Dear clients and cooperation partners,
Looking back at 2010, we can see that the huge fall in the Latvian real estate market might have stopped. The first investors have appeared in the market to take advantage of lower price levels and have gradually started buying real estate. At the same time, the strongest developers are using lower construction cost options and have returned to developing frozen projects. However, no basis exists for over-optimism. The amount of bad assets is immense and banks will keep taking over properties of insolvent debtors and restructuring unsuccessful projects.
Nevertheless, even in these critical circumstances it remains important to follow changes to legal acts and changes in the market. This newsflash covers changes to municipal rights of first refusal, management regulation of residential properties, and the Competition Council opinion on leasing premises in shopping centres.
Head of the SORAINEN Real Estate & Construction Team in Latvia
- SHORTER DEADLINE FOR EXERCISE OF MUNICIPAL RIGHTS OF FIRST REFUSAL
- NEW RESIDENTIAL PROPERTY LAW
- MANAGEMENT OF RESIDENTIAL BUILDINGS
- WHAT SHOULD RETAIL SHOPPING CENTRES SELLING DAILY CONSUMER GOODS TAKE INTO ACCOUNT IN CHOOSING SHOPPING PREMISES?
- SORAINEN LATVIA REAL ESTATE & CONSTRUCTION TEAM NEWS
1. SHORTER DEADLINE FOR EXERCISE OF MUNICIPAL RIGHTS OF FIRST REFUSAL
On 1 October 2010, new CM Regulations No 919 “Regulations on Procedure and Time Limits for Using Municipalities’ Rights of First Refusal” came into force. The most significant changes implemented by the new legal regulation to real estate sale procedure are as follows:
- When submitting a copy of a purchase agreement to a municipal council, the original of the purchase agreement must be shown.
- When the municipality does not need real estate for municipal functions set by law, the municipality must prepare a statement waiving the right of first refusal. The statement must be issued earlier (within five business days from receiving the purchase agreement or a copy) than when deciding that the municipality needs the real estate (20 days from receiving the purchase agreement or a copy).
- On receiving a decision or statement from the municipality waiving the right of first refusal, the buyer can register title to the real estate with the Land Book without waiting for expiry of the entire term as set out above. However, if the municipality fails to issue a decision or statement waiving the right of first refusal before expiry of the 20 day term, the buyer can only register title with the Land Book on or after the twenty-seventh day after the municipality received the purchase agreement (or a copy).
Although the new legal regulation sets a shorter (ie, five-business-day) term in specific cases to exercise the municipal right of first refusal, if the municipality fails to observe this term it does not lose its right of first refusal and can still adopt a decision within 20 days after receiving the purchase agreement or a copy. Therefore the practical role of the new legal regulation to accelerate the real estate sale procedure actually depends on the working speed of each municipality.
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2. NEW RESIDENTIAL PROPERTY LAW
On 28 October 2010, a new Residential Property Law was adopted. This will come into force as of 1 January 2011 and substitute the previous law with a similar title. The new provisions are quite similar to the previous law but with some clarification and new regulations.
Under the new law, if the area of an apartment changes due to reconstruction but only within the limits of the apartment, changes in notional shares to a jointly owned property (ie, part of a building owned by all apartment owners proportionally) are not required.
The law also clarifies the decision making procedure and sets quorum requirements for the apartment owners’ community to adopt decisions. For example, decisions regarding changes to the jointly owned part, use of the jointly owned part, or establishing rights of first refusal to other apartment owners can be adopted only if all apartment owners vote for the decision. Decisions regarding most other questions will be adopted if more than half the apartment owners vote for the decision.
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3. MANAGEMENT OF RESIDENTIAL BUILDINGS
On 2 October this year, several CM Regulations were issued on the basis of the Residential Building Management Law. This regulates in detail issues of inspecting equipment and communications, technical servicing, regular repairs, and procedure for renovation and reconstruction, as well as sanitary cleaning of the building and completing the file of the house. This joint regulation is expected to facilitate more progressive and transparent cooperation among building managers and owners.
Overall, the new regulation for management of residential buildings already indicates the following:
- Apartment owners are responsible for management of residential buildings, and everything is decided by a majority of votes.
- The law specifies mandatory management activities.
- Building management appointed by municipalities for privatised houses that the apartment owners have not taken over performs minimum management services specified by law.
- Building management appointed by municipalities unilaterally determines a management fee according to the method specified by CM regulations and informs the apartment owners. If the owners do not take over the building themselves and do not agree upon a different payment, then the fee determined by the manager becomes effective.
- Legal relations with a manager freely chosen by owners are determined by agreement and the manager need perform only functions assigned to him.
- If a building is not put into operation or only rights to use are sold, then management functions can arise only on the basis of an agreement.
- Management of buildings in joint ownership (not divided into separate apartment properties and apartments are expressed in notional shares) is very difficult because the consent of all joint owners is necessary under the Civil Law.
- The law sets remuneration (that is, profit) for the manager as a separate part of the management fee. This remuneration is not limited and the manager does not have to report on its use.
- The law does not set a procedure for using the management fee collected. Thus in practice the manager’s costs are often covered but public utilities or repairs are not paid for, so the matter must be resolved by agreement.
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4. WHAT SHOULD RETAIL SHOPPING CENTRES SELLING DAILY CONSUMER GOODS TAKE INTO ACCOUNT IN CHOOSING SHOPPING PREMISES?
In September 2010, the Latvian Competition Council published an opinion on its home page (please click here) that a situation where a retail chain of daily consumer goods rents shopping premises used before by some other retailer can be considered as a merger within the meaning of Section 15, Paragraph one, Point 3 of the Competition Law. Although this practice has existed before, determining a criterion of turnover is a significant change. That is, in this situation the previous lessee’s (retailer’s) net turnover on the particular premises should (additionally to the new lessee’s aggregate net turnover) be taken into account instead of the premises owner’s turnover gained by letting out the respective premises. This opinion from the Competition Council is explained in that by renting the premises the shopping centre chain acquires or increases market share not only in the market for daily consumer goods procurement or the market for renting premises in shopping centres, but also in the retail market of daily consumer goods.
In addition to determining the occurrence of turnover criterion, it should be taken into account that it is insignificant:
- how long ago the previous lessee stopped using the particular premises;
- that at the time of the new transaction the previous lessee had ceased operation or gone bankrupt;
- that the market share of the previous lessee was small;
- that within the shopping centre, the premises used by the previous lessee do not coincide with the premises chosen by the new lessee (in this case the turnover generated by the previous lessee in the leased premises is also taken into account).
On 11 November 2010, the Competition Council adopted a decision whereby such a transaction was cleared with obligations for the new lessee (see here in Latvian).
Taking into account these changes, future transactions retail chains must especially consider whether the Competition Council must be told of a new lease of premises before concluding the transaction.
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5. SORAINEN LATVIA REAL ESTATE & CONSTRUCTION TEAM NEWS
Free of charge consultations to readers of Latvian morning newspaper
Starting Autumn 2010, specialists from the Real Estate Practice in Latvia have started to provide free of charge consultations on real estate and other topical issues to readers of the Latvian newspaper Neatkarīgā Rīta Avīze and magazine Māja. The latest questions and answers on real estate issues in Latvian are available here.
Latest transaction experience
- SORAINEN Latvia provided legal assistance to JSC Regionala investiciju banka on real estate and construction issues related to building a new bank main office (approx 4,000 m²) in Riga. Assistance included advice on real estate development and acquisition structure – including limited legal due diligence, drafting the LOI and real estate purchase agreement. SORAINEN lawyers also helped draft the construction contract, the construction supervision contract and represented the client in negotiations with the main contractor and construction supervisor.
- SORAINEN Latvia advised Riga Municipality on implementation of the Northern Corridor project. The office prepared a legal opinion on legal risks related to construction of a bridge in the frame of the Northern Corridor and shipping restrictions in the river Daugava. In its legal analysis SORAINEN evaluated potential claims by owners and occupiers of land against Riga Municipality for restricted rights of use, in particular in the light of the terms of their leases.