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This newsletter provides information which might help stimulate business and avoid legal hurdles. Daily practice shows that issues which might seem insignificant may later be a decisive factor. Therefore, we draw your attention to some of those issues in these pages.
1. SALE OF REAL ESTATE AND APPLICABLE VAT The new VAT rules on the sale of property have been in force for over a year. However, these have yet to gain wide acknowledgement and mistakes are often made when applying the rules. The obligation to pay VAT should not be overlooked when buying or selling real estate. Moreover, all notifications should be timely submitted: mistakes may be costly. For these reasons we will point to some of the main aspects of the new rules. In April 2012 amendments to the Value Added Tax Act came into force establishing a reverse charge mechanism on taxation of real estate for which inclusion of VAT is voluntary. VAT inclusion is voluntary when an immovable corresponds to the following three criteria:
Generally, it is an immovable occupied by a commercial building or a production building. When including voluntary VAT a reverse charge mechanism is applied where:
VAT inclusion is necessary and reasonable in situations where costs have been incurred or investments have been made by the seller over the past decade as regards the immovable in respect of which the seller applies for a refund of VAT from the state. If VAT is not included in the purchase price on sale of an immovable, the seller will have to adjust the input VAT deducted during this period. Previously deducted input VAT which may not be deducted as a result of the adjustment will have to be refunded to the state. When implementing the new rules, note that voluntary VAT inclusion requires prior written notification to the Tax Authority. The Tax Authority has not specified a separate format or set procedures for submitting notifications. Notification in a freely chosen format has to be sent to the Tax Authority by mail. In practice, the Tax Authority has accepted digitally signed and e-mailed notifications. Often the seller is not aware of the obligation to notify and the issue only arises upon preparation of a VAT declaration. Typically real estate transactions are preceded by intense rounds of negotiations in the midst of which notifications may simply be overlooked. Therefore, it is not uncommon that notifications are submitted late. The law does not indicate consequences for delays. In the worst case scenario the Tax Authority may assume that the prescribed conditions for VAT inclusion were not fulfilled and require adjustment of input VAT.
2. NEW APARTMENT OWNERSHIP AND APARTMENT ASSOCIATION ACT SOON TO BE ADOPTED The Ministry of Justice has initiated a third round of coordination of the draft Apartment Ownership and Apartment Association Act. The latest amendments concern possibilities for elimination of debt arising from unpaid management costs (including communal costs) in situations where apartment ownership is encumbered with a mortgage. The draft Apartment Ownership and Apartment Association Act will facilitate codification of apartment ownership law in the framework of which the draft Act will replace and merge the Apartment Ownership and Apartment Association Acts currently in force. The new Act will regulate all legal ties and relations concerning apartment ownership. Under the draft Act, management of all apartment ownerships will be carried out through an independent legal entity – an apartment association. Once the Act is in force, an apartment association will be automatically established when establishing apartment ownership. When apartment ownership is already in existence before entry into force of the new Act and is managed in the form of a community of apartment owners, an apartment association will be established by the state. The planned reform should eliminate problems that arise from the coexistence of the community of apartment owners and its administration. For example, when concluding contracts with third parties such as a contractor carrying out repair works, it is unclear under existing law who exactly constitutes a party to the contract – the administrator or owners of apartments. It is also difficult to ensure that an individual claiming to be an administrator in fact qualifies as such. An apartment association which is established automatically under the draft Act constitutes a far clearer and concrete party to any contract. In comparison with the Act currently in force the activities of apartment associations will become increasingly transparent for apartment owners. Each apartment owner will have access to banking details of the apartment association. Thus the new Act will eliminate risks of breach of confidence by the administration of the apartment association as all changes in the apartment association’s bank account are visible to apartment owners. The new Act will slightly modify the principles of liability of apartment owners as co-owners of the building. According to the draft Act, in case of danger associated with the building (e.g. falling icicles) claims for damages will be presented against the apartment association. In the case of management debt incurred the new Act will offer increased clarity for all parties concerned (apartment owners, apartment associations and mortgagees). A claim by an apartment association against an apartment owner will be secured by a lawful right of security enabling the apartment association to successfully enforce its claims even in situations where apartment ownership is encumbered with a mortgage which exceeds the value of the apartment. As opposed to transfer to the buyer (under procedures currently in force) of debt associated with apartment ownership, the new Act will clearly limit the scope of the right of security (up to 5% of the amount secured by the enforcement procedure). The new Act will further clarify regulations regarding insolvency of apartment associations. As with any legal entity, permanent insolvency of an apartment association involves applying for a declaration of insolvency. Following bankruptcy the apartment association will not be liquidated but will be reorganised. This means that the court will appoint a management arrangement for the apartment association to ensure its sustainable activities as well as rights of creditors. The amendments to the draft are based on the principle that an individual (whether an apartment owner or third parties bound by a loan agreement) wishing to exploit an apartment as security will ensure full payment of management costs of the apartment in addition to repayment of the loan. At the same time clear limitations established on the right of security enable increased security and clarity for mortgagees as opposed to legislation currently in force which enables an apartment association to present claims of unlimited scope on sale or execution of apartment ownership. Urmas Volens, head of the SORAINEN Estate & Construction Team, participated in preparing the draft Act.
3. COMPETITIVE CONSTRAINTS IN LEASE AGREEMENTS OF COMMERCIAL REAL ESTATE Parties to lease agreements often wish to agree on constraints which may conflict with prohibitions under the Competition Act. We have recently sought an opinion from the Estonian Competition Authority to ask for their specifications on competitive constraints in lease agreements of commercial real estate. As expected the position of the Competition Authority in the matter is conservative. According to explanations, a lessor and lessee whose market shares in a relevant market do not exceed 15% may not rely on exemptions laid down for agreements of minor importance. This is because the majority of problematic provisions (from the viewpoint of competition law) included in lease contracts restrict third person access to the market. These provisions include:
Therefore all competitive constraints included in lease agreements are regarded as conflicting with the competition law. However, it is possible to analyse this on a case-by-case basis and to take into consideration relevant circumstances in assessing whether constraints comply with conditions established for individual exemptions:
The Competition Authority explained its views as regards the conditions of two individual exemptions: restrictions on competition must be indispensable and should not allow the possibility of eliminating competition in respect of a substantial part of the market for particular goods. In conclusion, parties to a lease agreement with an exclusivity obligation exceeding 5 years should in any event expect that any restrictions are not indispensable for achieving efficiency and therefore conflict with the Competition Act. Lease agreement parties whose share of a particular market does not exceed 30% can feel somewhat confident regarding compliance with the criteria under the requirement that restrictions should not in any way allow the possibility of elimination of competition in respect of a substantial part of the market for particular goods. This is on the basis that in the case of smaller market shares one cannot, in principle, talk about substantially affecting competition. However, market shares below 30% or even 15% do not exclude the prohibition on restriction of competition in situations where the restrictions do not meet the remaining three conditions established for individual exemptions.
4. GRANTING CONSTRUCTION GUARANTEE – TO WHOM AND WHEN DOES THE OBLIGATION APPLY? By signing a contract for construction work the customer and the contractor may in addition to obligations under the contract agree on a contractor’s guarantee, which will establish an additional and separate legal relationship. Moreover, current legislation (as well as the Building Act draft) sets an obligation for the contractor to ensure conformity of construction work with established requirements as well as safety for a specified period. The contractor’s obligation arising under the Building Act is called a building guarantee. Both the building guarantee and the contractor’s guarantee complement the general rules on contractor’s liability. However, sometimes the contractor may be held liable in civil law (for causing unlawful damage) to parties it has no contractual relationship to (i.e. third parties). The legal delimitation of the four institutes – contractor’s liability, contractual guarantee and building guarantee work as well as civil law liability of the contractor – is legally problematic. In particular, it is debatable who and when should benefit from a building guarantee, what is the legal content of such an institute and what agreements it allows.
5. THE NEW INDUSTRIAL EMISSIONS ACT The Industrial emissions Act enters into force on 1 June 2013. The aim of the new Industrial Emissions Act is to transpose EU Directive 2010/75/EU on industrial emissions (integrated pollution prevention and control) into Estonian law. As the directive includes various fields of activity, to a large extent its provisions have already been previously transposed into Estonian law but are scattered between different legal acts. The Industrial Emissions Act will incorporate rules applicable to the industrial activities sector and set uniform requirements for operating industrial installations in a manner similar to the Directive. In comparison with earlier regulation some of the major amendments concern setting new emission limit values for combustion plants, waste incineration plants and waste co-incineration plants and for installations producing titanium dioxide as well as implementing best available techniques at installations requiring integrated permits subject to established requirements included in the Commission’s conclusions and reference documents on the best available techniques. Moreover, one of the more substantive amendments is the newly established obligation for installations requiring an integrated permit to publish baseline reports on the site and implement aftercare measures on decommissioning of installations. Another important item is implementation of an environmental monitoring system ensuring regular monitoring of installations and enabling adjustment of integrated permits whenever considered necessary. Further information on the Act and relevant procedural information can be accessed on the web page of the State Gazette.
6. GREEN BUILDING COUNCIL (GBC) COURSE: LEGAL REQUIREMENTS AND VOLUNTARY CERTIFICATION On 3 June, the Green Building Council (GBC) in cooperation with Law firm SORAINEN is organising a course on “Legal requirements and Voluntary Certification”. A full-day course will provide essential information on current and impending European and National legislation and international green building rating tools that are increasingly demanded by investors and dramatically changing how buildings are designed, constructed, operated and deconstructed.
For registration, please contact info@gbc.ee. |
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