I INTRODUCTION TO THE LEGAL FRAMEWORK
i Ownership of real estate
In Slovenia, the most common types of title to real property are: (1) ownership rights (which can be held by multiple parties simultaneously as co-ownership or joint ownership), (2) condominiums and (3) building rights.
The ownership right, as the principal in rem right, guarantees its owner, pursuant to the Slovenian Law of Property Code,2 to possess the real property, make use of it and benefit from it in the broadest sense possible, while having the power of disposal over the real property,3 which constitutes an exclusive and comprehensive right. The ownership right can be acquired on the basis of a legal transaction, inheritance, prescription or decision of a state body. Real property may be owned by more than one owner by way of a co-ownership and joint ownership. Such types of ownership by multiple parties may foresee predefined shares of each owner in the real property (co-ownership) or owners' shares that are not predetermined in relation to the entirety of the real property (joint ownership).
The principle that title to land also comprises the ownership of any building built on such land (superficies solo cedit)4 represents a basic principle of Slovenian real estate law with respect to real property ownership. However, Slovenian real estate law foresees two exceptions of this principle – namely, condominiums and building rights.
A condominium is the ownership right on part of a strata titled building, which also includes co-ownership on common parts of the building.
A building right is an in rem right5 to own a building on or under the land owned by a third party. A building right is transferable and may be established for a maximum of 99 years. It is established on the basis of an agreement and upon its registration in the land register. A building right may be pledged, and the pledge shall be registered in the land register in relation to the building right.
ii System of registration
The land register is an electronic and public database of rights and facts on the real properties and is kept and managed by the Supreme Court of the Republic of Slovenia.6 Applications for registrations must be filed electronically.7 According to the Land Registry Act,8 the following rights in rem on real properties may be entered into the land register: (1) ownership rights; (2) mortgages; (3) easement rights; (4) land charges; and (5) building rights. Additionally, certain contractual rights may be entered into the land register (e.g., lease rights, repurchase rights).
Upon the entry of its legal title in the land register, the acquirer of real property is well protected, as the person entered into the land register as the owner of a certain real property is assumed (erga omnes) to be the owner of such real property.9 Moreover, the acquirer shall not suffer any adverse consequences if it had acted in good faith and relied on information entered into the land register.10
Consequences of omission to file for registration of title or other rights in rem in the land register may result in possible loss of title over the real property or, respectively, other in rem right.
iii Choice of law
Slovenian law applies to all contractual relations subject to which a right in rem on real property or a lease of real property located on the Slovenian territory is stipulated. This lex rei sitae doctrine corresponds with the European legislation11 as well as the secondary applicable Slovenian legislation.12 Slovenian courts have exclusive competence over any disputes related to rights in rem, lease and disturbance of possession over the real properties situated on Slovenian territory.13
II OVERVIEW OF REAL ESTATE ACTIVITY
According to information provided by the Surveying and Mapping Authority of the Republic of Slovenia,14 the real property market growth continued in the first half of 2018, a trend that began with the growth of the residential real property prices in 2015. We believe that the price increase is a consequence of low interest rates, availability of financing from the banks, increase of holiday rental apartments and increased confidence in the market.
In comparison with the figures from 2017, the number and value of real property transactions closed in the first half of 2018 were slightly lower, although they remained at a relative high level. The slight decrease of the said figures can be attributed to the decrease in number of real property transactions because of the lack of new apartments and the increase of prices. Although prices of residential properties in the first half of 2018 did not quite reach the record values of the year 2008, they were very close, whereas the prices for houses with pertaining land, which were rising slightly more slowly than the prices for apartments, showed more potential for growth in comparison with apartment prices.
On the other hand, the number of commercial property transactions started to stagnate in 2018. The majority of transactions involved office premises, as the sale and purchase agreements of office premises represented two thirds of all market sales of commercial property. In comparison with residential property, the prices for commercial property stagnated in the last three years and did not show any signs of reversing this trend in the first half of 2018. The market on construction land transactions levelled off while the trend shows an increase of prices, whereas the agricultural and wood land transactions and prices showed a slight tendency towards growth.
III FOREIGN INVESTMENT
The right of foreigners (foreign nationals and legal entities established abroad) to acquire ownership of real estate in Slovenia is primarily set out in the Constitution of the Republic of Slovenia,15 which stipulates that foreigners may acquire ownership rights on the real properties if preconditions provided by law or by an international treaty ratified by the Slovenian parliament are fulfilled.
Foreigners are entitled to purchase real property in Slovenia if reciprocity is established by the Ministry of Justice, as stipulated in the Reciprocity Act.16 Prior to the acquisition of real properties, an application shall be filed with the Ministry of Justice to issue a decision on establishment of reciprocity with respect to the transaction. Statutory term for issuing this decision is 90 days and no ordinary legal remedy is admissible against it.
No reciprocity is required for foreigners from member states of the European Union (EU), who may freely acquire real estate in Slovenia (i.e., under the same conditions that apply to Slovenian citizens and entities). The same rules also apply for acquirers from member states of the Organisation for Economic Co-operation and Development (OECD), the European Free Trade Association (EFTA) and for individuals with the status of a Slovene without Slovenian citizenship. Companies established under Slovenian law can acquire real properties without any restrictions (i.e., establishment of reciprocity), regardless of its shareholders being foreign persons or entities.
With respect to the possibility of acquiring real properties in Slovenia, foreigners can be classified into the following groups:
- foreigners that do not require a decision of the Ministry of Justice on establishment of reciprocity (nationals and legal entities from member states of EU, OECD and EFTA);
- foreigners that require a decision of the Ministry of Justice on the establishment of reciprocity (nationals and legal entities from candidate states for future membership of the EU: Albania, Macedonia, Montenegro, Serbia and Turkey); and
- foreigners that can not acquire ownership on real properties or can only obtain it on the basis of inheritance (which, among others, include nationals and legal entities from Bosnia and Hercegovina, China, Russia and Ukraine).
IV STRUCTURING THE INVESTMENT
Real property may be acquired by way of an asset deal or by way of a share deal (if the real estate is owned by a legal entity).
In an asset deal, the transfer of title on real properties is made on the basis of an asset sale and purchase agreement concluded between the seller and the buyer of the real property, which could be a new entity or a pre-existing entity. In any event, the purchaser has to be validly established before the business sale and purchase agreement is signed. The purchaser becomes the singular legal successor of the acquired real property. Title on real property is transferred to the buyer based on a valid contract (asset sale and purchase agreement) and a specific mode of acquisition, namely by issuing a declaration allowing the transfer of ownership (clausula intabulandi) and the registration of title into the land register. In principle, asset deal transactions enable the purchaser to 'cherry-pick' real properties it wants to purchase and to leave less attractive land with the seller. Disadvantages of an asset deal are the following:
- there is no universal legal succession: valid legal title and specific modus acquirendi is necessary for the transfer of each asset;
- the acquisition of agricultural land requires a special proceeding and other pre-conditions (e.g., transfer may not be possible or is time consuming);
- consents may be required for the transfer of third party contracts or financing arrangements related to the land;
- the statutory right of a tenant to prematurely terminate the lease agreement may be triggered;
- statutory pre-emption rights (by municipalities or co-owners) need to be waived; and
- real estate transfer tax may be triggered by the transaction.
In a share deal, the shares of the entity holding real property would be transferred to the purchaser. The transfer of shares requires a valid share purchase agreement and the registration of the transfer of the share in the court register (with respect to business shares in limited liability companies) or central registry of dematerialised securities (with respect to shares of joint stock corporations). Generally speaking, a share deal is less complicated than an asset deal but would require the buyer to diligence the financial and legal status of the entire company.
For commercial real estate, it is usual to set up special purpose vehicles in form of a limited liability company.
Real property transactions structured as asset deals are subject to real estate transfer tax of 2 per cent (calculated from the value of the real estate including buildings), if the transaction is not subject to mandatory VAT (such as non-built-up building plots; sale of land with newly erected buildings that have not yet been handed over or used, or if the sale of such land happens within two years after the first handover or use) or if the parties have not opted into payment of VAT. The real estate transfer tax is a final cost and cannot be offset, unlike VAT. Share deals do not trigger real estate transfer tax.
V REAL ESTATE OWNERSHIP
Spatial planning policy in Slovenia has a national and local dimension and is included in strategic documents: the Spatial Development Strategy of Slovenia, the Spatial Order of Slovenia and the National Housing Programme. The National Spatial Plan is a spatial act that includes spatial arrangements of national importance. On a local level, each municipality has a Municipal Spatial Plan that needs to be in accordance with the National Spatial Plan and Spatial Planning Act.17 It can also be divided into more detailed plans for a certain area – a Municipal Detailed Spatial Plan. For any construction, reconstruction and change of use of the real property, a building permit shall be obtained in accordance with the Building Act.18 As a pre-condition to obtain a building permit, the investor may be required to pay communal fees to the competent municipality, for the use of existing infrastructure. Alternatively, the investor may enter into an agreement with the municipality according to which the investor builds and finances infrastructure; the building costs are in such case set-off against the communal fee.
A constructed building shall generally only be used after obtaining a use permit, whereas the Building Act foresees certain exceptions to this requirement (e.g. non-complex building objects).
Environmental liability in Slovenia is regulated by the Environmental Protection Act,19 which stipulates that in an event of any pollution on a real property, the 'polluter pays principle' applies, meaning that the person that caused a pollution is liable for remedying such pollution. This way the person that caused the damage or the direct danger of damage is encouraged to take appropriate measures and develop procedures for protection of the environment.
According to Slovenian case law, liability is limited only to abnormal environmental burdens (i.e. environmental burdens that exceed maximum levels of emissions, environmental standards, codes of conduct or legitimate use of the environment as stipulated in environmental legislation). If an environmental burden is not abnormal, the person cannot be held liable for the damages under the provisions of the Environmental Protection Act. This is also the case if a person that causes the pollution proves that it has acted in accordance with mandatory instructions of the competent public authority or in accordance with a permit authorising it to carry out certain activities.
If more polluters have caused pollution and the liability of individual polluters could not be determined, the polluters are jointly and severally liable for remedying the pollution and damages in this regard.
Real property transactions are generally taxed with a 2 per cent land transfer tax, which shall be settled by the seller upon the ownership transfer of real property in accordance with the Real Property Transaction Tax Act,20 except if the parties agreed that the land transfer tax shall be borne by the buyer. The transfer of real property shall be exempt of real property transaction tax in case the transfer is taxed with VAT.
In accordance with Article 44 of the VAT Act,21 the following real property transactions are exempt from VAT charge:
- purchase of land, except construction land;
- the purchase of buildings or building parts and land, on which the buildings are located, except if such purchase is performed before the buildings or building parts have been accommodated or used or if the purchase has been performed before the expiry of a two year period from the first use or accommodation; and
- the lease of real properties (including leasing), except:
- accommodations in hotels or similar hospitality providers, including the accommodation in holiday houses, holiday camps or areas intended for camping; and
- the lease of garages and areas intended for car parking.
Nevertheless, a taxable person – with the ability of full VAT deduction – performing real estate transactions, which are tax exempt, may agree with the opponent party (lessee or the buyer of real property) that the transaction is subject to VAT (general tax rate: 22 per cent), in lieu of payment of the real property transfer tax. This may be agreed on in the relevant transaction document and VAT statements no longer have to be submitted to tax authorities.
iv Finance and security
The most common form of security granted over real property in Slovenia is a mortgage. Under Slovenian law, a mortgage or a pledge is an accessory right and is therefore subject to the same legal consequences as the secured obligation; if the secured obligation is terminated, not valid or unenforceable, the same applies to the mortgage. Furthermore, the mortgage can not be separated from the secured obligation, which means that it can only be held and enforced by the creditor of such secured obligation.
The mortgage is validly established, if registered in the land register in favour of the creditor of the obligation secured with the mortgage, all on the basis of the mortgage agreement. The mortgage agreement may be concluded in a simple form (which only requires the mortgagor's notarised signature on the mortgage agreement) or in form of a directly enforceable notarial deed. Maximum mortgages that secure receivables up to an agreed amount may not be directly enforceable.
If a mortgage is not directly enforceable, the creditor must first file a lawsuit demanding the sale of the mortgaged real property to obtain an enforcement title, based on which an enforcement procedure can be initiated. If the mortgage is concluded in a form of a directly enforceable notarial deed, this first step is not required as such directly enforceable notarial deed is a valid enforcement title pursuant to Slovenian law.
In addition to the mortgage, lenders often require the fiduciary assignment of receivables under the sale and purchase agreement or lease agreements. It is not a perfection requirement to inform the third-party debtors (tenants). Rather, the duty to inform the tenants is usually triggered by an event of default. It is market practice to conclude the fiduciary assignments as notarial deeds, to have the assignment acknowledged in case of insolvency as a right to separate satisfaction or in case of an enforcement of third parties (Article 209(2) and Article 206 of the Property Code).
VI LEASES OF BUSINESS PREMISES
Lease agreements are generally governed by the Code of Obligations. In addition, leases for business premises or business buildings are regulated also by a special law, the Business Premises Act.22
Lease agreements for business premises may be concluded for a definite or an indefinite period of time.
Lease agreements concluded for an indefinite period of time terminate after expiry of the notice period of at least one year or earlier if termination of the lease agreement is mutually agreed.23 Termination of the lease concluded for an indefinite period of time must be made through court and a simple termination notice does not suffice.24 If the lease agreement concluded for an indefinite period of time provides for a termination notice period shorter than one year and a termination in a simple written form, such provisions are null, and statutory provisions apply.
Lease agreements for business premises concluded for a definite period of time expire with the end of the period for which they have been concluded.25 For lease agreements concluded for fixed term, the law does not determine the notice period that would apply in case of termination. Some legal scholars are of the opinion that in such case the same notice term of at least one year should apply; on the other hand, the Slovenian case law allows a shorter notice period to be contractually agreed for lease agreements subject to a fixed term.
According to the Business Premises Act, the landlord may terminate the lease agreement with immediate effect (i.e., without a termination notice period) if:
- the tenant is in default with the payment of monthly rent and costs (statutory law allows the landlord to terminate the lease if the tenant is late with the payment of rent for more than two months as of the day when he was reminded by the landlord);
- the tenant, despite a warning, is not using the leased premises and objects in accordance with the provisions of a lease agreement or is using lease premises with insufficient duty of care leading to significant damage; and
- the landlord, for reasons beyond his or her control, is permanently unable to use the leased premises designated for the performance of business activity, and therefore needs the business facilities or business premises for his or her own purposes.26
The tenant, on the other hand, may terminate the lease with immediate effect if: (1) the landlord does not hand over the business premises in time and in the agreed condition under the agreement; in such case, the tenant also has the right to claim indemnity for the damage suffered and to, by him or herself, arrange for the business premises to be in the condition that it should have been in when handed over by the landlord; and (2) the business premises require repair at the cost of the landlord and the landlord does not carry out the repairs within the deadline set by the tenant; the tenant also has the right to carry out the repair by him or herself; in both cases the tenant has the right to indemnification for the damage suffered because of the landlord's omission.27
Upon termination of the lease, the tenant must hand over the leased premises to the landlord in the same condition as it was at the time when handed over to the tenant taking normal wear and tear into consideration.28 During the lease term, the landlord is obliged to maintain the premises in the condition required for the intended use of the premises.29 Unless agreed otherwise, the tenant is obliged to bear costs for service charges of the premises and part of the common service charges.30 The tenant has the right to use the leased premises for the purpose determined in the agreement.31 If not otherwise agreed, the tenant is not entitled to make alterations to the business premises without the prior consent of the landlord. If not otherwise determined in the lease agreement, the tenant is not allowed to sub-lease the business premises without the prior consent of the landlord.32
In case the leased premises are transferred to a third party, the tenant may terminate the lease agreement, while considering statutory termination periods33 (one year with respect to the leases with an indefinite term and eight days with respect to the leases with a fixed term). Upon the transfer of the leased premises to the third party, provided that the tenant has not terminated the lease agreement, the acquirer enters into the lease relationship as the new landlord by operation of law.34
If the lease agreement is concluded for a definite term, such lease converts into a lease for an indefinite period of time if the tenant continues to use the leased premises after expiry of the term for which the lease agreement was concluded and the landlord does not file for an eviction court order within one month after the expiry of the lease term.35
VII DEVELOPMENTS IN PRACTICE
On 1 June 2018, three new laws relevant for the real estate sector entered into force in Slovenia, namely a Construction Act, new Spatial Management Act and a new Architecture and Civil Engineering Act.36 This was part of the implementation of the legislation reform with respect to the land use planning and construction. The most significant of the three laws with regard to potential investors are the Construction Act and new Spatial Management Act.
The new Building Act introduced several novelties for obtaining building permits as outlined below.
In general, a building permit needs to be obtained for the construction of new buildings, the renovation of existing buildings, the construction of substitute buildings and for change of use of the building. There is no need to obtain a building permit for minor building activities. The applications and requests in the construction proceedings are submitted via electronic means to the Spatial Information System. The Building Act foresees three types of proceedings for the issuing of building permits: regular, simplified and integral, in which the environmental impact assessment process is integrated.
In the regular procedure, the building permit shall be issued within the statutory period of two months. Within this simplified procedure, all necessary opinions have to be already obtained prior to the submission of the application and need to be submitted together with the application itself. Therefore, with respect to the simplified procedure, the law stipulates a shorter statutory period of one month. The integral procedure is applicable for the construction of buildings that have an impact on the environment. The environmental impact assessment process is now integrated into the administration proceedings for obtaining a building permit and therefore the environmental impact assessment does not have to be performed in a separate proceeding.
The process of obtaining building permits itself is integrated in the process of obtaining opinions by the opinion providers (i.e., state authority, municipality, holder of the public authorisation in the area of protection of environment, nature, cultural heritage, water supplies, etc.), which are issued for the purpose of obtaining a building permit and are the basis for issuing a building permit in construction matters. There is also a possibility of obtaining a pre-decision with respect to issuing a building permit. The investor may submit an application for pre-decision prior to submitting an application for the building permit. Such process facilitates the obtainment of an opinion of the competent administrative authority responsible for the issuing of the building permit on whether the intended construction is in accordance with applicable legislation. Even though the conditions set out in the issued pre-decision are binding in the proceedings for issuing the building permit, no construction works are allowed on the basis of such pre-decision. After the end of construction works, the investor has to apply for the issuance of a use permit for the building with the competent building authority. For demanding buildings and the buildings that have an impact on the environment, the use permit is obtained in special determination proceedings on the basis of a technical inspection of the construction. For less demanding buildings, a valid use permit can be obtained in a simplified proceeding, without a special determination proceeding and without a technical inspection. After the use permit is issued, the building is registered in a cadastral register ex officio.
The most significant changes (among others) with regard to the new Spatial Management Act are more effective spatial management, introduction of better judicial protection and a new concept of building land plot. The new Spatial Management Act stipulates a new level of spatial management (i.e., regional spatial plans). Municipalities are no longer obliged to issue a municipal spatial act (with the exception of urban municipalities) and can instead use the regional one. This will especially simplify big infrastructure projects pertaining land plots in several municipalities. Another novelty is also the introduction of a building land plot. It was established to ensure that a building constructed on the basis of a building permit may be used not only at the time when such permit is issued but also in the future. According to the past legislation, there were no obstacles for the owner to individually sell part of the land without the building and remaining pertaining land that were subject to the same building permit. That meant that in some cases the functionality of the building changed and it became very difficult or even impossible to function in practice.
As of 1 January 2019, the new VAT Act entered into force. With respect to real estate transactions, the new legislation abolished the obligation to submit VAT statements to tax authorities when the parties agree that the transaction will be subject to an optional VAT charge. Instead of such obligation to submit VAT statements, the new VAT Act introduced the obligations of the parties to prove the existence of an agreement on the optional VAT taxation of the real estate transaction, if demanded by tax authorities.
VIII OUTLOOK AND CONCLUSIONS
In general, Slovenian law provides a stable basis for real property transactions along with a functioning land registration system that is an objective and transparent way of presenting important data regarding real property ownership and other relevant rights in rem. The two mentioned aspects of real property in Slovenia therefore have a positive effect on the real property market in Slovenia facilitating stable investments in the long run.
In general, Slovenian law has developed rules and practices that form a solid basis for real property transactions, along with the land registration, which is transparent and provides meaningful information that is accessible by anyone.
Additionally, in light of the current economic situation and real estate market, real property investments and prices still show potential for growth and are therefore expected to increase. Furthermore, there are ongoing construction projects, which aim to offer new residential buildings and shall additionally benefit the real property market as well as widen the real property offer in Slovenia.
1 Markus Bruckmüller is a partner and Petra Jermol is a senior associate at Wolf Theiss.
2 Stvarnopravni zakonik – SPZ (Official Gazette No. 87/02 as subsequently amended).
3 Article 37 of the Law of Property Code.
4 Article 8 of the Law of Property Code.
5 Articles 256 to 265 of the Law of Property Code.
6 Article 3a of the Land Registry Act.
7 Article 125a of the Land Registry Act.
8 Zakon o zemljiški knjigi – ZZK-1, Official Gazette RS, No. 58/03, as subsequently amended.
9 Article 11 of the Law of Property Code.
10 Article 8 of the Land Register Act.
11 Article 11 of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).
12 Article 23 of the Slovenian Private International Law and Procedure Act – Zakon o mednarodnem zasebnem pravu in postopku (ZMZPP), Official Gazette RS, No. 56/99, as subsequently amended.
13 Article 64 of the Private International Law and Procedure Act.
14 Information provided by the reports on the real estate market in Slovenia, prepared by the Surveying and Mapping Authority of the Republic of Slovenia, available at: http://www.e-prostor.gov.si/zbirke-prostorskih-podatkov/etn/#tab5-970, last accessed 16 January 2019.
15 Article 68 of the Constitution of the Republic of Slovenia – Ustava Republike Slovenije (URS), Official Gazette RS, No. 33/91-I, as subsequently amended.
16 Reciprocity Act - Zakon o ugotavljanju vzajemnosti (ZAVza-1) (Official Gazette of Republic of Slovenia No. 27/2017).
17 Zakon o urejanju prostora – ZUrep-2, Official Gazette RS No. 61/17.
18 Gradbeni zakon – GZ, Official Gazette RS No. 61/17, as subsequently amended.
19 Zakon o varstvu okolja – ZVO-1, Official Gazette RS No. 39/06, as subsequently amended.
20 Zakon o davku na promet nepremičnin - ZDPN-2, Official Gazette RS No. 117/06, as subsequently amended.
21 Zakon o davku na dodano vrednost - ZDDV-1, Official Gazette RS No. 13/11, as subsequently amended.
22 Zakon o poslovnih stavbah in poslovnih prostorih – ZPSPP, Official Gazette SRS No. 18/74, as subsequently amended.
23 Articles 23 and 24 of the Business Premises Act.
24 Article 26 of the Business Premises Act.
25 Article 27 of the Business Premises Act.
26 Article 28 of the Business Premises Act.
27 Articles 15 and 16 of the Business Premises Act.
28 Article 21 of the Business Premises Act and Article 604 of the Code of Obligations.
29 Article 14 of the Business Premises Act.
30 Article 19 of the Business Premises Act.
31 Article 20 of the Business Premises Act.
32 Article 22 of Business Premises Act.
33 Article 613 of Code of Obligations.
34 Article 31 of Business Premises Act.
35 Article 27 of Business Premises Act.
36 Zakon o arhitekturni in inženirski dejavnosti – ZAID, Official Gazette RS No. 61/17.