The Ultimate Legal Guide for Real Estate Investments in Romania: Essential Checks & Safety Measures

When analyzing potential investments in the real estate sector, investors must thoroughly evaluate the associated risks to prevent complex problems down the line. Current challenges in real estate underscore the importance of steering clear of legal, financial, and operational traps that could transform what seems like a secure opportunity into a significant hurdle. In this Q&A session, Lorena Ciobanu, who is a partner at
ONV LAW
discusses common errors investors should steer clear of when venturing into the real estate market, ranging from insufficient legal scrutiny to engaging with developers who have an unstable history.

1. What due diligence checks can investors conduct on a developer prior to finalizing a property purchase in Romania? Should notable developers in Romania possess particular certifications, accreditations, or licenses?

Prior to putting money into a Romanian property, investors ought to perform an extensive series of evaluations on the developer to confirm their authenticity, reliability, and crucially, their fiscal stability.

One of the crucial actions includes examining the company’s legal and financial standing, verifying the project’s paperwork like construction permissions, ownership records, and land registry information, along with evaluating the builder’s track record in executing comparable ventures. Such precautions are vital for steering clear of potential legal issues and ensuring that your investment adheres to quality benchmarks and regulatory requirements.

Furthermore, potential investors have the option to conduct various legal and administrative verifications to ascertain the reliability of a developer prior to making an investment commitment. This may involve conducting due diligence through examination of available data regarding the developer’s corporate status, operational scope, shareholding details, and pending lawsuits or bankruptcy petitions. Additionally, scrutinizing the financial reports furnished by the developer to the Ministry of Finance can help evaluate their fiscal soundness.

In parallel, real estate assessments offer further assurance concerning the developer’s standing. A search at the land registry office will validate whether the developer holds legitimate title over the property slated for development or possesses valid authorization to proceed with construction work without facing claims from third parties. Moreover, verifying compliance with regulations via inspection of approved building permits ensures adherence to statutory norms during execution phases.

A different method to confirm this is via an urbanism certificate, which offers details regarding the legal, financial, and technical condition of both the plot and any structures present as per the date of application. This document adheres to zoning laws and pertinent directives concerning spatial development. Additionally, it delineates the specific urbanistic prerequisites based on local characteristics and enumerates all required permissions/consents needed for issuing a construction permit.

Furthermore, investors may examine other ventures undertaken by the same developer to gauge the standard of construction and compliance with timelines. Additionally, they could request referrals from other investors or property owners to evaluate the developer’s interactions with their clientele.

Investors should collaborate with a real estate attorney to conduct these inspections and negotiate the terms of the initial agreement and sales contract when relevant, thereby minimizing potential legal and financial hazards.

The ONV LAW team has participated in various real estate deals throughout their career, including a recently completed transaction worth roughly 8 million Euros. This deal was aimed at acquiring all shares of Bluehouse Investiții, a firm that holds ownership of a property previously occupied by the historical Eva store in Bucharest.

2. What methods do investors use to assess the financial stability of the developer and review their track record on past projects? Is information available about the developer’s prior ventures, specifically focusing on completion ratios as well as instances of delays or unmet commitments?

In order to steer clear of financial and legal pitfalls, investors should rely on an extensive examination of the developer’s fiscal stability and track record of projects. This process includes utilizing trustworthy public resources along with assessing the firm’s credibility.

The annual financial reports provided by the developer to the Ministry of Finance can be viewed via the organization’s publicly accessible portal. This paperwork encompasses key data like revenue, net income, both short-term and long-term debts, along with details about the firm’s stock value. Several metrics should be kept an eye on, including debt ratios and liquidity positions. Should the developer hold substantial short-term obligations, this could signal potential challenges in finishing their undertakings. Conversely, robust cash inflows coupled with considerable shareholder funds suggest sound fiscal stewardship.

By simply checking the Trade Registry, investors can find out whether the developer is involved in insolvency proceedings, the company’s share capital, if there are frequent changes in shareholders, or if the company was recently established, which could raise red flags.

Furthermore, many developers feature a portfolio section on their sites, showcasing finished endeavors. Prospective investors ought to confirm the locations of these ventures and ensure they align with targeted markets. Assessing the caliber of the work is also crucial; this can often be done through site visits at completed developments. Additionally, the adherence to deadlines for project completions plays a key role and must not be overlooked.

By examining the extracts from the land registry of finished projects, one can request these documents from the Land Registry Office for information purposes. This process helps verify whether the developer has duly recorded the completed properties within the land registry and identifies any encumbrances, liens, or legal complications like pending lawsuits.

Additionally, investors should also verify whether the developer is currently involved in any legal proceedings, particularly those concerning delayed deliveries or breaches of contract.

For major developers, credit assessments can be acquired from dedicated firms offering comprehensive insights into the company’s fiscal health and inherent risk factors. Moreover, certain developers engage separate entities for auditing their ventures as well as their economic standing. Investors have the option to seek out these evaluations or confirm whether such audits have been conducted.

A dedicated, cross-disciplinary group can conduct thorough examinations covering legal, financial, and technical aspects, providing an unbiased assessment of the potential risks tied to the investment. This process enables investors to clearly grasp the developer’s fiscal reliability as well as their capability to fulfill all obligations under both regulations and contracts when executing projects.

3. Which warning signs should investors watch for in the marketing and promotional content from developers? Are there specific regulations in Romania that restrict what developers can claim, and what steps can investors take to confirm these assertions?

At present, Romania lacks specific industry standards that restrict developers’ marketing assertions; however, there is regulatory oversight concerning deceptive advertising under Law No. 158/2008. Furthermore, investors may seek advice from legal experts specializing in this area to ensure the legitimacy of these claims.

When investors are individual persons rather than professional entities involved in specific economic pursuits, consumer protection laws come into play, allowing them to contact bodies like the National Authority for Consumer Protection (ANPC) for assistance.

Even though appealing, marketing and promotional materials from real estate developers might include inflated assertions, insufficient details, or deceptive statements. When considering investments in Romania, potential buyers should keep several factors in mind: ambiguous descriptions regarding the project’s progress or overly enthusiastic praise demand further scrutiny. The lack of solid evidence backing up these points serves as a warning sign. Additionally, if a developer guarantees set returns, interested parties must request specifics concerning how those figures were derived, what financial strategies underpin them, and whether legally binding agreements back such assurances.

4. What key components must be incorporated into a pre-construction property purchase agreement in Romania? How can investors make sure that these agreements specify exact timelines, consequences for missed deadlines, and assurances about the quality of the completed units?

A pre-construction property sales agreement should include clear and detailed clauses to protect the investors’ rights and prevent potential conflicts. Such a contract should contain a detailed description of the property with clear specifications, including cadastral identification, surface area, future layout, permitted construction materials, and amenities; a fixed price and any expressly and restrictively defined conditions for its adjustment; specific deadlines with exact dates for the developer to complete the construction and deliver the property; penalties establishing clear and effective fines in case of delays or failure to meet deadlines, as well as compensation mechanisms; guarantees for construction standards and material quality, with details on the remedy of any defects post-delivery (e.g., warranty period, maximum remedy time); a payment plan with structured payments, correlated with the construction stages, so that investors are not required to pay a significant portion before delivery.

At this point, it is advisable to seek an actual assurance from the developer, which involves setting up a mortgage lien in favor of the purchaser on the property.

Moreover, the agreement must verify that the developer possesses all required permissions for the initiative, encompassing urban development licenses and building approvals, without any pending legal disputes or additional bureaucratic processes that might compromise property entitlements or hinder the project’s conclusion. Consequently, the responsibilities and privileges of each party ought to be explicitly outlined, along with the protocol for terminating the pact.

5. Should foreign investors consider hiring a Romanian lawyer or legal advisor for real estate deals? What particular safeguards can this legal counsel provide, and are there key local regulations they ought to know about?

Foreign investors are strongly advised to work alongside a real estate attorney when dealing with properties in Romania. Understanding the domestic legal framework, mastering the intricacies of real estate deals, and navigating possible hazards necessitate a skilled professional who can safeguard your investment interests. An experienced lawyer will perform an exhaustive due diligence investigation—confirming titles, reviewing permissions, scrutinizing developers’ backgrounds, and uncovering any liens or litigation tied to the asset. Furthermore, they will prepare, discuss terms, and examine agreements, making sure critical provisions like penalties, guarantees, and completion timelines are properly addressed. In addition, the lawyer ensures adherence to regional laws, uncovers latent legal or fiscal challenges, and devises strategies to minimize these issues throughout the deal’s execution phase as well as post-transaction phases.

There are essential regulations that the investor’s team should be aware of, which is why it’s important for them to have a specialized legal team by their side. These include the Civil Code, which regulates the sale contract, warranties, property rights, and contractual obligations in general; Law No. 50/1991 regarding the authorization of construction works; Law No. 10/1995 on construction quality, which establishes the developer’s obligations regarding post-delivery warranties and quality standards; Law No. 372/2005 on the energy performance of buildings, which requires developers to provide an energy performance certificate upon delivery of the property; and Law No. 85/2014 on insolvency prevention and insolvency procedures.

Elements such as Value Added Tax (VAT), taxes, and additional charges like notary fees are essential components of the transaction’s fiscal framework. A domestic legal advisory group plays a crucial role in keeping international investors well-informed and safeguarded from possible legal or practical hazards.

6. What steps should investors take to ensure that the property has all required planning permissions and adheres to local zoning laws? Can they use any public records or reach out to specific Romanian government agencies to check the legality of the project?

Several key procedures must be followed to confirm the legitimacy and adherence to rules of a real estate development in Romania, making sure the builder complies with town planning and land use laws.

The initial step involves obtaining the urbanism certificate – it’s the primary document up for review. This certification reveals how the plot is zoned for usage, restrictions related to building heights, the proportion of the lot that can be built upon (known as POT), and the factor governing land utilization intensity (referred to as CUT). Additionally, it encompasses various other pertinent aspects of urban development guidelines.

Step two involves obtaining the building permit—a crucial paper that authorizes the developer to start construction according to zoning laws, granted by the nearby city hall.

Step three entails obtaining the required approvals, such as environmental permits, utility connections for water, gas, and electricity, along with considerations from civil protection entities or oversight from historical monument authorities when relevant, all of which should be detailed within the urban planning permit.

It is crucial to confirm whether the developer adheres to local zoning laws, which are outlined in documents such as the General Urban Plan (PUG), Zoning Plan (PUZ), or Detailed Urban Plan (PUD). Potential investors should ensure that the project aligns with these regulatory standards.

Institutions where one may seek this information encompass local city halls, the National Inspectorate for Buildings, the Environmental Protection Authority, the National Agency for Cadastre and Real Estate Registration, and the Public Urban Development Register. Notably, certain municipal offices like those found in Bucharest or Cluj-Napoca provide internet-based access to urban development records and approved licenses.

Nevertheless, verifying the legal adherence of the project is crucial to prevent possible legal or fiscal hazards in the future.

7. What financial safeguards are provided for purchasers, particularly when buying properties at the project or pre-construction phase? Is there any provision under Romanian law for mechanisms like escrow accounts, warranty funds, or similar secure means to protect buyers’ down payments?

Buying a property prior to its completion comes with various financial risks; however, Romanian laws offer multiple safeguards for purchasers. Developers have the option to utilize escrow accounts to handle funds from buyers. These monies are disbursed solely as per the advancement of building work, following a predetermined schedule. Although employing such accounts isn’t legally required, it’s advised as a means to minimize potential fiscal hazards for the buyer.

Moreover, developers have the option to provide tangible assurances like mortgages or intangible ones like bank guarantee letters to secure the reimbursement of funds should the project fail to be completed. This serves as another safeguard for purchasers against potential insolvency of the developer. Occasionally, developers might also obtain insurance coverage aimed at mitigating risks associated with unfinished projects or considerable delays.

A different approach entails organizing payments in accordance with the construction milestones, allowing purchasers to pay in increments as each phase of the project is completed. This strategy minimizes financial risk from possible hold-ups or problems and stops investors from paying a significant portion of the total cost during the initial phases when the investment is most susceptible to risks.

It is advised that purchasers, be they individuals or corporations, should discuss contract terms clearly outlining deposit refunds, consequences for late payments, and additional safeguards, along with specifying conditions for ending agreements. In essence, working alongside an attorney capable of suggesting legal strategies to minimize risks would be prudent.

However, there is a legislative proposal currently in the legislative process at the Senate in 2024. In its initial form, real estate developers could request an advance of a maximum of 10% of the total value of the property upon signing the sales promise. If the developer takes out an insurance policy that protects the investment, the advance can rise to 40%. Furthermore, advance funds must be deposited into a special account designated exclusively for the project and used solely for it. This legislation aims to protect buyers, increase transparency in the real estate market, and hold developers accountable. This legislative proposal has not yet been adopted.

8. Do insurance programs or safeguards exist to protect investors’ funds should a developer face bankruptcy? Is it possible for investors to buy supplementary insurance separately to enhance protection against non-delivery risks?

Even though the Romanian market includes certain safeguards, investors ought to take initiative in securing their financial well-being. Individuals who buy properties during development phases encounter considerable hazards such as developer bankruptcy. While legislation and procedures in Romania do offer some protective features, these systems lack complete standardization.

Hence, developers provide certain assurances such as insurance policies to safeguard pre-paid amounts from purchasers, specialized accounts for these advanced payments, and the initial sum must be placed into a designated account earmarked for the particular project being handled by the developer. This system offers a degree of security because the finances are utilized solely for the advancement of the specified project.

Moreover, investors have the option to choose standalone insurance policies that offer additional protection, like non-performance insurance, designed to safeguard against significant delays or failure to complete the project, along with insurance covering bankruptcy risks. These types of coverage are not frequently found in the Romanian marketplace but can be obtained via insurance intermediaries.

In addition, investors ought to discuss incorporating provisions into agreements, including conditions for deposit refunds and compensation for breaches in the event of contract cancellations, explicit consequences for project lags, along with a payout schedule contingent upon the advancement of construction activities.

9. What due diligence measures should investors undertake concerning the funding and construction schedule of the project? Are there methods to verify that a project has sufficient financing and monitor its advancement during the building phase?

To reduce the hazards involved in buying off-plan properties, investors ought to adhere to several measures aimed at evaluating the fiscal soundness of the builder, ensuring clear title deeds, and confirming the feasibility of the scheduled completion dates. Engaging professionals like separate legal advisors, financial analysts, and engineering specialists could assist in pinpointing potential dangers across each aspect.

10. What steps can investors take to secure consistent updates and transparency about the project’s progression? Should investors incorporate specific contract terms to ensure steady communication and proof of advancement?

To guarantee consistent updates and transparent communication about the project’s progress, investors ought to incorporate explicit provisions in their contracts outlining the developer’s duties for reporting as well as specifying the rights of buyers or prospective buyers to review pertinent information and documentation throughout all stages of construction.

These provisions guarantee openness and, indirectly, enhanced safeguards for investors. However, they ought to be adjusted according to the particular aspects of every individual project. Naturally, every agreement should be personalized to cater to the requirements and situations of all parties involved. The suggestions must undergo discussion and negotiation with competent legal professionals who will consider the distinct legal environment.

11. What steps can investors undertake to ensure that the final property aligns with the advertised specifications and quality? Are investors permitted to solicit independent inspections, or does the industry have specific regulations that developers must follow at the time of handover?

Investors have various methods at their disposal to ensure that the property under final stages of construction aligns with the promised specifications and quality levels as stated in promotional materials. These verification steps ought to be clearly detailed either in the initial contract or the purchase agreement. Potential actions might encompass conducting unbiased examinations, performing regulatory checks to confirm conformity with building codes and guidelines such as those related to health and safety protocols, ecological safeguards, and zoning laws, incorporating an inspection approval term, or stipulating a guarantee for structural integrity post-handover. This last provision compels the builder to address any faults or deficiencies identified within a set timeframe following transfer of ownership, adhering strictly to relevant statutes and mutually accepted terms laid out in the contract.

Furthermore, investors must adhere to specific building regulations. This involves working alongside certified specialists from the State Inspectorate for Constructions (ISC) throughout the construction process, ensuring adherence to safety norms, durability criteria, and city planning guidelines. Agreements might also require meeting global quality benchmarks or accreditations like ISO or LEED when relevant.

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The insights shared here were contributed by Lorena Ciobanu, a partner at ONV LAW, who boasts considerable expertise in offering strategic legal advice across various domains including construction, real estate, telecommunications, and labor laws. Should you seek additional details or necessitate legal representation, kindly proceed to their website for more assistance.

www.onvlaw.ro

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*This is professional content supplied by ONV Law.