When existing medicine would not help or new ideas for real estate transactions

Ģirts Rūda
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Who could have predicted that real estate market would turn from a flourishing rose garden into a valley of tears within one and a half year's time? From today's point of view, investments into real estate threatens to become a millstone round the neck, especially for those who invested loaned funds in real estate and did not accumulate more liquid reserves. Historically these investments have nonetheless lived up to the long-term profit expectations. Therefore the time, while the market is in decline, must be used focusing attention to worthwhile use of real estate and its organisation.

Here are some new solutions, which developers or owners of apartment projects can use in the present circumstances.

1. Lease with rights of purchase. In this case the owner (developer), who is unable to sell residential premises, concludes a fixed-term lease agreement with the client. Upon expiry of the term, the tenant is offered an opportunity to purchase the apartment property and the paid rent is included in the purchase price. During the lease term, the tenant pays the maintenance costs and charge for the public utilities. Problems can be caused by determination of the purchase transaction price, formulae for its decrease or increase and possibilities of the parties to withdraw from the transaction.

2. Transformation of residential premises into holiday (student) apartments. Such solution would not fit many; however, as a result of successful implementation it ensures the owner regular income. In order to decrease the risk project developer should carefully consider cooperation terms with tourism portals, form of settlement, terms of lease agreement and insurance against the caused damage to the apartment property and its fittings. Likewise it is possible to transform the residential house into student dormitories, offering to lease apartments for a small rent with students' obligation to pay the maintenance costs and for the public utilities.

3. Apartment purchase agreements with atypical seller's obligations. Encouraging the buyer, agreement may include seller's undertaking to cover the maintenance costs, public utility payments, credit interest until a certain term, Land Book duties or costs for fitting the house, instead of the buyer. From the buyer's point of view it should be considered whether he himself will have the necessary means to pay these costs in case the seller becomes insolvent.

Significant changes are observed also in the commercial object lease market. Tenants wish to decrease their costs significantly or they fail to fulfil liabilities, but the landlord must maintain profit or observe creditors' requirements. Assessing the future of a lease agreement, parties should turn attention to the following issues:

1. Be aware of parties' rights to unilaterally terminate the agreement. In case of office premises most agreements are concluded with minimal terms of termination (three to six months) which allow the tenant to terminate the agreement at short notice or claim amendments to separate lease provisions in exchange for lease continuation.

2. Evaluate presence and scope of security (money deposit or guarantees). Lately, guarantees from the mother company were used more often in practice. Therefore landlords should carefully follow whether the securities provided by the tenant are valid and whether the guarantor will be able to fulfil its liabilities.

3. React immediately to a decline in financial situation. Landlord must immediately notice warning signs of problems, for example, delays in payments or even default of payments, as well as payments performed by a third party instead of the tenant – they often are the first signs of tenant's financial difficulties. If any difficulties arise with the tenant, landlord should gather information of property owned by the tenant and its value, at which a collection would be possible to direct. It should be remembered that the law allows interim measure also before raising a claim.

4. Be aware of your priorities. If tenant begins to fail fulfilling obligations, the landlord should choose whether to vacate the property as soon as possible in order to lease it to another tenant or, taking into account the economic crisis and situation, when finding a new tenant is complicated, to agree to continuation of lease relations on easier terms, for example, decreasing rent payment. Legal proceedings are recommended only when all other means for regulating mutual relations, including negotiations, have failed to provide the desired result.

Unfortunately, also the described "medicine" or suggestions may not bring immediate solutions. One is nevertheless obvious – in this time of changes, solutions should be searched and implemented as soon as possible.