Legal aspects: Buying a property in Romania
You will ﬁnd below the answers to the most frequently asked questions when purchasing a property in Romania:
Can foreigners invest in Romanian real estate? Yes, foreigners can invest in Romanian real estate. It is possible for foreigners to purchase apartments with
no diﬃculty: the process is similar to buying a freehold property in the UK.
Villas, houses and land can also be purchased by foreigners but not directly. The Romanian Constitution presently restricts the right of ownership of Romanian land to Romanian citizens and to Romanian companies and other legal entities. The only exception to this
rule is that a non-Romanian may own Romanian land which has been inherited through the intestacy laws,
i.e. not through a will.
This is expected to change now that Romania is a member of the European Union. Law 312/2005
provides that, upon Romania becoming a member of the EU, citizens of other EU countries, stateless persons domiciled in Romania or in another EU country and legal entities existing under the laws of other EU countries may own Romanian land, subject to some exceptions, on the same terms a Romanian citizens and legal entities.
One exception to the right to own Romanian land relates to the ownership of agricultural lands and forests. This exception will continue for seven years after Romania’s accession to the EU. This restriction on the right of ownership of Romanian land will not however apply to independent farmers that (i) are citizens of other EU countries or stateless persons
domiciled in other EU countries that take up residence in Romania; or (ii) are stateless persons domiciled in Romania.
Further exceptions to the right of ownership of Romania land relate to the acquisition by citizens of other EU countries and stateless persons domiciled in other EU countries who are not resident in Romania of land for secondary residences, and by legal entities of other EU countries of land for secondary headquarters. These exceptions will last for a period of ﬁve years after Romania’s accession to the EU.
It is important to note that all of the foregoing applies to citizens of and stateless persons domiciled in other EU countries, and to legal entities formed in other
EU countries. For other persons and legal entities, the restrictions under the Romanian constitution will
continue to apply unless and until relaxed on the basis
of a treaty of reciprocity between the particular non- EU country and Romania.
In the meantime, it is possible for non-Romanians to invest in Romanian land by using a Romanian limited liability company as the owning vehicle – there is no restriction on foreign ownership of such companies. In view of the continuing restriction outlined above, we would expect the use of Romanian limited liability companies as property investment vehicles to continue for the time being.
It is also possible for non-Romanians to have rights of use of Romanian land, which fall short of full ownership. Such rights include usufruct (where the user obtains ownership of the “fruits” of the land), servitude (easement) and concession.
What is the diﬀerence between owning land and owning buildings?
The Romanian Constitution only restricts non- Romanians from owning land in Romania – it does not prevent foreigners from owning buildings constructed on land in Romania. It is therefore
perfectly possible for non-Romanians to purchase ﬂats in Romania.
The same principle would apply also to a house, however to avoid any diﬃculties over the garden and driveways surrounding a house (and also the land under the house should the house burn down), it is probably better to have a Romanian company own the land and, possibly, the building on it. This is because the owner of a building constructed on land
in Romania (whether the owner is or is not Romanian) has a legal right to use the land that supports the building whilst the building exists (the so-called “superﬁcies” right).
Is there any other restriction on owning Romanian Property?
There is no restriction on buying property in border areas or the like, but certain types of property are considered to be of the public beneﬁt and accordingly cannot be privately owned. It can however be given
in concession or leased. Examples of such property include for example the shoreline. Such property will be administered by a governmental body or by a local authority. Concessions can be granted for up to forty- nine years and may be extended for no more than half of the period of the initial concession.
- Not all properties held by governmental bodies and local authorities are however subject to the concession regime. Such public authorities can also own property in the ordinary way and such property can be sold.
It may be possible to have property held by a public authority re-classiﬁed to make the property eligible for sale rather than concession.
It should also be remembered that ownership of real estate in Romania can be lost if the property becomes subject to compulsory purchase, although such situations are normally described as expropriation on grounds of public utility. Real estate owned by natural or legal persons may be expropriated in full or in part only on grounds of public utility and on payment of a fair indemnity paid in advance under a court decision.
Is there any distinction between freehold and leasehold property in Romania?
Romanian law does not have the English concepts of freehold and leasehold property.
Leases of Romanian real estate can however have some of the features of leasehold property and prospective purchasers of Romanian real estate should take care in this regard.
Such a lease will however potentially aﬀect the real estate itself and not merely the owner of the real estate who granted the lease. This means that where an owner of real estate has granted a lease of real estate and subsequently disposed of the property by whatsoever means, subsequent owners will take the property subject to any existing prior lease.
It is clearly therefore very important for prospective purchasers of Romanian real estate to check whether the property is subject to any existing lease.
Leases for longer than three years are required to be registered with the Land Registry to be binding on third parties such as a purchaser of the leased property. If this is not done, the lease will not bind a purchaser of the property. Leases of three years or less will bind a third party purchaser of the property if they are concluded before a notary and/or if they are registered with the Land Registry. Unless the owner is a company that lets property as part of its business, in each case the owner is required to register the lease with the ﬁscal authorities so that tax can be levied on the rent. In practice this may not always be done, but failure to register the leases with the ﬁscal authorities will not in principle aﬀect the validity of the lease. It will be noted from this that there is potential for property to be subject to a lease of up
to three years which will bind a purchaser, but which will not be discoverable by the purchaser from searches
with the Land Registry or ﬁscal authority. Property investigation of the property and suitable protective wording in the purchase agreement are therefore very important to protect a purchaser.
Can I get a mortgage to buy the property?
Yes, in theory. In principle, an owner of Romanian property has the right to create a mortgage (hypothec) over it.
In practice, the mortgage market in Romania is still developing and any prospective purchaser who is using a newly created Romanian company as the property-holding vehicle will be able to obtain a bank loan to that company once it shows a tenancy agreement. This agreement will be with you.
Can my UK solicitor act for me in buying the property?
This is possible in theory but diﬃcult in practice. Ownership of land and buildings in Romania is governed by Romanian law, which also governs the formalities of change of ownership.
Even if a UK-based ﬁrm of solicitors has Romanian lawyers on its staﬀ, many of the steps required
to purchase property safely need to be taken in Romanian. Local knowledge of the practicalities is also likely to be helpful. That is why we have engaged the services of LIVE Overseas.
Do I need a notary?
Yes. Agreements for the sale and purchase of Romanian land must be concluded, in the Romanian language, in authentic form before a Romanian notary.
The notary is also responsible for obtaining an excerpt in respect of the property from the Land Registry. This excerpt will specify whether there are any mortgages or other legal rights aﬀecting the land and grant a period of priority for the transaction to be made and recorded with the Land Registry. The notary will also collect the relevant state taxes on the transaction in addition to the notary’s fees and will normally deal with the registration of the transaction in the Land Registry. If this is not done, the transaction will be binding as between the seller and the purchaser but will not be binding on third parties.
Sellers and purchasers of real estate must either be present in person to sign the documents before the notary or must send duly appointed representatives under formal and speciﬁc powers of attorney to do so. Such powers of attorney must however themselves have been given before notaries. LIVE Overseas will have power of attorney.
If I have a notary, why do I also need a lawyer? The notary performs a diﬀerent role from the lawyer. The notary performs a public oﬃce and is
responsible for checking the identity of the seller and the purchaser, obtaining the excerpt from the Land Registry, checking the legality of the agreement and collecting the state taxes on the transaction. Some sellers and purchasers do however conduct real estate transactions without lawyers and rely on the notary alone to deal with the transaction, including drafting the documents.
How soon should I arrange a Romanian company to purchase the land that I want to buy?
In an active market, delays to the completion of transactions can be dangerous and cause deals to be lost. We would therefore advise that prospective purchasers intending to use a Romanian company as a property-holding vehicle should deal with the incorporation of the company as soon as possible
– they should not wait until they have found the property that they wish to purchase. This is particularly important because there will also be a certain amount of corporate procedures to be dealt with for the company to be able to go ahead with a transaction.
Possibly due to the bureaucracy involved, clean shelf companies are not as widely available as is the case in the UK. The incorporation of a limited liability company with the Registry of Commerce has been
made simpler and faster than before. If the Commercial Registry raise no questions on an application ﬁle for the incorporation of a company, it may be possible
to have the company incorporated in as little as ﬁve working days after the ﬁle is lodged.
It is likely that more time will be taken on the preparation of the incorporation application ﬁle itself. This documents that this must contain include the constitutive document of the new company, various declarations given by the intended shareholders and directors, evidence of the registered oﬃce (a lease
or free lease or ownership of property) and a letter from a Romanian Bank certifying the deposit of the share capital of the company. Assembling these documents can take some time, particularly where the shareholders have few contacts in Romania and / or where the constitutive document of the company
needs to be drafted to include joint venture provisions between diﬀerent shareholders.
Do I risk being gazumped?
In a dynamic market, yes. Being in a position to proceed with a purchase quickly can reduce the risk of this.
A formal agreement, written in the Romanian language and signed before a Romanian notary, is required to transfer ownership of Romanian property. It can take some time to prepare for this, particularly where due diligence enquiries are carried out on the property and the title. It is therefore common for the parties to conclude a pre-agreement relatively quickly and to deal with the formal notarised agreement- transferring ownership of the property later.
The purpose of the pre-agreement is to commit the seller to sell to the purchaser for the agreed price once the purchaser’s lawyers have conﬁrmed that the title to the property is satisfactory. Until the pre-agreement is signed, there is no deal and each party is free to withdraw.
If one of the parties breaches a pre-agreement which has been signed before a notary, such as by unjustiﬁably refusing to sign the formal sale-purchase agreement to transfer ownership of the property, the other party may
seek an order from the court which transfers ownership of the relevant real estate. Contractual penalties (as opposed to damages) are also commonly used in Romania.
If the pre-agreement is registered with the Land Registry, this will be prima facie evidence of bad faith where the owner has purported to sell the property to a third party, allowing an application to be made to the court for the sale to the third party to be annulled.
Litigation in Romania can however be slow, costly, stressful and time-consuming. In general, our advice would be to try to be in a position to complete the transaction as quickly as possible to reduce the risk of being gazumped.
What should my lawyer need to do to protect me in making the purchase?
The purchaser’s lawyer should:
- Deal with the formation of any necessary Romanian company to own the property;
- Deal with the drafting and negotiation of the pre-agreement, also arranging for it to be signed and (where appropriate) registered with the Land Registry;
- Investigate the title of the property, probably in conjunction with the notary selected by the purchaser’s lawyer;
- Investigate the seller (a married seller will require the consent of his or her spouse to sell property; other parties may have pre-emption rights); and
- Deal with the drafting and negotiation of the formal agreement for the transfer of ownership of the property, including liaising with the notary on the arrangements for signature of such agreement and the completion of the transaction.
The result of this work should be that the client purchaser would obtain a clean ownership title (except insofar
as there are any agreed encumbrances), which is not vulnerable to a successful court challenge by a third party.
- Deal with the drafting and negotiation of the formal agreement for the transfer of ownership of the property, including liaising with the notary on the arrangements for signature of such agreement and the completion of the transaction.
Will my Romanian lawyer make all the checks that my solicitor would do if I were buying property in the UK?
Probably not, since some of the matters commonly searched against by UK solicitors are not relevant in Romania or because there is no practical system allowing such searches to be made.
Examples of the former are common land searches and searches for chancel repair liability – there is no equivalent of these under Romanian law (“commons” with assorted animals on them do exist but such lands are normally owned by the relevant local authority
– see question 4).
Examples of the latter are coal mining and brine extraction searches. Mining has taken place in parts of Romania but we are not aware that there is any authority responsible for conﬁrming that a property is or is not located in such an area.
In other cases, searches can theoretically be made but, so far as we are aware, are often not bothered with in practice An example of this relates to environmental matters: a prospective purchaser can apply to the relevant Environmental Authority for details of information held on a particular piece of property.
This situation may be explained by the fact that the Authority has thirty days to give a reply, which may or may not prove to be helpful. In such circumstances where there is concern as to possible environmental
problems, a purchaser should consider arranging for a private environmental survey.
There are also some searches which one would not expect to undertake in the UK, but which can be made in Romania. For example, in Bucharest there is a register of buildings that are considered to be at signiﬁcant risk in an earthquake.
If the property has a registered title, why does my lawyer need to spend time in checking the title of the property?
Although there is Land Registry in Romania and there
is requirement that no Romanian real estate can be bought or sold unless it has a registered title, the fact that a piece of property has a registered title does not necessarily mean that it has a clean ownership title.
Unlike the land registration system in England & Wales, a registered title under the Romanian land registration system carries no State guarantee. The staﬀ of the Romanian Land Registry are not responsible for checking the validity of documents which form the basis of acquisition of rights of ownership and any interested party may require the Land Registry to amend the registration of a property title where this is required by a ﬁnal court decision.
A search against a title in the Land Registry should disclose documents showing whether the property is subject to a mortgage, a privilege (e.g. a registered pre- agreement) and / or any other adverse claims. As a matter of practice, only interested parties can obtain a search against a particular piece of property in the Land Registry. “Interested parties”include the owner, persons with rights over the relevant property and a prospective purchaser with a pre-agreement to purchase the property.
In view of the above-mentioned issues, a prudent purchaser will insist on property which is proposed to be purchased being registered with the Land Registry, but will also arrange for a full investigation of the title.
Is it safe to buy a property that does not have a registered title?
No. As mentioned in our answer to question 16, the law forbids the sale and purchase of real estate that does not have a registered title: notaries may not deal with the sale and purchase of unregistered real estate.
Where a property does not have a registered title, this situation is commonly dealt with by specifying in the pre-agreement that the seller is responsible for arranging such registration and that registration is a condition precedent to the signature of the formal agreement to transfer ownership.
Is it safe to buy property oﬀ-plan?
This depends on whom you are dealing with since, in addition to the normal checks on the legal title to the property, the purchaser also needs to be certain about the building to be constructed.
With any new building or building which has been subject to recent building work, planning and construction should be checked.
- As regards to the buildings themselves, there are good builders in Romania but there are also other builders who are less good. Romania has no general system equivalent to the NHBC scheme in the UK. Similarly, although it is less likely where property is being purchased oﬀ-plan, it is not uncommon for some people to do the building work themselves or to bring in labour working “on the black”. It is therefore important to ensure that you are dealing with a reputable builder and to consider what contractual
safeguards can be negotiated in the agreement for the purchase of the property. The services of architects, engineers and building supervisors (“sef de santier”) should also be considered. Simply because a building has paperwork from the local authority certifying compliance with the regulations, do not count on the local authority being liable to you if it turns out that there was a mistake.
A common alternative to buying oﬀ-plan is to buy, as Romanians say, on the red (“la rosu”). This involves purchasing the shell of a building that is then completed according to the wishes of the purchaser. An advantage of this is that it is easier to see how the building looks in relation to its neighbours and for the structure of the building above ground to be inspected.
How long will buying the property take?
It is impossible to give a single estimate, as it will depend on the property and on the structure of the deal. What can however be said is that in a dynamic market deals tend to happen fairly quickly.
One cause of delay can be the need to incorporate a Romanian company for use to own the property.
Another cause of delay can be problems with the title to the property, particularly where the title to the property is not registered. Registration requires the preparation of cadastral documents for the property, which involves the measurement and surveying of the property and the preparation of a cadastral plan by an authorised expert.
Do I need to come to Romania to deal with the purchase?
In theory, no. You can give powers of attorney to your representatives to deal with matters.
As a matter of practice, however, we would suggest that you consider making at least one visit.
How much is the conveyancing likely to cost? This depends on the circumstances. Generally speaking, hourly rates of Romanian lawyers are
lower than those of solicitors in the UK practising in similar circumstances, but it will be apparent from the foregoing answers that the conveyancing system in Romania is rather less certain in many respects than that in the UK and that more work needs to be done than would be the case in the UK to ensure that the purchaser gets a clean title. You should also take into account that your lawyer will probably need to spend more time in ensuring that you are fully aware of the situation in view of the likely language barriers.
Cutting corners on legal work is risky, but it may be worth considering where there is a risk of losing a deal and investment in a number of properties results in the risk being spread. However and generally speaking, it is worth remembering that you can only lose your money once.
Do I need to do anything else to be able to live in the house or ﬂat that I have purchased?
British citizens and other EU nationals do not presently require a visa to enter Romania but if they spend
more than ninety days in Romania in any period of six months, they are required to register with the authorities and to obtain a temporary residence card.
Do I need to do anything else to let the property that I have purchased?
Once the change of ownership of the property has been registered with the ﬁscal authorities, you simply need to enter into a rental agreement with the tenant and register this also with the ﬁscal authorities. If the properties held in a Romanian company, it should be checked that leasing property is within the company’s objects of activity.
There is no compulsory form of letting agreement, but we would suggest that appropriate professional advice be taken on this, not only to protect against problems with tenants but also to ensure that problems do not arise with the ﬁscal authorities.
Will I be taxed in Romania on any capital gain that I make when the property that I have purchased is sold?
This will depend on your circumstances and on the relevant taxation legislation in force at the time that you sell the property, but it is safest to assume that something will be payable.
The present Fiscal Code does not exempt capital gains from taxation on the grounds that they have
arisen on a sole or principal residence. Natural persons who make capital gains on the sale of real estate are presently taxed at 16% of such gains made only on:
- income obtained from the transfer of ownership of buildings of any kind and the related land where such transfer is made less than three years after the date when ownership was acquired; and
- income obtained from the transfer of ownership of any kind of land without buildings which was acquired on or after 1 January 1990.
Where a Romanian company is used to hold the property, income resulting on the sale of that property will not be taken into account in calculating the taxable proﬁt of the company but are subject to a tax of 16% of the capital gain made on the property.
What restrictions exist on Foreign Ownership? Currently, foreigners may directly own buildings but they may not directly own land. However, it is an accepted and common practice on the Romanian real estate market for foreigners to own land indirectly through legal entities incorporated in Romania, even if such entities are wholly owned by a foreign entity or individual.
All acquisitions of real property must be registered in the real estate registry (Land Registry) Registration of a change in ownership normally takes at least one week.
What costs do I incur during the property purchase?
A stamp duty, including a ﬁxed amount and percentage calculated on the value of the real property ranging from 0.5% to 3% (subject to 50% discount for transfers of undeveloped land), must be paid for notarisation of sale-purchase contracts involving real estate.
Mortgages and transfers of real property must be certiﬁed by a notary. The fee is negotiable but normally ranges from 0.5% to 1.5%.
Payments of commissions and fees for services performed in Romania (e.g. consultancy and management services) are subject to a withholding tax of 15% irrespective of the location where they are performed.
What income tax do I pay on rental income?
If the landlord is an individual, the net rental income for buildings (i.e. after a deemed expenses deduction of 25%) is subject to individual income tax at a ﬂat rate of 16% (rate as of 1 January 2005). If the landlord is a company, the net rental income is taxed at 16% proﬁt tax (rate as of 1 January 2005). Expenses incurred for deriving rental income are tax deductible. In their Articles of Association companies should have “rental activity” listed as their object of business in order to be allowed to let real estate property.
What property tax do I pay?
Owners of buildings and special constructions are subject to building tax, irrespective of their location or function. For individuals, 0.2% is applicable on the value of buildings located in urban areas, and 0.1% elsewhere. For companies, building tax ranges between 0.5% and 1% of the accounting value. This percentage is increased to between 5% and 10% if the building has not been revalued in the last three years.
Owners of land are subject to land tax which is established at a ﬁxed amount per square metre, depending on location.
What capital gains tax do I incur on sale?
Sale of property may also necessitate the payment of capital gains tax of 16% or 10% if the property is owned for at least two years. The buyer as owner of
property is subject to property tax (0.5% to 1% of the book value of the building