off such loans as part of an enforcement of a share pledge should a default occur. Thus, subordination does not occur by law but may be agreed upon. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? Generally, the parties are free to determine the lease length according to their economic needs. Typically, commercial leases are entered into for a five-year term (such term being the prerequisite for an indexed rent). Further, commercial lease agreements often provide for options in favour of the tenant for another term of five years. 1.2 Maximum / minimum lease length if any? Leases may be entered into for a definite or an indefinite period of time. In respect of leases entered into for a definite period, i.e. leases not granting ordinary termination rights and ending after the lapse of the stipulated term, there are no express statutory provisions prescribing a minimum or maximum lease length. However, the maximum lease length is limited under general principles of Swiss law. In absence of clear precedents expressly addressing the maximum length it is fair to say that terms of 20 or even 30 years are still admissible (a 20-year term can also be combined with two options for additional five-year terms). Such terms also correspond with the longest terms market participants agree upon. Contract provisions linking the term of the lease to the existence of a business or company (e.g. lease terminable only upon winding up of a certain company etc.) are, according to court rulings, after the lapse of the admissible period of time (around 30 years), subject to ordinary termination. Leases entered into for an indefinite period, i.e. leases not stipulating any term, are, as a rule, terminable with a 6 months notice to certain dates (31.3. or or of each calendar year) or, alternatively, to the end of a 3 month lease duration. Leases expressly excluding termination rights of any party (so called eternal leases ) are inadmissible. However Swiss courts will, generally, not hold such leases as null and void, but only reduce the eternal term to an admissible lease length. 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Fixed term leases end after the lapse of the respective term. If the parties continue the lease after the lapse of such term, the lease is transformed into a lease for an indefinite period. Leases entered into for an indefinite term, i.e. lease agreements not providing for a term, may be terminated on 6 months notice to expire on certain dates (31.3. or or of each calendar year) or, alternatively, to the end of a 3 month lease duration. Commercial leases entered into for an indefinite term or a fixed term may, generally, be extended by the competent court for a maximum period of 6 years. To obtain an extension by the court a tenant would be required to prove that the termination of the lease 170 CMS Real Estate Finance

171 would result in hardship for the tenant which is not justifiable by the interests of the landlord. In weighing the interests, the competent authority takes into account the following criteria: (a) the circumstances of entering into the lease agreement and its terms; (b) the duration of the lease relationship; (c) the economic condition of the parties and their behaviour; (d) a need for personal use by the landlord and the urgency of such need; (e) the local market conditions for business premises. The tenant may only twice apply to the court for an extension. The two extensions may in the aggregate not exceed 6 years. In practice, courts seldom grant extensions reaching the maximum period, because often, reasonable replacement premises for the tenant are available within a shorter timeframe. Further, a termination by the landlord may be subject to challenge by the tenant, if it is given in violation of principles of good faith. This is in particular deemed to be the case, if the termination is given: (a) because the tenant has in good faith asserted contractual claims; (b) to impose unilateral changes detrimental to the tenant or to adjust the rent; (c) during a conciliation or court proceeding in relation to the lease relationship (save where the tenant abusively initiated such proceedings); (d) prior to the expiration of three-year barringperiod after a conciliation or court proceeding regarding the lease relationship in which the landlord: lost to a substantial degree; has withdrawn or substantially reduced his claim or action; has waived his right to appeal to the judge; has concluded a settlement or otherwise reached an agreement with the tenant. A successful challenge makes the termination invalid. Further, it triggers the barring period, which factually precludes the landlord from giving termination for the next three years. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? A tenant may terminate fixed term leases with immediate effect, only if: (a) the landlord does not either transfer the premises at the agreed time or transfers it in time but with defects excluding or significantly impairing its suitability for the predetermined use and, in addition, he fails to transfer the premises or cure the defects within a reasonable period of time (generally 5 to 15 business days); (b) after the transfer of the premises, the landlord is aware of a defect preventing or significantly impairing the predetermined use of the premises and does nevertheless not remedy such defect within a reasonable period of time. Defects which affect the use of the premises less significantly lead only to damages claims and other remedies (reduction of rent, deposit of rent, remedy of defects by third party). Further, a tenant may terminate a fixed term lease by extraordinary termination, if he can avail himself of valid reasons rendering the further performance of the lease intolerable. Courts construe such reasons very narrowly. Generally, only circumstances not foreseeable at the time of entering into the lease agreement may be taken into account. In case the tenant can avail himself of valid reasons he may terminate the lease at any point in time respecting the statutory notice of 6 months. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? No. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? The parties may freely agree on the dates of payment of the rent and the relevant costs connected with the use of the premises (e.g. monthly / quarterly in-advance or in-arrears). The statutory default provision stipulates that, if no other time is in accordance with local custom, the payment date shall be at the end of each month (i.e. payment monthly in arrears), in any event at the latest at the end of the lease period. Typically, commercial lease agreements provide for monthly or quarterly rental payments in advance. 171

172 2.2 Periodicity of reviews? Commercial leases are usually entered into for a fixed term of five years. Such term allows for an indexation of the rent linked to the Federal Index of Consumer Prices. And indexed rent entitles the landlord to rent increases in accordance with such index. Moreover, the parties can provide for staggered rents, which enable the landlord to increase the rent yearly by the amount the parties have agreed upon. Further, parties may agree to a variable rent tied to the turnover of the tenant s business. Indexed, staggered and turnover rents may not be combined. In addition to these special increase mechanisms a landlord may also increase the rent on a restricted number of general grounds, in particular in case of renovation and additional benefits granted to the tenant. If the lease agreement does not provide for one of these mechanisms the landlord may increase the rent pursuant to the general grounds justifying a rent increase, in particular in case of an increase of the interest rate for mortgage loans or an increase of inflation. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? The parties can agree on: (a) variable rents (e.g. turnover rents, normally upwards, with a floor, i.e. minimum rent); (b) staggered rents (generally, only upwards; however, also a mixed down and upward staggering qualifies as staggered rent and has to meet the pertinent requirements); (c) indexed rents. If the parties do not agree on these mechanisms, the basis of review is determined on the general grounds justifying an increase (see in further detail under 2.2). 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? The law protects tenants against abusive initial rents and abusive rent increases by allowing a tenant to challenge the rent. Generally a rent qualifies as abusive, if it results in excessive returns (such term being interpreted narrowly) or if it is based upon an obviously excessive purchase price. As a rule, however, rents are deemed not abusive, in particular, if the rent: (c) with regard to relatively new buildings lies in the range of a cost covering gross return; (d) only serves to compensate for a previously granted lower rent based on deferred market conformed financing costs, and if it is set out in a payment plan disclosed to the tenant in advance; (e) merely compensates a cost increase with regard to the risk carrying capital; or (f) does not go beyond the extent recommended by landlord and tenant associations or organizations safeguarding similar interests in their general agreements. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? The landlord is under a general duty to keep the leased premises in a condition suitable for the predetermined use and to maintain it in such condition throughout the period of the lease. Thus, the duty of internal and external maintenance and repair is, as a rule, an exclusive duty of the landlord. With respect to (internal) maintenance and repair tenants have only very limited duties; only very small outlays for cleaning and small repairs (rule of thumb: CHF ) are to be borne by tenants. The tenant may renovate or modify the premises only with the written consent of the landlord. If the parties agree upon a core & shell lease, the maintenance, decoration and repair obligations are contractually transferred to the tenant. 3.2 External maintenance, decoration and repair? See Structural repairs? The landlord has responsibility for structural repairs. Moreover, the landlord has to bear all maintenance costs that do not qualify as small outlays (see 3.1). 3.4 Insurance? The premises are subject to mandatory insurances. Premiums have to be paid by the landlord and cannot be passed on to the tenant. (a) falls within the range of rents customary in the neighbourhood; (b) is based upon increased costs or additional benefits granted to the lender; 172 CMS Real Estate Finance

173 3.5 VAT? Rental income is generally exempt from VAT. In respect of business leases, however, the landlord may under certain conditions opt to become subject to VAT. After opting in the landlord may charge the applicable rate of 8% (as of January 1, 2011) to the tenant; further it entitles the landlord to the input tax deduction (Vorsteuerabzug) in particular on any building costs or maintenance and repair costs. 3.6 Rates? As to the VAT-Rate, see 3.5., as to public levies, see Other typical outgoings? (a) Interest on mortgage loans. (b) Actual expenditures connected with the use of the premises (Nebenkosten), such as heating, hot water and other similar operating costs (e.g. cost for cleaning the staircase) and public levies. 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? Landlords may only recoup outgoings qualifying as actual expenditures connected with the use of the premises (Nebenkosten; see in more detail 3.7). Management costs do only partially qualify as such expenditures. In absence of clear precedents it is fair to say that passing on management costs of 2% of the expenditures (Nebenkosten) to the tenant is admissible. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? Like in other civil law systems Swiss landlord and tenant law, generally, consists of a set of default rules that will govern the lease in the absence of a contrary agreement of the parties. In addition to these rules landlord and tenant law provides for several mandatory provisions, which cannot be altered by the parties (in particular provisions with a protective aim, e.g. rules against abusive rents and terminations, extension of lease, etc.). The primary source of law, thus, is the agreement of the parties, which, however, must respect the mandatory provisions of the landlord and tenant statute. The agreement will only be supplemented by the default rules if it does not contain provisions deviating from such rules. Like in other civil law systems the Swiss judiciary is, therefore, generally, restricted to the task of interpreting the relevant statutes. However, because neither statutes nor lease agreements tend to be complete, the judiciary also has the task of filling in gaps either of the statute or the agreement. Given the foregoing, courts must recognise any lease term that does not contravene mandatory provisions of landlord and tenant law. 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? Parties are free to support allegations made in court by valuations prepared by any kind of real estate appraiser (it being understood that the better the standing of the appraiser the more the court may be convinced by the valuation). To be admitted as formal evidence (expert opinion; Gutachten), however, a valuation must be prepared by an appraiser appointed by the court. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. Local government agencies as well as insured environmental professionals may on request issue environmental reports in respect to a certain property. Furthermore most of the 26 Swiss Cantons have official online cadastres wherein polluted areas are marked. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? In Swiss environmental law, the polluter pays principle (Verursacherprinzip) provides that a party breaching environmental law is liable for the damage incurred. Accordingly, the lender only holding a mortgage over real estate is generally not liable for damages resulting from breaches of environmental law by the property owner or any other person. However, if a property is contaminated because of a breach of environmental law, its value decreases and thus may indirectly affect the lender as well. 173

174 Ukraine 174 CMS Real Estate Finance

175 A. Mortgages Introductory note: Ukrainian real estate security instrument ipoteka is often translated into English as mortgage. However, ipoteka should not be confused with mortgages as this is understood in common law jurisdictions; rather, it is a charge, a non-possessory security. It involves the creation of new proprietary rights in the creditor. The essence of a charge is that the secured property is made liable for the repayment of a debt without there being any transfer of ownership or possession from the debtor (the chargor ) to the creditor (the chargee ). The debtor retains both ownership and possession of the asset; the creditor obtains neither. Instead the creditor obtains a new form of proprietary interest, a charge, over the secured property. In the event of default by the debtor, the creditor is normally entitled under the terms of the security agreement to initiate the sale of the secured asset and recoup the outstanding debt from the proceeds of the sale. Thus all references to mortgage in this document are references to Ukrainian law ipoteka as explained above. 1. Can security be granted to a foreign lender? Yes. 2. Can lenders take a mortgage over land and buildings on the land? Lenders can take a mortgage over real estate objects being land and buildings on the land. Foreign lenders can take security over assets which can only be owned by Ukrainian residents, e.g. agricultural land; however, enforcement of such security can be through public auctions but not by transfer of the collateral into the ownership of the foreign lenders. Only persons prescribed by the Land Code of Ukraine can acquire agricultural land. Only banks can act as mortgagees with respect to agricultural land. 2.1 The distinction between mortgages on land and buildings on the land? The mortgage of a building or construction must include the underlying land (and vice versa), if both the building and the land are owned by the same person (i.e. mortgagor). Incomplete construction work is construction, regardless of whom they belong to and which are located on the mortgaged land are deemed to be collateral. 2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable? Mortgage certificates (zastavna) can be issued in Ukraine, and should specify, inter alia, the amount of principal obligation and interest. Mortgage certificates should be documented on secure forms / blanks, which can be ordered from and produced by specialised licensed enterprises. The cost of one form is about EUR 2.00; the minimal order is 1000 forms. Notary fees for notarization of a mortgage agreement and the issuance of a mortgage certificate are negotiable and typically do not exceed 0.21% of the value of collateral. 2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered? Second ranking security over the same real estate can be taken subject to the consent of the initial mortgagee. All mortgages over land and buildings must be registered in the Mortgage Register in order to secure priority of claims. This is (a) the Registry of Mortgages, as provided by the Temporary Procedure of the State Registration of Mortgages, or (b) the State Registry of Rights in Immovable Property and Restrictions of such Rights, once such registry is established and has become operational in Ukraine. On registration, the registered mortgage will have priority over any unregistered security interests and those registered at a later date. Priority deeds are not registered in Ukraine. 2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender s consent? No. In order to prevent any unauthorised transfers, the mortgage should be registered with the Uniform Register for Immovable Property Disposition Bans. 2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)? No. 2.6 Can all monies mortgages be taken? No. 2.7 Can a landlord s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how? Yes. The borrower s right to receive rent can be charged by way of a pledge agreement. 175

176 2.8 It is customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made? Yes. It is customary / possible for a lender to take a charge / security over bank accounts of the borrower as the rights to funds under a pledge agreement. It is usual to contractually restrict the borrower s rights to withdraw funds from the bank accounts. 3. What are the mechanisms for registering land and for registering and perfecting security? According to Ukrainian legislation, the right of ownership, the right of lease and the right of permanent use to both private and public land take effect as of the moment of the state registration. At present such rights are registered in the State Register of Land, which is the part of the State Land Cadastre. However, in the future, the introduction of the new State Register of Rights to Real Estate is expected which will supersede the State Register of Land in part of registration of rights to land. By analogy to the above, until the new State Register of Rights to Real Estate is established, title to buildings and structures (and other real estate objects) is registered with the Register of Ownership Rights to Real Estate. A mortgage over real estate objects should be registered in the Mortgage Register in order to ensure priority of claims and in the Uniform Register for Immovable Property Disposition Bans in order to prevent any unauthorised transfers of collateral by the mortgagor during the term of the mortgage agreement. 3.1 Consequences of failure to register? A mortgage agreement, which is not registered with the Mortgage Register, is valid; however the lender s claim will not have priority over registered rights or claims of third parties with respect to the same collateral. Registration with the Uniform Register for Immovable Property Disposition Bans is optional; however, the absence of such a registration would make it possible for the mortgagor to transfer collateral to third parties. 3.2 Formalities for execution of security and costs? The mortgage agreement must be executed in writing and is subject to notarisation. Costs include: (i) state duty - up to EUR 160; (ii) notary fees (negotiable) typically up to 0.2% of the value of collateral; (iii) registration fees (Mortgage Register and Uniform Register for Immovable Property Disposition Bans) EUR Can the lender use a Security Trustee to hold security on trust for creditors? No. Only lenders can hold security (i.e. act as mortgagees). Concept of parallel debt is not yet recognized or widely used in Ukraine. 4.1 What happens if the lenders change later on e.g. on a transfer? Do new security documents have to be signed? Yes. Changes to the existing agreements have to be made, unless the lenders change these by way of transfer of the mortgage certificate (by endorsing the relevant mortgage certificate). 5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease? Yes, the landlord / borrower has control over changes in tenants. Transfer of the lease to a new tenant (by way of sub-lease or assignment) is subject to the consent of the landlord / borrower, unless the lease agreements provides otherwise. Transfer of any use rights to state owned land is not allowed by Ukrainian law. 6. How can the lender enforce its security? Under Ukrainian law, a mortgage can be enforced either through: (i) out-of-court settlement (if so provided for by the agreement); (ii) notarial writ (endorsed on the original execution copy of mortgage agreement); or (iii) court judgement. In practice, first two methods are not possible without the cooperation of the mortgagor. 6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised? Ukrainian courts have exclusive jurisdiction over the matters involving real estate, including enforcement of mortgages. 6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review? Prior to enforcement, arbitral awards or foreign judgements have to be recognized in Ukraine. Ukraine is a party to the New York Convention. 176 CMS Real Estate Finance

177 6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? The most reliable method of enforcement is through a court judgement. Although enforcement without recourse to the courts is allowed under the Ukrainian law (based on a notarial writ or out-of-court settlement provisions of the mortgage agreement), in practice, however, such enforcement is impossible without the cooperation of the mortgagor. It is not possible for a secured party to appoint receivers / liquidators in Ukraine. Typically, collateral is sold by public auction; however, the mortgage agreement can permit the transfer of the collateral into the ownership of the mortgagee, or the sale of the collateral by the mortgagee to a third party; the latter can also be effected through the court. 6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale? No. The borrower remains responsible, unless the mortgage agreement provides otherwise. 6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction? The mortgage agreement can provide for such out-of-court settlement option as transfer of the collateral into the ownership of the mortgagee. However, in an event of default, this transfer is not automatic, and in practice is impossible without the cooperation of the mortgagor. Alternatively, if the real estate is not sold at a public auction ordered by the court or carried out pursuant to the notarial writ, collateral can be transferred to the mortgagee, provided that, within 10 days after the auction, the latter decides to acquire collateral at the starting price setting off secured claims against the value of the collateral. 7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult? Cross-border loans from foreign lenders to Ukrainian borrowers are subject to registration with the National Bank of Ukraine prior to the disbursement of any funds. Ukrainian legislation sets maximum interest rate limitations with respect to such loans. In particular, the floating-rate loans in major currencies such as euros, US dollars and sterling, are capped at 750 basis points above the 3-month LIBOR USD rate; while fixed rate loans are capped at 9.8% pa (if repayable in < 1 year), 10% pa (1-3 years) and 11% pa (> 3 years). B. Security Over Shares Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate: 1. Can security be granted to a foreign lender? Yes. 2. Can second ranking security be taken? If so, how is it registered? Yes. Security over shares (of any ranking) is to be registered with a custodian / registrar and the State Register of Encumbrances over Movables Property. 3. What are the mechanisms for registering and perfecting security? 3.1 Consequences of failure to register? Failure to register a pledge over shares with a custodian / registrar affects the validity of the pledge. The pledge is only valid from the moment of its registration with a custodian / registrar. Failure to register the pledge over shares with the State Register of Encumbrances over Movables Property affects the ranking of the pledge. 3.2 Formalities for execution of security and costs? A pledge agreement must be executed in written form. If any party to the pledge is a signatory in their personal capacity it must be notarised also. Costs associated with execution of a share pledge agreement are comprised of: (a) costs related to the signing of the agreement. If the agreement is to be notarised, then the parties must pay a state duty in the amount of 0.01 per cent of the value of the pledged shares; and a notarial fee, which will vary; (b) costs related to the blocking of shares and the recording of the pledge with a custodian / registrar. These costs will depend on the custodian s / registrar s internal rates; and 177

178 (c) costs related to registering the pledge with the State Register of Encumbrances over Movables Property (approximately USD 15.00). 4. Do the shares need to be transferred into the name of the lender or its nominee? If the shares are in non-documentary form, then they cannot be transferred to the lender or its nominee. If the shares are in documentary form, they may be transferred to the lender or in deposit to a notary or bank. 5. How can the lender enforce its security? Enforcement can be performed through a non-judicial procedure, by way of a notarial writ (if the agreement was notarised) or court proceedings. For more details, please see section 5.1 below. 5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction? As soon as an event of default occurs and before the actual enforcement, the lender is required to send to the borrower and its shareholders a cure notice. This notice must be sent at least 30 days in advance of the proposed enforcement. The notice must be registered with the State Registry of Encumbrances over Movable Property. The lender can only proceed with the enforcement of its security after the 30 day grace period has expired. Enforcement can be performed through a non-judicial procedure, by way of a notarial writ (if the agreement was notarised) or court proceedings. The non-judicial procedure of enforcement is only allowed if it was provided for in the pledge agreement. During the course of a non-judicial enforcement, the title to the shares can be transferred to the lender or the shares can be sold to a third party. The course of enforcement action depends on the terms and conditions of the pledge agreement. Court proceedings and a public auction are the mandatory enforcement procedure if the shares are owned by a state-owned enterprise. Irrespective of the enforcement procedure, the lender can appoint any third party to act on behalf of the lender in enforcing the pledge. The third party s authority will depend on the scope of the lender s power of attorney. 5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur? Ukrainian law does not provide for the mandatory subordination of shareholders loans. Subordination depends on the terms and conditions of a loan agreement. It is not customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur. In enforcing a share pledge a lender must consider any shareholders loans or third party creditors. C. Leases Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective. 1. Lease Structure 1.1 Typical lease length? Land: 5, 10, 25, 49 years Buildings: 3 or 5 years 1.2 Maximum / minimum lease length if any? Land: 50 years (maximum) Buildings: no limits If there is no non-judicial procedure set out in the pledge agreement, or a pledgor is not cooperative in the course of enforcement, the lender will be forced to enforce the pledge through court proceedings. As a general rule, shares enforced through court proceedings are sold through a public auction, unless otherwise provided for in the court judgement. 178 CMS Real Estate Finance

179 1.3 Statutory controls and obligations re renewal / termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal? Land On expiry of a lease term, a tenant who has complied with its obligations under the lease has a priority right to renew the lease. In this case the parties may agree to change the terms and conditions of the lease. On expiry of the lease term if a tenant continues to use the land plot the lease is deemed to be renewed for the same term and under the same conditions provided by the original lease agreement unless the landlord objects in writing within 1 month of the lease expiry. Automatically extension will not, however, work with state-owned land. To terminate the lease, the landlord must serve a written notice on the tenant rejecting renewal of a lease within 1 month following the lease expiry. Buildings On expiry of a lease term, a tenant, who has complied with its obligations under the lease, has a priority right to renew the lease. In this case however, if the tenant intends to renew, it must inform the landlord prior to expiry of the lease. There is no requirement for the tenant to serve any notice if it does not wish to renew the lease agreement after the expiration of the initial term. 1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)? No, a tenant cannot unilaterally terminate the lease unless such break right is specifically provided for in the lease agreement. 1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents? No. 2. Rent / Rent Reviews 2.1 Rental income receivable quarterly / monthly in-advance / in-arrear? The mechanics of rental payments are agreed by the parties. Market practice is that the rents are payable on a monthly basis in advanced based on invoices issued by a landlord. 2.2 Periodicity of reviews? The rent payable under leases of state-owned land is reviewed on an annual basis. The review is undertaken in line with indexation of the normative value of the land (which is the basis for land calculations). For non state-owned land rent reviews the parties will agree the mechanics. Market practice is that rent is being reviewed on an annual basis. 2.3 Basis of review (upwards-only or variable, indexation or market rent)? Market rent review and indexation are treated as different rent review mechanisms. Both mechanisms could be used simultaneously. Rent review is usually restricted to being subject to upwards only increases. 2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)? No, there are no controls other than the review of rent payable state-owned land being required annually. 3. Lease Obligations: Who has responsibility for: 3.1 Internal maintenance, decoration and repair? Tenant, unless otherwise specifically provided for in the lease agreement. 3.2 External maintenance, decoration and repair? Landlord, unless otherwise specifically provided for in the lease agreement. 3.3 Structural repairs? Landlord, unless otherwise specifically provided for in the lease agreement. 179

180 3.4 Insurance? Insurance of land is discretional and is determined by parties in the agreement. It is not common in Ukraine to insure land plots. Insurance of state owned real property is mandatory and should be procured by tenants Insurance of privately owned buildings is discretional and is subject to parties negotiations. Market practice is that Landlord would be responsible for insurance of structural part of the building and external fit out, whilst the tenant will insure internal fit out and fittings and its belongings. 3.5 VAT? Yes, VAT is payable on rents at the rate of 20%. 3.6 Rates? Subject to the agreement between the parties. State owned property rates are regulated and will depend on property, its designation and location. In most cases, however, the rent rate for state owned property (land in particular) is determined by means of an auction. 3.7 Other typical outgoings? Among other typical tenant s expenses it is common to have phone and utility charges, marketing share (for shopping malls), fit out and internal fittings insurance, grand opening share (for shopping malls). 3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges? 5. Valuation and Environmental 5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction? Any valuers / environmental surveyors must be licensed to undertake such appraisals for the appraisal to be recognised. 5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional? Yes. 5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate? No. The general principle of Ukrainian environmental legislation is that the liability for breach of environmental laws arises if the person is guilty of the relevant breach. Generally a party holding security over real estate is not liable for breaches of environmental law by its owner or a third party. However, once the lender enforced a mortgage over the property, i.e., became the owner thereof, it is deemed to assume all the environmental risks and liability attached to such property, unless there is an established fact that the breach of environmental laws in respect of the property has been caused by other person. Yes. The landlord can recover the costs of external maintenance, decoration, repair and structural repair, management fees etc. via a service charge. 4. Enforceability 4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction? No. Ukraine operates in the civil law system, which means that a court will be relying on the contents of the agreement and effective legislation rather than on existing precedents. 180 CMS Real Estate Finance

181 Contacts Austria Peter Huber T M E peter.huber@cms-rrh.com Günther Hanslik T M E guenther.hanslik@cms-rrh.com Belgium Bruno Duquesne T M E bruno.duquesne@cms-db.com Bosnia and Herzegovina Nedžida Salihovic-Whalen T M E nedzida.salihovic-whalen@cms-rrh.com 181

182 Contacts Bulgaria David Butts T M E david.butts@cms-cmck.com Reneta Petkova T M E reneta.petkova@cms-cmck.com Gentscho Pavlov T M E gentscho.pavlov@cms-rrh.com Croatia Gregor Famira T M E gregor.famira@cms-rrh.com 182 CMS Real Estate Finance

183 Czech Republic Paul Stallebrass T M E paul.stallebrass@cms-cmck.com Pavla Kreckova T M E pavla.kreckova@cms-cmck.com England Keith Ham T M E keith.ham@cms-cmck.com Simon Johnston T M E simon.johnston@cms-cmck.com France Gérard Kling T M E gerard.kling@cms-bfl.com 183

184 Contacts Germany Berlin Jens Moraht T M E jens.moraht@cms-hs.com Berlin Axel Dippmann T M E axel.dippmann@cms-hs.com Cologne Herbert Wiehe T E herbert.wiehe@cms-hs.com Frankfurt Markus Pfaff T M E markus.pfaff@cms-hs.com Hamburg Marc Riede T M E marc.riede@cms-hs.com Hamburg Thomas de la Motte T M E thomas.delamotte@cms-hs.com Stuttgart Peter Ruby T M E peter.ruby@cms-hs.com Stuttgart Marc Seibold T M E marc.seibold@cms-hs.com Hungary Arpad Lantos T E arpad.lantos@cms-cmck.com 184 CMS Real Estate Finance

185 Italy Paolo Bonolis T M E paolo.bonolis@cms-aacs.com Luxembourg Vivian Walry T M E vivian.walry@cms-dblux.com The Netherlands Marcel Groenewegen T M E marcel.groenewegen@cms-dsb.com Eduard Scheenstra T E eduard.scheenstra@cms-dsb.com 185

186 Contacts Poland Malgorzata Chrusciak T M E malgorzata.chrusciak@cms-cmck.com Portugal António Payan Martins T M E antonio.payanmartins@cms-rpa.com Romania Simon Dayes T M E simon.dayes@cms-cmck.com 186 CMS Real Estate Finance

187 Russia Vladislav Sourkov T E vladislav.sourkov@cmslegal.ru Karen Young T E karen.young@cmslegal.ru Scotland Gordon Hay T E gordon.hay@cms-cmck.com Timothy Pitt T E timothy.pitt@cms-cmck.com Serbia Aleksandra Jovic T E aleksandra.jovic@cms-rrhs.com Stojan Semiz T E stojan.semiz@cms-rrhs.com 187

188 Contacts Slovakia Ian Parker T M E ian.parker@cms-cmck.com Peter Šimo T M E peter.simo@cms-rrh.com Slovenia Brigita Kraljič T E brigita.kraljic@cms-rrh.com Spain José Antonio Rodriguez T M E jarodriguez@cms-asl.com Gracia Sainz Munoz T E gracia.sainz@cms-asl.com 188 CMS Real Estate Finance

189 Switzerland Kaspar Landolt T M E kaspar.landolt@cms-veh.com Alain Raemy T M E alain.raemy@cms-veh.com Stephan Werlen T M E stephan.werlen@cms-veh.com Ukraine Adam Mycyk T M E adam.mycyk@cms-cmck.com Andriy Prykhodko T M E andriy.prykhodko@cms-rrh.com 189