This country-specific Q&A provides an overview to real estate laws and regulations that may occur in Bulgaria.
It will cover the most pertinent issues including ownership structures, restrictions, transfers, taxes and environmental contamination.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate
Bulgarian law recognizes sole/ co-ownership over real estate as well as different types of limited rights in rem. Real estate can be hold by natural and legal persons, private citizens, public entities, the Municipality and the State. Local natural and legal persons may acquire all types of property except those, owned exclusively by the State/ Municipality as public property in public interest.
Establishment and transfer of in rem rights are generally effected by a Notary deed executed by a duly qualified Notary public authorised to act within the area, where the property is located. As an exception, other title documents may be administrative acts, judicial acts, written contracts, etc. All title documents are subject to mandatory entry into the Property register. Any encumbrances, liens and third parties' rights are also entered in the Property register.
How is ownership of real estate proved?
Usually it is proved by a Notary deed. However, there are exceptions such as:
- Written contracts for acquired Municipality/ State property;
- Acts for Municipality/ State property;
- Articles of association/ Incorporation deeds for contributed in kind property;
- Decrees for assignment of property issued by a bailiff;
- Court decisions;
- Handwritten testament together with a notary protocol on its announcement;
- Contract with notarised signatures and content on transfer of commercial enterprise
The establishment, transfers, changes of rights in rem should be registered in the Property Register with the Entry Agency to the Ministry of Justice. The contributions in kind and deals with commercial enterprise, which consist rights in rem is registered also in the Commercial Register. The registrations themselves are not a proof of title.
Are there any restrictions on who can own real estate?
European Union ("EU') citizens and entities registered in the member states of the EU and the European Economic Area are treated in the same manner as Bulgarian citizens and companies.
There are restrictions on the acquisition of ownership of real estate by other foreigners (i.e. foreign-registered or foreign-controlled entities and foreign individuals). However, companies registered in Bulgaria, are considered local legal entities and are often used for indirect acquisition of real estate by foreigners.
Depending on the type of owner/ property as well as the nationality/ residency of the owner, the following restrictions may apply:
- agricultural land and forests cannot be acquired by political parties and foreign countries;
- agricultural land can be acquired by natural persons/ legal entities, who have been resident/ established for at least 5 years on the territory of Bulgaria. Companies established less than 5 year ago can acquire agricultural land if their shareholders satisfy the 5-year requirement for residency as well as the requirements in the next bullet;
- agricultural land cannot be owned by commercial entities (i) in which shareholders are directly/ indirectly companies registered in jurisdictions with preferential tax regime; (ii) which shareholders are not allowed to acquire agricultural land; (iii) which have issued bearer shares.
- agricultural land and forests can be inherited by foreign citizens by law (i.e. not based on a testament) but (unless provided otherwise in an international treaty) they are obliged to transfer the property rights to a third person within 3 years after inheriting them.
- foreigners, who are not EU citizens/ entities registered in the EU and the European Economic Area can acquire real estate only in accordance with the terms of an international agreement (if such exists), ratified under the terms provided for in the Constitution of the Republic of Bulgaria, promulgated and has entered into force
What types of proprietary interests in real estate can be created?
The main types of in rem rights over real estate are:
- ownership (sole ownership, co-ownership and condominium ownership);
- right to build;
- right to use;
- еasements (servitudes)
Ownership is the right to possess, use and dispose of property. The ownership is not limited by a specific term. The right may be acquired through legal transaction, prescription or other means provided by the law. The right of ownership shall be lost if another person acquires it or if the owner renounces it. An owner of an immovable property shall not perform such acts in its property which create obstacles, greater than the usual, for the use of an adjacent property.
The right of ownership may belong jointly to two or more persons - the state, municipalities and other entities and individuals. The shares of the persons shall be deemed equal until proven otherwise. Each joint owner shall participate in the benefits and burdens of the common property in proportion with its share. In case of co-ownership over a real estate the co-owner can transfer its title to a third person only after proving that the other co-owners refused to buy it under the same conditions.
The owner may cede to another person the right to construct a building on its land, whereby the other person becomes owner of the building (right to build). The owner of the land may also transfer independently from the land the ownership of an already existing building. Ownership of a building independently from the underlying land may also be created through voluntary partition. The owner of a building may use the land to the extent that is necessary for the use of the building according to its purpose, unless the act with which the right is ceded provides otherwise. This right may be limited by term. After the expiration of the term the ownership of the building shall pass gratuitously to the owner of the land.
The right to use includes the right to use the property in accordance with its purpose and the right to the benefits thereof without causing any essential changes to it. This right is not transferable. The user should pay the expenses related to the use, including taxes and other charges, maintain the property in the state in which it was received, and return the property to the owner after the termination of the right to use.
The easement is an in rem right set up in favour of an owner of a property with respect to another person’s property. The easement is usually set up with respect to two adjacent properties, although it is not necessarily the rule. This right may be limited by term.
It should be noted that through leases can be provided contractual and not in rem rights. Similarly, the mortgages are considered by the Bulgarian legal doctrine as a form of security - a creditor whose debt is secured by a mortgage shall be entitled to be satisfied preferentially from the mortgaged property's price, whoever its owner might be.
Is ownership of real estate and the buildings on it separate?
Yes, it is allowed different persons/ entities to own separately the land and the building(s) on it.
The owner may establish in favour of another person the right to construct a building on its land, whereby the other person becomes owner of the building. Also, the owner of the land may transfer independently from the land the ownership of an existing building. Ownership of a building independently from the underlying land may also be created through voluntary partition.
The general rule is however that ownership of a land extends over any buildings erected on it.
What are common ownership structures for ownership of commercial real estate?
Usually the ownership over commercial real estate is allocated to legal entities (i.e. оn rare occasions it is a direct ownership by natural persons). The reasons for that are:
- the limited liability of the legal entities (i.e. the limited liability company or joint stock company);
- the publicity, surrounding the legal entities (e.g. the annual financial statements, pledges and insolvency requests are all published in the Commercial register);
- the transfer of land with buildings on it is subject to VAT taxation (thus, a legal entity being the acquirer will be able to make use of the VAT tax deduction rules)
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
Based on the initially provided by the seller title documents, several checks in public registers/ institution should be completed. Due the complexity of the matters concerned, it is recommended assigning of a lawyer to conduct such thorough due diligence.
Usually the following multiple searches are undertaken/ documents requested:
- searches in the Property register (i.e. if the right is entered there; review of the title history of the property and whether the ownership rights of the seller can be justified based on consecutive transfers between the former predecessors; existing liens, encumbrances, mortgages, claims filed by third parties);
- Sketch/ Cadastral map from the Agency of Geodesy, Cartography and Cadastre. It is necessary to verify the current factual status of the property (e.g. location, designation, way of use, area, neighbours). It shows the registered owners of the property, their title documents as well as the identification number of the property, which is used for accomplishment of most of the checks as well as in the transaction documents;
- checks of the zoning status of the land. Depending on the location, this could be done online or in the respective municipality. Concerns the allowed construction parameters for the respective/ neighbouring plot(s) (for free);
- Certificate for entered encumbrances over the property by the Entry agency;
- Certificate for registered pledges by the Special pledges register;
- Certificate for existing restitution claims by the regional administration bodies or the agricultural land commission;
- Certificate for lack of issued act for State and Municipality property;
- Certificate for the identity of the land (if one and the same land is marked with different numbers in the title documents and cadastral map) from the Agency of Geodesy, Cartography and Cadastre. This certificate is needed in order to establish which land is subject to sale;
- searches in the court case registers regarding pending proceedings against the seller and the property;
- searches in the commercial register regarding the status of the seller, its enterprise, annual financial statements, insolvency or liquidation proceedings, registered pledges on shares, etc.;
- searches in the Central register of debtors concerning pending execution cases against the seller
For some of the above described searches and certificates the buyer needs cooperation from the seller, as sometimes only the latter is entitled to receive the information about the property. Further, the seller should provide a tax evaluation for the property, from which unpaid property taxes are evident as well as a declaration for lack of public duties.
What legal issues (if any) cannot be covered by usual legal due diligence?
Some issues cannot be established during the LDDR if they are not disclosed by the seller. For instance:
- existing lease contracts, which have not been entered into the Property register will be binding for the buyer for up to a year;
- rights of third person(s) (even ownership based on the expiration of the statutory prescription period for more than 10 years) based on factual holding of the real estate in a way demonstratively excluding the right of the owner;
- any other information that is not contained in the public sources of information and not visible from the seller's documents
Since the legal due diligence is based primarily on the private documents presented by the seller and the entries into the public registers. Thus, any information that is not contained in those sources/ any misrepresentation therein will hardly be considered in the due diligence report. The possible risks should be prevented by explicit representation and warranties of the seller and setting forth respective penalties for the cases of misrepresentation and false declarations.
What is the usual process for transfer of commercial real estate?
The usual process includes:
a. Due diligence process
Based on the information provided by the seller (e.g. ownership title documents, sketch), the buyer (with the assistance of a lawyer, other consultants (if needed) undertakes the relevant checks (please refer to sections 7 and 8). Depending on the risks identified and mitigation measures proposed/ undertaken, the buyer makes its decision on acquisition of the property (including by defining the condition precedents to that).
b. Preliminary agreement
Once the decision for the transaction is taken, usually the parties negotiate and sign a preliminary agreement, which should set the main aspects of the deal: description of the property/ other rights in rem, transaction prise and manner of its payment, seller's and buyer's obligations, the term for execution of the final deal, any conditions precedents to the deal, any deposit due as a security for fulfilment of the obligations under this agreement, the Notary public (or the manner of its defying) who is chosen for the execution of the final deal, representation and warranties, agreed penalties.
The preliminary agreement should be signed in a written form for validity and under the Bulgarian law it can be announced as final by the court upon a claim of the non-defaulting party in case the other party breaches its obligations to sign the final agreement. Therefore, it is of high importance the preliminary agreement to has the contents prescribed under the law in order to be enforced by the court.
The execution of a preliminary agreement is not mandatory step of the transaction but is often used to provide time for preparation of the final deal and meanwhile - to secure the signing of the final deal.
c. Preparation for execution of the final agreement
In the period between the preliminary and final agreement usually the parties arrange any open issues, such as: issuance of missing official documents, applying for financing, preparation of PoAs, decision and declarations necessary for the final deal, rectifying any discrepancies and insufficiencies in the documents.
d. Final agreement and delivery of the possession over the property
The transfer of real estate should be executed in front of a Notary public (in charge for the location where the property is located) in the form of a Notary deed. The Notary checks all relevant documents in original, reads the Notary deed and then it is signed by the parties and the Notary.
Usually the transaction price should be paid as of the date of the final deal. In any case, the Notary deed should clearly state if the prise is paid or how it would be paid (e.g. via bank credit or in instalments after signing of the final deal). The buyer should confirm to the Notary that the price is paid/ it is agreed to be paid as written in the Notary deed. After such confirmation (as of the date of the final deal) the Notary shall register the deal with its records and provide the deed for entry into the Property register with the Entry agency. Before that a stamp duty land tax, notary tax and fees for entry of the notary deed into the Property register should be paid.
Normally the possession of the property is delivered as of signing of the final deal, but the parties may agree otherwise.
e. Registration with the tax authorities
In several days after signing the Notary deed it will be registered into the Property register and the parties can obtain original of it. In 2 months term as of final deal, the new owner should declare the acquisition in front of the tax authorities.
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Sometimes the transfer of ownership is effected by way of share transfer or by selling all/ part of the commercial enterprise as a combination of assets, obligations and receivables. In such cases the acquirer avoids paying taxes for acquiring ownership over the immovable asset (the so-called stamp duty land tax).
However, often the buyer prefers asset acquisition in order to avoid any risks related to the company/ commercial enterprise. Further, the required due diligence investigation in case of share/ commercial enterprise transfer differs significantly and may cause additional costs and concerns. The contractual protection which the buyer needs also increases and purchase contracts become more complex.
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
The following applies:
- If the lease contract has been entered into the Property register, it is binding for the buyer of the property for its entire term;
- If the lease contract has a certified date (i.e. the date has been certified by a Notary public), its terms are binding for the buyer but for no longer than a year as of the transfer of ownership;
- If the date of the lease contract is not certified, each of the parties can terminate it with a one-month notice. If the rent price is stipulated on a daily basis, the termination notice is one business day
In any case, if the lease contract is terminated prior to the agreed term, the lessor (the former owner) is liable for any damages to the lessee. Contractual clauses may envisage additional consequences with respect to the sale.
As to the question, who shall receive the rent price – the previous or the new owner, this is not expressly settled in the law but usually the new owner is entitled to receive the lease price after the transfer of the ownership. For avoidance of any doubts, the parties may agree on this aspect explicitly in the purchase contract and inform the lessee.
Concerning the agricultural land, there is a special act which regulates such leasing relations. If it is agreed in the contract, the legatees, respectively the legal successors of the lessee shall substitute the latter as party to the leasing contract. They shall be obliged to inform immediately the lessor about the substitution and to name their representative. The acquirer of the leased property shall substitute the lessor as party to the leasing contract, if it has been registered, even if the property has not yet been transferred. If the contract has not been registered it shall have effect regarding the acquirer for a period of two economic years after the year of acquiring.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
The right to build grants the right to build on the land owned by another person/ entity. This right is a transferrable right and may be limited by term. Its beneficiary has to construct the building within 5 years as of the establishment of the right (or as of acquiring the necessary access to build). Otherwise the right shall expire.
The right to use includes the right to use the property in accordance with its purpose and the right to the benefits thereof without causing any essential changes to it. This right is not transferable. The user must pay the expenses related to the use, including taxes and other charges, maintain the property in the state in which it was received, and return the property to the owner after the termination of the right of use.
The easement (servitude) is an in rem right set up in favour of an owner of a real estate, with respect to another person’s real estate. Easements frequently arise among owners of adjoining parcels of land, when one land cannot be effectively used unless its owner has a form of limited in rem right over the adjoining land. Usually, with easement are provided the right to trespass, rights of way and rights related to infrastructure facilities. Easements can be established by contract or when specifically provided in the law (e.g. Electricity Act; Waters Act etc., with an administrative act).
The leases are contractual rights created via contracts, which do not need to be notarized. There is no limitation as to the duration of commercial lease contracts (unlike in the case of non-commercial leases, where the time limit is 10 years). The terms and conditions of real estate lease contracts if entered into the Property register are obligatory for any subsequent acquirer.
A form of burden over a property is the mortgage, which is created with a notary deed for an initial period of 10 years, subject to entry into the Property register. The mortgage gives the privilege to its beneficiary to receive the amount of the debt from the price of the property with priority before other creditors respecting the order of the registered mortgages.
Another form of security is the registered pledge over immovable property of the debtor (as a part of enterprise). The contract for the registered pledge should be entered into the Special pledges register. The creditor (i.e. beneficiary of the registered pledge) is entitled to receive with priority the price of the pledged asset or the compensation for it. Such pledge is opposable to third persons as of its registration. Enforcement proceedings include a simplified out-of-court procedure for sale the property.
As an interim measure the creditor may impose an injunction over real estate of the debtor. via obtaining of a preservation order from the court and entering it in the Property register. The injunction prevents the owner of the property from disposing of it and entitles the creditor to receive amount of the debt from the price collected through the public sale even if the property has been subsequently (after registration of the injunction in the Property register) transferred to a third person, who is not initially liable for the obligations of the debtor.
The property rights can be protected via several claims:
- The rightful owner, who does not hold possession over the property, may seek protection from the court against any third person, who is in possession of the property;
- The owner may request termination of any act of any third person creating obstacles for exercising of its right without lawful grounds;
- The owner may raise a claim for defining of the boundaries between its land plot and the neighbouring ones;
- Any person, who has been in possession of the real estate for at least 6 months, may seek judicial protection against third parties infringing its rights.
The publicity of the Property register and the mandatory registration also ensure protection against actions and transfers done in bad faith.
Are split legal and beneficial ownership of real estate (i.e. trust structures) recognised
They are not recognised under the Bulgarian law.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
Owners and persons, having limited in rem rights over real estate have to pay an annual real estate municipal tax, the amount of which is determined by the municipality based on the size, location and the tax assessment of the property.
Owners and users of real estate also owe a waste tax, the amount of which is determined by the municipality based on the number of people using the real estate or the quantity of the waste produced (the choice is left to the municipality).
In case of direct acquisition of real estate, the acquirer shall pay stamp duty land tax, amounting to up to 3.5 % (determined by each municipality) from the value of the transaction or the tax assessment of the property – whichever value is higher. The parties should also pay a notary fee determined in accordance with the state tariff as well as a fee for entry into the Property register (0.1 % of the transaction value).
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
The parties are free to negotiate the rental price for the property, and no restrictions apply. Rent for office space is usually determined as a fixed amount. The rent for commercial space is usually a combination of a fixed amount and turnover rent. Sometimes the rental price may be subjected to annual adjustment based on commonly used price indexes (like LIBOR and others).
In addition to the lease prise, usually in the commercial leases a management fee is due separately (or explicitly included in the lease prise; determined as a fixed price per 1 sq.m.).
Commercial leases are executed either for a fixed term or with a clause, stipulating repetitive renewal unless one of the parties sends a termination notice within the specified time limits. Representative of the lessor who have only managing functions, can represent the lessor and sign a lease contract for a period no longer than 3 years. For longer lease contracts these representatives need an additional authorization.
The law generally allows the subletting of real estate without the consent of the lessor (the lessee is responsible for any damage caused by the subtenant). However, usually the parties agree on subletting with the lessor's consent.
The costs associated with the ordinary use and depreciation of the real estate are payable by the lessee. All other material costs and damages of the property are to be borne by the lessor, unless they have been intentionally caused by the lessee. If the lessor refuses to undertake the necessary reparations, the lessee is entitled to undertake them and to receive a compensation from the lessor.
How are use, planning and zoning restrictions on real estate regulated?
The following main types of regulation apply:
- General regulation plans ("GRP") defining the general guidelines of use, regulation and main construction parameters;
- Detailed regulation plans ("DRP") determine in further details the designation of the land, boundaries, location of infrastructure elements, the permissible construction parameters (i.e. building height, lines, distance, location, green space zones and others)
Special regimes for land use and construction may be created, which are in deviation of the prescriptions of the DRP, for territories, subject to special territorial protection (cultural properties, sport facilities and others specified in law). The regulation of the sea side, military zones, areas/objects with national and regional importance and others are subject to a special set of rules.
The GRP and DRP are adopted by municipal administrative bodies. Before entering in force, GRP are subject to mandatory public consultations, whereas DRP are subject to announcement and publication and only interested parties (for example affected private land owners and investors) may submit objections against the proposed DRP. Both types of regulation plans may be subsequently amended, by way of exception, in limited by law cases.
Who can be liable for environmental contamination on real estate?
The polluter-pays principle is the guiding principle. All owners, lessees or other users are obliged to keep the property clean and in good condition. Responsible for any pollution of real estate will be the person, who has caused/ contributed to it. Under the general tort law, the owner of an object is always liable for any damages to third parties/ their property caused by the object, thus the owner may be jointly liable with the polluter to third parties, whose rights have been infringed.
Is expropriation of real estate possible?
Real estate may only be expropriated by the state/ municipality if a significant public interest exists (e.g. construction of infrastructure, creation of green space, etc.), cannot be satisfied otherwise and only after payment of a fair compensation. A specific case of expropriation is envisaged for the purposes of regulation of lands with unapplied initial land regulation or out of regulation.
Is it possible to create mortgages over real estate and how are these protected and enforced?
Mortgages are often used as security for contractual obligations (both over the property of the debtor or such owned by a third party - with its consent). They are created through registration in the Property register on the grounds of a contract (i.e. Notary deed) or by operation of law (via written application). The content of the Notary deed/ application is prescribed by the law. Once established, the mortgage is transferred together with the title over the property to any next owner.
The initial period of validity of the mortgage is 10 years, which can be renewed for new 10-year terms.
The first-rank mortgage creditor is entitled to collect its debt from the price received by a public sale of the property, conducted by a bailiff. The mortgage creditor should have a lawful ground for receiving the price and may receive no more than the sum determined in the notary deed/ application for the creation of the mortgage. If there are other creditors with higher ranks (i.e. older mortgages), the creditor is entitled to receive what is left after the claims of the privileged creditors are satisfied.
The enforcement is a relatively straightforward process involving usually a court ruling and private bailiff actions.
Are there material costs associated with the creation of mortgages over real estate?
The costs for creation of a mortgage are:
- administrative fees for assembling the full set of documents needed for creating the mortgage (e.g. cadastral maps/ sketches of the property, different certificates issued by the Entry agency/ other regulatory bodies) – depend on the specific case but usually are not substantial;
- notary fees for execution of the notary deed – determined in the Ordinance for the notary fees, dependent on the type of the real estate and the debt value, secured with the mortgage but up to BGN 6000;
- fee for entry into the Property register with the Entry agency – 0,1 % of the debt value but not less than BGN 5
Upon renewal of the mortgage (after the expiration of each 10-year period) the notary's fee is half of this collected for the establishment of the mortgage, whereas the Property register's fee remains the same.
Is it possible to create a trust structure for mortgage security over real estate?
Such are not recognized under Bulgarian law.
What is the main legislation relating to commercial real estate ownership?
The main legislative acts governing the real estate aspects are the Bulgarian Constitution, Property Act, State Property Act, Municipal Property Act, Privatization and Post-privatization Control Act, Agricultural Land Ownership and Use Act, Forestry Act, Commercial Act, Encouragement of Investments Act, Territorial Development Act, Law on Contracts and Obligations, Condominium Ownership Management Act, Agricultural Lease Act, Civil Procedural Code, Cadastre and Land Register Law and the Regulation on Registration in the Land register etc.