Real Estate Transactions in 2024 - a Legal View

The 2023 geopolitical events propelled much of Europe and beyond into a whole new chapter of economic uncertainty.

This inevitably affected the Romanian investment landscape as well. However, despite 2024 being an election year in Romania, one should look beyond temporary structural difficulties into an improved market at the end of this economic cycle.

We see 2024 in Romanian real estate as a year of potential reset in terms of interested players, pricing, and availability of quality products.

For many long-term investors, real estate is a solid choice with less volatility than other assets, therefore being a safe(r) harbour. While governments and central banks take actions against global recession, as lawyers accompanying developers, investors and financial institutions, we believe that opportunities still lie ahead.

1. Financing real estate deals

In a time when the financing costs of real estate transactions remain borderline unaffordable for institutional products, the past year has shown that investors bringing equity to the table have had a clear advantage in acquisitions against investors which are highly leveraged. Nonetheless, owners of high volumes may still consider refinancing their portfolios to release both equity and leverage for new acquisitions.

In any case, many economic commentators consider that the current level of interest rates is temporary and a gradual decrease in the near future is becoming predictable, so buying now while having in mind later refinancing is something to be considered.

The (lack of) availability of bank financing have slowed down the investment market, but 2024 is expected to be a year in which new opportunities (such as adjustments of price expectation or quality asset previously unavailable being brought to the market) will arise – and that will show also potentially new bank financings into a more favourable perspective.

2. Buying real estate

The local legal framework on title to real estate (and its application in practice) remains imperfect and thorough due diligence is a must.

More than thirty years elapsed since the end of the communist regime and more than fifteen years after the deadlines for submitting claims under the special restitution laws. Nonetheless, Romania is still struggling to clean up property matters and solve restitution claims in what seems a textbook example of procrastination.

To make matters worse, information on claims is scattered between multiple authorities and difficult to obtain. The standard legal due diligence process now developed to include sending close to twenty different letters to various authorities for each property.

In Romania, validity of title depends on validity of previous titles. The good faith defence is relevant only to the extent it is preceded by due and proper due diligence. The standard (particularly) for institutional investors is very high and that puts potential acquirers in the position of investing a considerable amount of time and money in the pre-acquisition checks.

Even with a couple of months allowed for due diligence, sometimes deals end up being subject to conditions precedents which relate to obtaining confirmatory letters from authorities or, more often lately and almost as a standard requirement, to obtaining title insurance coverage – all to deal with title risks which cannot be addressed otherwise in due course.

3. Registering real estate

Checking the registration of the ownership right of the current and previous owners with the Land Book represents an important step in all real estate due diligence reviews. Ownership rights (as well as other real estate related rights) must be registered with the Land Book to be opposable against third parties.

However, land book registration is not absolute proof of ownership and validity of current title still depends on the validity of previous titles.

Following the entry into force of a new Civil Code thirteen years ago, the effect of land book registrations should have changed, for the registration to become a condition to the actual transfer of rights over real estate. However, this new effect of land book registrations will come into play only after the cadastral works are completed for each administrative unit (city or village). Until completion of the cadastral works, land book registration will continue to be performed for opposability purposes only and potential acquirers will still be unable to rely (solely) on land book registration.

4. Developing real estate

Real estate development in general is a complex process which entails a multitude of legal issues, mainly to do with authorisations and permissions of various parties for the purpose of developing the intended project.

Real estate development is also a dynamic process which involves a multitude of interactions with third parties. As such, there are many issues which may vary over the course of a project or as a result of particular situations or local practice.

For every new project it is important to correctly identify the urbanism regime, constraints and type of urbanism permitting to be secured. As the project gets to its final construction stages, it will be virtually impossible to correct a mistake done during the urbanism permitting phase.

With NGOs and private individuals becoming more aware and involved in urban planning matters, case law on challenged urban plans has expanded, along with the odds of vulnerabilities in the process of preparing and/or approving an urban plan being speculated by third parties. Much to the surprise of anyone not familiar with the local market, not only that challenges have been aimed at urban plans prepared by authorities themselves, but some of such challenges were also successful. When the annulled urban plan regulated a large area, private investments may also be affected, despite the investors themselves having done nothing wrong.

One of the basic rules in urban planning concerns the hierarchy between various types of urban plans: each plan must observe the higher-ranked ones, while changes are allowed only within specific limits. Nonetheless, corelation is not always achieved and that puts developments at risk. Most of the times, flaws cannot be cured otherwise than starting the whole process over.

Legislation on terms for challenging urban plans is particularly complex and prone to a variety of interpretations, which leads investors needing proficient legal advisors to grasp the severity of potential issues. ​ ​

Transactions are often subject to urbanism considerations – as ultimately urbanism is a matter of permitted use and (via building permits) title to buildings. The real estate legal industry for many years focused its due diligence efforts on issues related to title to land but has now started to develop more capabilities in assessing urbanism matters. Urbanism is no longer the exclusive backyard of architects. This sometimes brings the two professions to collide upon various urbanism issues, as lawyers are more conservative in interpretation while architects deal more often with local authorities.

Any future legislative changes will need to bring more clarity and coherence so that the two worlds – formal and functional – are not disconnected and in permanent struggle.