A Q&A guide to corporate real estate in Croatia. This Q&A is part of the PLC multi-jurisdictional guide to corporate real estate. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestatehandbook.
In the last year, the most significant events in the real estate market involved legislative amendments. These changes allowed real estate acquisition by EU legal and private entities without prior consent from the Ministry of Justice (which was previously required).
Since Croatia is still undergoing a process of transition, the most significant deals were infrastructural (involving roads, highways, stadiums, sports halls, hospitals, hotels and golf courses).
The structures commonly used (for example, property companies and partnerships).
Are real estate investment trusts (REITs) available? If so, are they commonly used?
Institutional investors.
Private investors.
While investing in real estate, investors primarily use property companies, with the aim of:
Mitigating tax duties.
Reducing personal liability.
REITS are not available in Croatia.
The role of institutional investors is significant. There is a developing trend of entering into joint venture agreements.
In larger projects, the most commonly used model is the public-private partnership.
The main laws that regulate real estate in Croatia are the:
Law on the Ownership and Other Property Rights (Official Gazette Nos. 91/96, 68/98, 73/00, 114/01, 79/06, 141/06, 146/08, 38/09 and 153/09), which defines property rights, their acquisition and protection.
Law on Land Registries (Official Gazette Nos. 91/96, 68/98, 137/99, 114/01, 100/04, 107/07 and 152/08), which regulates the organisation of Land Registries (see Question 5).
Law on the State Measurement and Cadastre of Real Estates (Official Gazette No. 16/07), which regulates the organisation of the Cadastre (see Question 5) and its content.
Bye-law on Organisation, Keeping of Land Registries and Managing Other Works in Land Registries' Court's Departments (Official Gazette Nos. 81/97, 109/02, 123/02, 153/02 and 14/05).
Real estate consists of a plot of land including everything permanently connected to it, whether on its surface or beneath (Article 9, Law on Ownership and Other Property Rights). Land and a building on it are usually registered in the same Land Registry file and under the same title. There are some exemptions, including registration of a construction right, where the building is removed from the original Land Registry file and registered with a new Land Registry file.
There are two separate public real estate registers in Croatia, each of them with a specific purpose and legal role, where all information relevant to the status of real property can be found.
The Cadastre is a public register of real property where the following data is recorded concerning a property's (Article 32, Law on the State Measurement and Cadastre of the Real Estate):
Location.
Shape.
Surface.
Method of use.
Production capability.
Cadastral income.
User or possessor.
The original purpose of the Cadastre, which was to ensure the proper taxation of land, was soon extended to other issues such as:
Regional planning.
Settlement of border disputes.
Possessor's rights.
The state's Administration offices manage the Cadastre (see box, Real estate organisations). The information recorded with the Cadastre serves as a basis for registering the data on real property with the Land Registry.
The Municipal Courts manage the Land Registry. It identifies land on the basis of cadastral records. In addition, the Land Registry keeps public records detailing the legal status of real property relevant for legal transactions (that is, all real property rights).
Title to real property can only be acquired by registering the qualified statement of the transferor on transfer of its ownership title to the transferee with the Land Registry (Article 119, Law on Ownership and Other Property Rights).
The following information is registered with the Land Registry:
A description of the real estate and surface ownership (co-ownership, joint ownership, individual ownership and neighbouring rights).
Servitude (real property or personal).
The right to build.
Mortgaging and various notifications (for example, of personal relations and pending law suits).
Once title has been registered, all documents providing the basis for registration (book of documents) are made public and cannot be protected from disclosure, due to the principle of publicity. The book of documents forms an integral part of the Land Registry.
The state guarantees the title of an individual (that is, the right to private ownership) (Article 48, Constitution), which is a material constitutional principle. The Law on Ownership and Other Property Rights further elaborates this principle.
The Law on Courts (Official Gazette Nos. 150/05, 16/07, 113/08 and 153/09) provides that Croatia is liable for damages caused by judges to citizens or legal persons, by illegal and irregular work in performing their judicial activity, including running the Land Registries.
Insurance companies do not offer insurance policies for Land Registry titles.
Real estate can be held under:
Ownership (which can be divided into individual ownership, co-ownership and joint ownership).
Leasehold.
Building right.
How is real estate marketed, when does commercial negotiation occur and what pre-contractual arrangements are used?
When is the sale contract negotiated and executed?
When are the parties legally bound?
When is the change of title registered?
When does title transfer and what are the formal legal requirements to transfer real estate (for example, in writing and signed by the parties)? Is notarisation required?
The real estate can be marketed through the organised real estate market:
Using selling and purchasing agents (realtors) or agencies.
Privately.
Commercial negotiation occurs before the sale contract is concluded, usually with participation of the financing banks.
There is pre-contractual liability for damages if either party (Article 251, Law on Obligations (Official Gazette Nos. 35/05 and 41/08)):
Enters into the negotiation without the intention of concluding the contract.
Negotiates in a manner contrary to the principles of conscientiousness and good faith (fairness).
Terminates the negotiations without reasonable grounds.
Pre-contractual arrangements such as preliminary agreements must be concluded in writing. The seller can allow the buyer to pre-register its title with the Land Registry on the basis of the preliminary agreement, but the seller's signature must also be notarised. Sometimes the buyer makes a down payment as security for the seller, and as a sign that the contract has been concluded.
The sale contract is executed once the parties have agreed on essential issues such as the price and object, that is, the real estate. The sale contract is usually concluded before a notary public, since the seller's signature must be notarised to enable the buyer to register its title with the Land Registry.
The parties are legally bound once they sign the sale and purchase contract.
The change of title is registered after one of the contractual parties applies to the Land Registry for the registration of title.
Title (or ownership) is transferred to the buyer at the moment of registration with the Land Registry. There are two minimum formalities to validate the sale and purchase of real estate:
The object of sale must be a real estate property that is not extra commercium. Extra commercium real estate are properties which, by their nature, cannot belong to one person or legal subject, but must belong to the whole community (Articles 3 and 4, Law on Ownership and Other Property Rights).
The transaction is strictly formal, that is, it must be executed in written form and the signature of the seller must be publicly certified (Article 377, Law on Obligations). If the buyer is a foreign national, further formalities must be observed (see Question 22).
The buyer may be able claim damages (for actual damage (damnum emergens)) under conditions provided by the Law on Obligations. A party is responsible for actual damage suffered by the other party, if this damage was caused by the injuring party negotiating without the actual will to conclude a contract (Law on Obligations).
If the sale agreement is signed and it is later revealed that the seller was not entitled to sell the real estate for one of the following reasons, the buyer can claim the invalidity (nullity) of the transaction, resulting in the return of all gains acquired (the sellers' liability for damages is not excluded):
He was not a registered owner of the property.
He was not empowered by the owner to conclude the agreement.
If the agreement was the result of a wilful misrepresentation by the seller.
Real estate due diligence usually includes:
Detailed investigation of the Land Registry and the Cadastre.
Verification that all tax duties concerning the real estate (real property transfer tax and value added tax (VAT)) have been fulfilled.
Review of all sale and purchase contracts, and the construction permit and usage permit.
Although representations and warranties are sometimes given about the material facts of the transaction and the abilities of the parties to exercise their rights, they do not carry the same importance as representations and warranties in the common law system.
Provided the contractual terms are not contrary to the Constitution, statutory laws and ethics of society, the principle of contractual freedom implies the freedom to (Article 2, Law on Obligations):
Conclude the contract.
Choose a form (transactions involving real estate are a notable exception to this freedom).
Determine the contents of the contract.
If the landlord sells or in any other manner transfers its right over business premises, the business lease is not terminated. The third party who acquires the business premises enters into the position of the former landlord, subject to the pre-existing lease, with all rights and obligations arising from it.
The seller retains liability for a misdemeanour, criminal act and civil liability for damages (see Question 11).
The buyer usually pays the:
Costs of due diligence.
Notary's fee.
Court fee for registration of its title.
Unless otherwise agreed, the seller does not usually have any costs.
Transfers of real estate are subject to VAT only when the object of the transaction is a newly constructed building, and if sellers are legal or natural persons subject to the VAT system. The bye-law on VAT (Official Gazette Nos. 60/96, 113/97, 7/99, 112/99, 119/99, 44/00, 63/00, 80/00, 109/00, 54/01, 58/03, 198/03, 55/04, 77/04, 153/05, 79/07, 97/09 and 149/09) defines new buildings as those built, delivered or charged after implementation of the bye-law, that is after 1 January 1998. In all other cases, transfer of real estate is subject to real estate transfer tax (see Question 18).
The tax rate for VAT is 23% of the taxable value. The taxable value for calculating VAT is based exclusively on the value of the building. For the value of the land relating to the building, real estate transfer tax is payable at 5% (VAT is not payable).
Tax liability is created at the conclusion of the contract whose object is the relevant real estate (Article 14, Law on Real Property Transfer Tax (Official Gazette Nos. 69/97, 26/00 and 153/02)). If a real estate acquisition is based on a court decision or on the decision of any other administrative body, tax liability is created when the decision comes into effect. Real estate transfer tax is generally payable at 5%.
The buyer must apply for taxation of the transaction to the Taxation Office with jurisdiction over the territory where the real estate is situated, within 30 days from the date of the contract's conclusion.
Generally, in a sale of a company owning real estate, real property transfer tax for the real property owned by the company is payable. However recent tax administration practice has provided cases in which real property transfer tax is payable.
Croatian law provides for targets to reduce greenhouse gas emissions. The main law relating to this matter is the Air Protection Act (Official Gazette Nos. 178/04 and 60/08). It sets out limitations on greenhouse gas emissions, such as the need to obtain a licence for emissions and the maximum level of emissions. This act implemented Croatia's air protection obligations as a result of Croatia's ratification of the Kyoto Protocol.
Regulations made under the Air Protection Act are the:
Regulation on monitoring emission of greenhouse gas in Croatia (Official Gazette No. 1/07).
Regulation on emission quotas of greenhouse gas and the means to trade emission units of greenhouse gas (Official Gazette No. 142/08).
Distribution plan of greenhouse gas emission quotas in Croatia (Official Gazette No. 76/09).
The main law that regulates meeting minimum energy efficiency criteria for buildings is the Physical Planning and Construction Act (Official Gazette Nos. 76/07 and 38/09). The following regulations, which implement Council Directive 2002/91/EC on the energy performance of buildings, have been made under the Physical Planning and Construction Act:
Regulation on energy certification of buildings (Official Gazette Nos. 113/08 and 91/09).
Regulation on conditions for persons performing energy inspection and energy certification of buildings (Official Gazette Nos. 113/08 and 89/09).
Regulation on rational energy use and heat protection in buildings (Official Gazette Nos. 110/08 and 89/09).
The Physical Planning and Construction Act and related legislation provide energy characteristics for every type of building. These characteristics represent the preconditions for obtaining a use permit, and must be demonstrated by an energy characteristics certificate issued by persons authorised by the competent ministry.
It is common for companies to manage their real estate portfolios and their accommodation needs by using third parties. Companies usually engage property agencies to dispose of their real estate and to find appropriate accommodation.
EU nationals do not require any special approval before acquiring real estate or other real property rights (mortgaging and servitude). A servitude is a charge imposed on an immovable (the servient land) in favour of another immovable (the dominant land), belonging to a different owner. Other foreign nationals must acquire special approval from the Ministry of Justice.
A change of control does not affect a company's holdings of real estate.
The government can force an owner to sell business premises to it when (Law on Expropriation):
It has determined that is in the interest of the state. This is done after obtaining the opinion of the local administration.
It is estimated that after expropriation the business premises will be of better use than previously.
For remuneration, the government generally aims to provide the former owner with other appropriate business premises in the same county, of similar value and suitable for the same purpose as the expropriated business premises (Law on Expropriation). However, due to the lack of appropriate business premises, the government usually pays remuneration equal to the real estate's average market value at the time of expropriation.
No taxes are paid when the owner occupies its own business premises. If the owner occupies a building of historic value, the tenant must pay a special historic buildings monument fee.
Acquisitions of large real estate portfolios are usually financed by loans and contributions to share capital.
To raise finance, real estate is commonly sold and then leased back to its former owner, or used as security for loans.
The most common forms of security granted over real estate are a hypothecation (mortgage over movable property) and fiduciary ownership (the transfer of real estate as a guarantee over a debt). To secure the enforceability of both forms of security, the hypothecation or fiduciary agreement must be made as a notarial deed and registered with the Land Register.
Securitisation defined as mortgaging and fiduciary transfer of the ownership over the real estate is frequently used as a means of securitisation of loans and other creditors' claims.
Securitisation defined as gathering a group of debt obligations such as mortgages into a pool, and then dividing that pool into portions that can be sold as securities in the secondary market, is not used. Parliament has not passed a specific law on securitisation.
The contractual lease provisions are left to the parties, except when the lease is contracted with the local authorities or for the benefit of protected tenants (the ex-beneficiary of the so called right to use of the apartments.)
Rent levels are left to the will of the contractual parties. A tenant must pay the contracted rent.
Landlords (both natural and legal persons) who are within the VAT regime must charge VAT on the rent (see Question 11).
There is no typical length of lease term. This is left to the contractual parties, as a lease of business premises can be concluded for a definite or indefinite period of time.
There are no special provisions allowing a tenant to extend or renew the lease. Only the landlord can do this, if the tenant fulfilled all its contractual obligations to the landlord. In this case, the landlord can offer an extension of the lease but only if, unless otherwise agreed, it offers the extension within 60 days before the expiry of the earlier contract.
The sublease of business premises is prohibited unless otherwise agreed between the parties.
Tenants can share their business premises with companies in the same corporate group with the landlord's prior consent. The terms are agreed between the contractual parties.
The tenant is not entitled to make repairs resulting in material changes to the construction, surface, and purpose of use or external appearance of the business premises without the landlord's consent. Generally, the landlord is liable for the costs of repairs necessary for maintaining the property in a proper condition and necessary for its main purpose. The tenant is liable for day-to-day repairs, particularly if attributable to its own fault.
The need to insure the leased business premises is not covered by law, and is left to the discretion of the contractual parties.
If a lease of business premises is concluded for a definite period of time, the contract is deemed to expire on the last date of the term of lease. If a lease is concluded for an indefinite period of time, it can be terminated in writing and is deemed to terminate on the last date of the termination notice period. If the other party defaults, the non-defaulting party can, at any time, terminate the lease, irrespective of whether it was concluded for a definite or indefinite period of time.
A tenant's insolvency does not affect the existing lease (Article 115, Law on Bankruptcy (Official Gazette Nos. 44/96, 161/98, 29/99, 129/00, 197/03, 197/04, 82/06)).
The main laws that regulate zoning, the use and occupation of land and buildings and environmental protection are the:
Physical Planning and Construction Act (Official Gazette 76/07, 38/09).
Law on Environmental Protection (Official Gazette No. 110/07).
Law on Expropriation (Official Gazette Nos. 9/94, 35/94, 114/01 and 79/06).
Law on Managing and Construction Conditions for Stimulation of Investments (Official Gazette No. 69/09).
The Physical Planning and Construction Act:
Provides the general rules of regional planning.
Provides the requirements and the method of drafting regional planning documents.
Provides the responsibility of the state authorities authorised to implement them.
Regulates the design, construction, and maintenance of buildings.
Sets essential requirements for construction and performance of activities of design, construction, and expert supervision.
Regulates organisation and construction inspection.
The Law on Environmental Protection regulates environmental protection and the state institutions that regulate environmental protection.
The Ministry for the Protection of Environment, Regional Planning and Construction (Ministry) undertakes administrative and routine tasks, as well as professional analysis concerning construction and the use of buildings. The Ministry also acts as the supervisory body for the implementation of state policy by the authority for the relevant territories for regional planning, construction and environment. Generally, buyers can obtain reliable information on these matters by approaching local and regional administrative bodies or departments competent for particular issues.
The Law on Managing and Construction Conditions for Stimulation of Investments regulates conditions for obtaining approval for the construction of buildings for which a location permit and approval of the main project is usually required. The law was passed to stimulate investment and has already encouraged projects during the recession. It provides special (that is, relaxed) conditions for obtaining construction approval, and shortened terms for issue (45 days). However, the law is only effective until 31 December 2010.
The following permits may be required for a development:
Location permit.
Building permit.
Permit for use.
A location permit is issued for every building except those with a surface area not exceeding 400 square metres (600 square metres for agricultural buildings). This is based on regional planning documents for every alteration in a spatial area, unless the alteration:
Relates to an area for which a detailed regional planning plan has been made.
Is otherwise provided by governmental regulation.
A location permit designates only the main characteristics of future construction and a related cadastral plot.
A building permit is required for the construction of buildings whose surface area exceeds 400 square metres. Legally, it is an administrative act by which the competent administrative body decides the applicant's right to build a specific building at a specific location (as provided by the location permit) under the building permit's specific defined rules. For the simplest buildings, the building permit can sometimes be replaced with the main project's approval.
Until 31 December 2010, the Law on Managing and Construction Conditions for Stimulation of Investments provides the possibility of replacing the location permit and main design approval by a simpler decision on construction, for buildings whose surface area exceeds 400 square metres.
The construction of a building whose surface does not exceed 400 square metres (or 600 square metres for agricultural buildings) can begin after obtaining a final decision on construction conditions (Article 209, Law on Zoning and Construction).
The final document required for construction is a permit for use, which is issued on satisfactory technical examination of a construction whose surface area exceeds 400 square metres (or 600 square metres for agricultural buildings). The simplest buildings can begin to be used after the final auditor's report on their construction has been filed with the competent authority.
Which body grants initial planning consents?
Do third parties have the right to object? If yes, please give brief details.
In what circumstances is there a public inquiry?
How long does an initial decision take after receipt of the application?
Is there a right of appeal against a planning decision? If yes, please give brief details.
Initial planning consent is issued by local administrative bodies.
Third parties (particularly the owners of neighbouring plots) are notified on each application and can participate by giving opinions in the proceedings.
Public inquiries and the notification of the applicant's neighbours only take place when generally zoning plans are prepared and not when a particular decision on construction conditions is issued.
All permits are administrative acts, which should be decided on within 30 days from receipt of a correct application and all required documents (Law on Administrative Procedure). The Law on Zoning and Construction provides the same time frame for a decision.
An appeal can be filed against a decision issued by the local administration. An administrative claim can be filed in the Administrative Court against a decision issued by the Ministry.
In the years after the Second World War, almost 90% of the real property fund in the territory of the former state was nationalised and converted into a regime of so-called "social ownership". Therefore, one of the primary tasks of Croatian legislators is to re-establish the principle of unity of property and trust in the Land Registries, along with the abolition of social ownership, to create a legal environment fully adapted to modern standards.
This is an immense task which is ongoing. Currently, the state is involved in the task of improving electronic Land Registries, which would provide the public with easily accessible and more reliable information on the status of real property.
Main activities. This organisation manages the Land Registry.
W http://e-oglasna.pravosudje.hr/eoglasna/opcinski_sudovi
Main activities. This organisation manages the court, companies and registers, and determines a company's business activities.
W http://e-oglasna.pravosudje.hr/eoglasna/trgovacki_sudovi
Main activities. This organisation manages the Cadastre, a public register of real property where data such as the location, shape, surface, method of use production capability, cadastral income and user or possessor of the property is recorded.
Main activities. This organisation deals with real property tax assessment.
T +385 1 5555 630
F +385 1 4856 704
E miroslav.plascar@zuric-i-partneri.hr
Qualified. Croatia, 1996
Areas of practice. PPP; property projects, M&A
Recent transactions
T +385 1 5555 630
F +385 1 4856 704
E hrvoje.spajic@zuric-i-partneri.hr
Qualified. Croatia, 2008
Areas of practice. Real property
Recent transactions
