The economy of Lithuania is based on the constitutional principles of private ownership, freedom of individual economic activities and initiative. In order that these priorities be properly enshrined, the entire legal system in Lithuania has been respectively adjusted. Since the real estate-related markets constitute a substantial share in both the local and international business environment, a modern and efficient legal framework has been created to support the successful development of those markets.
Acquisition of Real Estate
Mortgage
Asset Deals
Lideika, Petrauskas, Valiunas ir partneriai
LAWIN
Jogailos st. 9/1, LT-01116 Vilnius, Lithuania
Tel. +370 5 268 1888
Fax +370 5 212 5591
vilnius@lawin.lt, www.lawin.lt
Legal Basics
Acquisition of Real Estate
Every agreement on sale-purchase of any kind of real estate must be certified by a notary public. Failure to notarise such an agreement makes it null and void. A title to real estate is deemed passed over to the buyer as of the moment of transfer of the real estate to the latter. The transfer of the real estate must be documented by a transfer-acceptance deed to be executed between the seller and the buyer.
Acquisition of Land
Acquisition of Land
For a foreigner to be entitled to acquire the land into ownership in Lithuania he must comply with the criteria of European and Transatlantic Integration. The said criteria shall be deemed satisfied if a legal person is established in or a natural person is a citizen or a permanent resident of one of the below indicated states:
• a member state of the European Union or a states that is a party to the European Treaty (Association Agreement) with the European Communities and their member states;
• a member state of the Organisation for Economic Cooperation and Development (OECD), a member state of the North Atlantic Treaty Organisation (NATO) or a
member state of the Agreement on European Economic Area.
In addition, the land may also be acquired into ownership by the non-Lithuanian citizens having permanent residence in Lithuania. With certain minor exceptions, even complying with the above-described criteria, the foreigners are not entitled to acquire into ownership agricultural and forestry land in Lithuania until 1 May 2011.
Foreigners that fail to meet the above-described criteria are not allowed to acquire land into ownership and may only use it on other legal bases, such as lease, right of development (superficies), etc.
Acquisition of Buildings
Acquisition of Buildings
Lithuanian laws do not provide for any substantial restrictions on the acquisition of buildings or premises irrespective of their purpose) by foreign legal andnatural persons into their ownership.
Although title to the land plot may be held separately from title to the buildings located thereon, however, acquisition of the buildings always results in acquisition of certain rights in respect of the land under them. An agreement on sale-purchase of buildings must specify the buyer’s rights in respect of the land plot on which such buildings are located. In case of failure to specify the said rights, the agreement cannot be certified by a notary public, and if it were – should be deemed void.
Property Restitution
According to the Lithuanian laws, owners and certain qualifying descendants of owners, whose real estate was nationalised under the laws of former Soviet Union, are still entitled to restore their ownership rights to the existing real estate. Nevertheless, it is to be pointed out that ownership rights are not restored inter alia to the real estate that has been acquired into owner ship by third persons. Thus, once having become the legal owner of real estate, the investor may not worry about losing it due to property restitution. The State is obliged to compensate the descendants of owners of such real estate under the prescribed procedure.
Lease of Real Estate
There are no limitations for the lease of the Stateowned land plots and buildings as well as private ones by both Lithuanian and foreign legal or natural persons. Any agreement on the lease of real estate is to be concluded in writing. The lease period is subject to a mutual agreement between a lessor and a lessee, although it may not exceed 100 years for any building any privately owned land, 25 years for the State-owned agricultural land and 99 years for any other kind of the State-owned land.
Under the agreement on the lease of building the right to use the land plot (or part thereof) required for the operation of the leased building, pursuant to its purpose, is to be transferred to the lessee as well. If the lease agreement of the building is silent on the said right, the lessee is considered to have been granted the right to use free of charge such part of the land plot as is necessary for the operation of the leased building according to its purpose.
Registration of Real Estate and Pertaining Rights
With certain minor exceptions, any types of real estate, rights in rem, such as mortgage, servitude, usufruct, etc., as well as legal facts, e. g. attachments, lawsuits, transactions related to the real estate or restriction of rights thereto, are registered with the Real Estate Register. Only legally registered real estate may be sold or otherwise disposed of. Failure to register the agreements related to real estate (sale-purchase, lease, gratuitous lease etc.) does not cause their invalidity. However, in majority cases, failure to register such agreements will preclude the parties from invoking the agreements against third persons, e. g. a lessee of a building could not rely on the respective lease agreement against a new owner of the building, if the agreement were not registered.
The registration process is quick and simple. The shortest available term for any registration is one business day.
Apart from certain exceptions, all data contained in the central data bank of the Real Estate Register are available to the public. Any person, upon payment of a set fee, may obtain information on the legal status of any real estate registered with the Real Estate Register.
Mortgage
Mortgage is a commonly used effective and costfriendly form of security in any real estate investment transaction.Any mortgage must be executed as a mortgage bond in a standard form approved by the Ministry of Justice.Additionally, the mortgage bond must be certifiedby a notary public and registered with the Mortgage Register. Registration of the mortgage normally takes 3 business days. Both notaries’ and registration fees pertaining to mortgage of property are capped.
The secured creditor has the right to receive satisfaction of its claims from the proceeds of sale of the mortgaged property prior to all other creditor, and this right does not cease in case of transfer of title to the mortgaged property. In case more than one mortgage is granted over the same property the mortgagees are ranked pursuant to the time of registration of the mortgage.
The mortgage enforcement procedure is performed via the mortgage offices and normally does not involve litigation proceedings.
Construction
Both national and foreign persons may act as builders (employers), designers, contractors, technical supervisors as well as other participants of the construction works in Lithuania provided they meet applicable qualifying requirements. Additionally, any foreigner willing to engage in particular construction activities in Lithuania needs to undergo certain qualification acknowledgement and/or attestation procedures, which scope depends on the origin of a foreigner as well as activities intended to be performed. The entire construction process usually comprises the following major stages:
• Territorial planning works. Usually it is necessary to prepare relevant detailed plan of the site establishing particular requirements for the construction works(density and intensity of construction, the maximum allowed height of the structures, etc.).
The mortgage enforcement procedure is performed via the mortgage offices and normally does not involve litigation proceedings.
Construction
Both national and foreign persons may act as builders (employers), designers, contractors, technical supervisors as well as other participants of the construction works in Lithuania provided they meet applicable qualifying requirements. Additionally, any foreigner willing to engage in particular construction activities in Lithuania needs to undergo certain qualification acknowledgement and/or attestation procedures, which scope depends on the origin of a foreigner as well as activities intended to be performed. The entire construction process usually comprises the following major stages:
• Territorial planning works. Usually it is necessary to prepare relevant detailed plan of the site establishing particular requirements for the construction works(density and intensity of construction, the maximum allowed height of the structures, etc.).
• Environmental impact assessment will need to be performed when the planned constructions falls within the list of particular activities established by the laws.
• Designing works. The design of a building is prepared in accordance with the designing conditions issued by a local municipality. For certain buildings the expertise of the design should be carried out and the design should be approved by the builder in the prescribed manner.
• Obtaining of a construction permit. Normally, the construction permit must be issued within 10 to 15 days from application. Validity term of the construction permit is 10 years. The construction permit becomes null and void if the respective construction works does not start within 3 years or the structures concerned have not been built and recognised as suitable for use within 10 years after the construction permit has been issued.
• Carrying out of the construction works. In the process of construction works, design, technical and State supervision is performed.
• Issue of an occupancy permit. A newly constructed or reconstructed building or a building after its major repairs can be operated only upon recognition of the building as suitable for use by the State commission, which recognition results in issuance of the occupancy permit of the building. On the basis of the occupancy permit the building is registered with the Real Estate Register under the ownership right of the builder.
Some Practical Aspects of REI Transactions
Lithuanian real estate investment (REI) market is rather safe and attractive for investments into office, retail, logistics, industrial and other sectors, if relevant legal and semi-legal risks are professionally managed.
Structuring REI Transactions
Commonly the REI transactions are structured either as the share deal, i. e. by acquisition of shares in a special purpose vehicle (SPV) holding the target real estate, or as an asset deal resulting in direct acquisition of real estate. Depending on the scope, usually REI transaction takes from two to nine months.
Share Deals
Share Deals
Share deals, as compared to asset deals, comprise a larger number of issues to be tackled, in particular:
• More extended due diligence review, including the review of corporate, employment issues as well as other fields of business of the target company.
• Investor may face a risk of historical issues of the target company in respect of its foundation, previous shareholders, taxation, etc.
• Deferred taxes issues.
• As a rule, the change of shareholders has no impact on the contractual relations of the target company. The investor has to evaluate such existing contractual relationships in order to asses related risk.
• Employees selected by the previous owner not always meet the expectations of the investor.
• Investor is not protected as a “fair third party” with respect to transactions entered into by the target company.
Asset Deals
Although asset deals are less cost effective, they are more common in Lithuanian REI practice than share deals. When choosing an asset deal, as with REI, the following major points should be taken into consideration:
• Asset deals involve increased costs due to notarisation and registration of a real estate sale-purchase agreement.
• Certain time-consuming issues arise while structuring acquisition of buildings located on the State-owned land plot. In such cases the REI transaction also comprises application to the State authorities for permission to close the transaction (transfer of title to and mortgage of the buildings).
• If the object of the REI transaction forms a substantial part of all assets of the seller, and the seller’s activities related to operation of the REI object constitute the essential part of all activities of the seller, the REI transaction, structured as the asset deal, may subsequently be recognised as the sale of enterprise. As a result of that, the investor may be exposed to certain additional risks.
• Particular lease issues should be considered while structuring asset deals, among them, the registration of lease agreements; termination clauses and the lessees’ statutory exit right in case of transfer of title to the leased property; business practice between the lessee and the former owner, etc.
Investments through local SPV
Commonly investments into real estate (either it is a share or asset deal) are structured through the locally established SPV. The most preferable types of entities are – in the most frequent cases – a private company (in Lithuanian uždaroji akcin? bendrov? or UAB) with the minimum share capital equal to approx. € 2,900, or – in more rear cases – a public company (in Lithuanian akcin? bendrov? or AB) with the minimum share capital equal to approx. € 43,450.
Commonly investments into real estate (either it is a share or asset deal) are structured through the locally established SPV. The most preferable types of entities are – in the most frequent cases – a private company (in Lithuanian uždaroji akcin? bendrov? or UAB) with the minimum share capital equal to approx. € 2,900, or – in more rear cases – a public company (in Lithuanian akcin? bendrov? or AB) with the minimum share capital equal to approx. € 43,450.
Lithuanian laws do not provide for any restrictions or special encumbrances with respect to the citizenship or national identity of the incorporators, shareholders or managers of Lithuanian companies. Also, the foreign incorporators do not need to go for any specific authorisations for the investment in Lithuania, or search for a national partner in order to proceed with the incorporation. The overall procedure of incorporation of companies in Lithuania is rather efficient and fast (takes approx. 2–3 weeks after arranging of all required documents related to the incorporator).
Lease in Practice
Save for certain mandatory statutory terms and conditions, the majority of lease provisions are subject to mutual agreement of the parties. Summarized terms and conditions of the commercial lease of premise/buildings commonly met in practise are revealed here.
Lideika, Petrauskas, Valiunas ir partneriai
LAWIN
Jogailos st. 9/1, LT-01116 Vilnius, Lithuania
Tel. +370 5 268 1888
Fax +370 5 212 5591
vilnius@lawin.lt, www.lawin.lt
