dentons.com

Insights and Commentary from Dentons On March 31, 2013, three pre-eminent law firms—Salans, Fraser Milner Casgrain, and SNR Denton—combined to form Dentons, a Top 10 global law firm with more than 2,500 lawyers and professionals worldwide. This document was authored by representatives of one of the founding firms prior to our combination launch, and it continues to be offered to provide our clients with the information they need to do business in an increasingly complex, interconnected and competitive marketplace.

FALL 2012

www.salans.com

GLOBAL REAL ESTATE CLIENT REPORT

Spotlight on Turkey Spanish Real Estate Market Global Hospitality Trends

REGIONAL DEVELOPMENTS

OUTLOOK

ASIA NEWS

LEGAL ROUND-UP

Central and Eastern Europe

Gridlock on the Road to Recovery

China, Vietnam, Singapore and India

UK, Germany and France

Our founding vision was to create a true international law partnership based on mutual cooperation, team spirit and a multicultural openness. Today, Salans is a truly international firm that acts as a bridge between different cultures. Carl Salans

Salans’ Global Real Estate Group With over 225 real estate and real estate specialists in 20 offices, Salans’ Global Real Estate Group is one of the largest and most recommended cross-border real estate teams amongst the world’s leading international law firms. We are trusted commercial advisors with the knowledge and experience to deliver costeffective, decisive and innovative advice. We gained this trust by combining fundamental local market real estate knowledge with sophisticated corporate, finance and structuring advice.

Index

Our team is capable of handling all aspects of real estate transactions in virtually all major real estate sectors, including offices, retail, hotels, warehouse and distribution facilities, large-scale residential developments, and infrastructure projects. The Group is divided into six industry sectors:

Note from the Editor....................... 4

CIS.....................................................................66

Focus on Turkey................................... 8



Russia..........................................................66

Real Estate M&A and Private Equity



Ukraine.......................................................73

Real Estate Finance



Azerbaijan.................................................74



Kazakhstan..............................................76

Special Feature on Hospitality and Leisure Sector.............................18 Central & Eastern Europe..........26

Poland.........................................................26

United States..........................................78



Hungary.....................................................29





Czech Republic.......................................31

Asia...................................................................80



Slovakia......................................................33



China...........................................................80



Romania....................................................36



Singapore...................................................82



India.............................................................84



Vietnam......................................................87

Salans News..............................................38 Focus on Spain.......................................42 Western Europe..................................52

Germany....................................................52



France.........................................................58



United Kingdom.....................................60

New York...................................................78

Office Contacts ....................................90

DISCLAIMER Salans LLP has offices, or is associated with Salans offices in: ALMATY, BAKU, BARCELONA, BERLIN, BRATISLAVA, BRUSSELS, BUCHAREST, BUDAPEST, FRANKFURT, ISTANBUL, KYIV, LONDON, MADRID, MOSCOW, NEW YORK, PARIS, PRAGUE, SHANGHAI, ST. PETERSBURG, WARSAW

Real Estate Asset Management Hospitality and Leisure Retailing Construction, Development & Infrastructure

Our clients include many of the world’s demanding institutions, real estate developers, banks, private equity houses, investment funds and multi-national corporations. The Global Real Estate Group and its clients also have access to the resources of Salans’ nearly 1700 attorneys and staff who specialise in a variety of support areas including mergers and acquisitions, private equity, project finance, tax, international arbitration, and energy. The Global Real Estate Group is headed by Eric Rosedale and Evan Z. Lazar who have nearly 50 years of combined international real estate experience and are recognised leaders in emerging real estate markets.

Salans LLP is a Limited Liability Partnership registered in England and Wales with Registration Number OC 316822. Regulated by the Solicitors’ Regulation Authority of England and Wales. A list of the members of Salans LLP and of the non-members who are designated as partners of Salans LLP and/or its affiliated entities is available at its Registered Office: Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ, United Kingdom. See www.salans.com for further information. © 2012. Salans LLP. All rights reserved. In certain jurisdictions this brochure may constitute attorney advertising.

3

FOCUSFROM NOTE ON SPAIN THE EDITOR

Gridlock on the Road to Recovery For the past two years the “Road to Recovery” in global real estate markets has been buffeted by a litany of headwinds and tail risks.

Since the inception of the global financial crisis, real estate professionals have held no illusions that the recovery would be complex and arduous. However, real estate market bulls were disappointed when transaction momentum began to stagnate in mid2011 as gloom and uncertainty crept back into investor sentiment. Many institutional real estate investors began to re-think their opportunistic strategies and work their way back down the risk curve or wait for outcomes of an array of conflicting global political and economic signals. The slowdown in transaction volume and flight to quality that began last year accelerated in 2012 and is beginning to create investment “gridlock”, with the weight of real estate capital bearing down on an increasingly narrow band of core global investment targets. The gridlock is being fuelled by fear over three overriding global risks.

The On-going Eurozone Crisis The continuing Eurozone sovereign debt crisis has spooked real estate investors from Madrid to Moscow. Part of the problem is rooted in real estate fundamentals (such as supply dynamics, flagging occupancy demand and the availability and cost of bank financing). But the more confounding headwind is the current atmosphere of political uncertainty in Europe and questions over the resolve of EU member states and central banks to find a lasting solution to the debt crisis. The dual market and political headwinds are dramatically suppressing real estate transaction volumes in both developed and emerging European real estate markets.

The slowdown in transaction volume and flight to quality that began last year accelerated in 2012 and is beginning to create core investing gridlock 4

The decline in real estate transaction volume in Southern Europe has been particularly severe. The Spanish and Italian real estate markets have virtually collapsed with the number of transactions in both countries falling by more than 90% in the past quarter. Emerging Southern European markets, such as Romania, have seen volumes hit seven year lows. The drop-off in activity indicates that even the appetite for buying distressed assets in a large part of the Eurozone has fallen away.

NOTE FROM FOCUS THE ON EDITOR SPAIN

While Germany, France and the Nordic regions collectively hold large volumes of highly-prized liquid “core” assets, real estate transaction volumes have been declining due to a combination of investors’ relentless appetite for core assets in financial hubs without sufficient product. Certain Central and Eastern European real estate markets have also experienced sharp drops in transaction volume with a reported 60% quarter-onquarter regional decline. This is a substantial reversal, considering that CEE transaction volume was up 75% in 2011. Poland and Russia (which dominate CEE real estate markets and continue to outperform their neighbours by a wide margin) are also experiencing resistance to growth over robust 2011 transaction volume levels, mostly due to a limited supply of prime assets on the market and high prices for core products. Poland’s real estate market is performing best, with volumes close to its 2007 peak levels, while Russia is experiencing a reported 30% year-on-year drop in investment activity.

Many observers view the fast approaching U.S. “Fiscal Cliff” as a greater cause for concern than China or the Eurozone crisis

On top of uncertainty over the future of the monetary union, the regulatory environment in Europe is also having an impact on real estate equity and debt availability. The combined effects of Basel III, Solvency II, new European Banking Authority capital reserve rules and the Volker Rule are set to challenge the European real estate investment landscape for years to come.

China The second major risk dragging on real estate investor sentiment is the continued fear of a hard landing or bubble bursting in China’s economy, which is largely fuelled by domestic real estate investment. China’s rapid economic growth has decelerated rapidly for the past eight quarters – the longest slowdown since the government began reporting such data a decade ago. GDP in 2012 is estimated to be in the region of 7.6%, down from a peak of 14% in 1992 and marking the slowest growth since 2009. FDI in real estate and other sectors is also weakening. As the second largest economy in the world with the most active global commercial property investment market, investors fear that a sharp economic downturn in China could trigger a global recession.

The U.S. “Fiscal Cliff” Many observers view the fast approaching U.S. “Fiscal Cliff” as a greater cause for concern than China or the Eurozone crisis. The “cliff” refers to a set of sharp budget cuts and tax hikes worth more than $1.2 trillion over the next 10 years which will automatically come into effect if the U.S. or Federal Government fails to pass new legislation by the end of this year. The legislation is meant to force Congress to reverse

Every tail risk has a silver lining and every headwind breeds a compelling contrarian real estate investment strategy 5

FOCUSFROM NOTE ON SPAIN THE EDITOR

rampant spending which has increased the total U.S. federal debt to nearly $16 trillion – a 70% increase since 2007. The impact of Fiscal Cliff uncertainty is suppressing U.S. business orders, retail sales, corporate profits and hiring. Ultimately there is a fear that the automatic fiscal actions could tip the U.S. economy back into recession and cut U.S. GDP growth by up to 4%. With so much riding on the results of the upcoming Presidential election and current political gridlock in Washington, hard-won gains in a growing number of U.S. real estate markets are at stake. From a global perspective, the Fiscal Cliff is the third major tail risk driving investors down the risk curve and contributing to real estate recovery gridlock.

Silver Linings Every tail risk has a silver lining and every headwind breeds a compelling contrarian real estate investment strategy. On the optimistic side of the Eurocrisis is a growing perception that a grand political solution may finally be on the horizon and that debates over an uncontrollable collapse of the Eurozone are largely academic. While past EU summit meetings have left real estate investors more convinced than ever to “sit on the side-lines” or avoid European markets, prime assets are performing relatively well and banks are finally becoming more proactive about the need to off-load non-core at price discounts that real estate investors have been anticipating for the past few years. 6

There is a growing amount of capital targeting real estate, which is seen as an attractive risk adjusted return across all asset classes

In China, the consensus view seems to be that the Government has the policy and credit tools it needs to engineer a soft landing, especially in the speculative residential real estate sector which is deflating at a measured pace. Equally important, many commentators believe that the impending change of leadership will result in a concentrated effort to increase government spending which should help maintain sufficient GDP growth and capital to support the domestic real estate sector. In the US, the debate over the Fiscal Cliff will crystalize between now and November as Republicans and Democrats face off over the fate of historic tax and budget legislation and voters grow increasingly impatient with the lack of progress on reducing the U.S. debt burden. The downside of letting the automatic cuts come into force will hopefully focus politicians’ minds and result in some progress on U.S. debt reduction. And some deficit hawks believe that going over the cliff is actually desirable, and would largely solve near-term fiscal problems. Despite the prospects of a cliff dive, U.S. real estate transaction volumes are still trending upward. For example, REITS raised record amounts of equity and debt in 2011, and foreign acquisitions of U.S. property doubled in 2011 to 20 billion and could double again this year. Overall, with interest rates low and investors increasingly seeking alternative risk adjust investment opportunities, there is a growing amount of capital targeting real estate, which is seen as an attractive risk adjusted return across all asset classes. More than 450 property funds are currently on the road

NOTE FROM FOCUS THE ON EDITOR SPAIN

seeking to raise almost $160 billion globally and there is reportedly $160 billion of dry powder now available to closed-end real estate private equity fund managers globally as of the end of the first quarter of this year. Tellingly, opportunistic funds have the largest proportion of available capital. These investors are looking to pursue modified opportunistic strategies ranging from the repositioning of “broken core” assets to loan restructurings where a new infusion of equity is required to seek out opportunities in hardhit secondary markets.

The range of players in the global real estate market is broadening despite all of the fiscal and political uncertainty facing global real estate investors

Partners currently allocated to real estate. Insurance companies with hundreds of billions of dollars of real estate under management are also considering making maiden investments in real estate this year. In addition, insurance companies could be in a position to increase real estate lending activities as a consequence of Solvency II legislation due to come into force in 2014. In fact, some observers have predicted that insurance companies will provide up to 20% of debt to the real estate sector.

Emerging and “Frontier” Real Estate Markets

Further, continued deleveraging should lead to more real estate investment opportunities worldwide and lenders are facing the reality that they will need to reduce prices to sell their properties. On the supply side, constraints in construction financing matched with pent up demand should help support occupancy rates and rent fundamentals.

Although core real estate investing in developed gateway cities is the dominant theme in today’s risk averse environment, it is hard for opportunistic investors to ignore more dynamic markets from Turkey to Brazil that are growing at rates many times faster than mature markets which are in no or negative growth territory.

Broadening Market Participants

Turkey is an especially intriguing market, being as it is at the cross-roads of European, Asian and Middle Eastern capital flows and trade. With 8.3% GDP growth in 2011 and an increasingly populous and wealthy middle class, it is attracting a growing number of cross-border real estate investors, especially in the retail sector.

The range of players in the global real estate market is broadening despite all of the fiscal and political uncertainty facing global real estate investors. An increasing portion of real estate capital for investment is coming from sovereign wealth and pension funds from North America, the Far East, Middle East and Central Asia.

Frontier global real estate markets in Central and South America and Central and Southeast Asia, including Thailand, Malaysia, Indonesia and Azerbaijan are attracting increasing attention from savvy regional players with access to local knowledge and local debt.

Sovereign wealth fund assets are set to grow from $4.8 trillion in 2011 to $5.2 trillion by the end of this year (with China accounting for nearly 30% of the total). An increasing number of sovereign wealth funds are adding a few percentage points to their global real estate allocations. SWFs from the Gulf, Korea, Norway, China, Russia, Malaysia and other countries have the ability to move local real estate market dynamics with even minute shifts in their investment allocations toward alternative assets such as real estate. Norway’s sovereign fund alone is expected to grow to $1 trillion in the next decade and only recently permitted real estate investments.

The Road Less Travelled The three overriding global risks on the road to recovery are channelling an increasing amount of real estate capital into an increasingly restricted “core” assets box. Whether this bottleneck will be relieved by a convincing reversal of at least one of the tail risks will probably not be known until well after the upcoming US elections.

Global pension fund assets are estimated to total over $30 trillion (a 3% increase over 2011). A wide range of pension funds, including a number of new players from Canada (such as CPPIB and HOOPP), saw the value of their real estate portfolios increase substantially with recent commitments to grow their exposure to real estate. Insurance companies are also becoming more active real estate players, both in direct investing and in the debt arena. The assets under management of insurance companies active in real estate currently stand at $13.2tn, representing 26% of the $50.2tn of total assets under management of all Limited

It is hard for opportunistic investors to ignore more dynamic markets from Turkey to Brazil that are growing at rates many times faster than mature markets

Until then, core assets in global money centres should continue to trade well given the growing weight of real estate capital from a broadening base of global real estate investors. On the other hand, less risk averse opportunistic investors should have more than enough niche opportunities off the well-beaten path and may be the biggest winners when gridlock on the road to recovery begins to clear.

Eric Rosedale, Co-Chairman, Global Real Estate 7

FOCUS ON TURKEY

Salans in Turkey Salans has been offering legal services in Turkey for nearly 10 years. We have recently strengthened our presence in Turkey by joining forces in Istanbul with local firm Balciog˘ lu Selçuk Akman to create a local partnership that is now known as Balciog˘ lu Selçuk Akman Keki (BASEAK) and which is fully integrated into the Salans global network.

Our Istanbul office comprises 37 lawyers, including 4 partners, 2 counsel and 31 associates, whose working languages are Turkish, English, French and German, among others. Our expanded and strengthened Istanbul practice provides creative and diligent transaction counselling and cutting edge litigation services to both foreign and domestic clients. We represent and advise a diverse client portfolio of Turkish and multinational clients, including Fortune 500 companies across a wide range of sectors.

Real Estate Team Members of our real estate team of 8 lawyers regularly provide legal assistance to developers, owners, private and institutional investors, contractors, construction companies and investment funds in connection with acquisition, development, construction, operation, leasing and management of business complexes, shopping centres, hotels, logistics centres and ports. We have advised extensively on real estate matters such as ownership, leases, rights of easement, government permits (construction licences, occupancy permits, etc.), zoning, environmental and similar issues. We also have experience in public offerings and acquisitions of Real Estate Investment Companies (REIC). Finally, we provide general Turkish law advice in connection with REICs.

8

Galip M. Selçuk (Istanbul Office Managing Partner) impresses clients with his excellent negotiation skills. ‘He is the complete lawyer,’ they say, ‘he is thorough, can work in detail and takes a commercial approach’ Chambers Global 2012

Our Expertise Our Istanbul practice offers a broad scope of services including: Real Estate Corporate Mergers & Acquisitions Banking and Finance Project Finance Capital Markets Restructuring Competition and Anti-Trust Employment Litigation and Arbitration Telecommunication Regulatory and Public Law Intellectual Property

FOCUS ON TURKEY

Commercial Real Estate Market in Turkey: A Powerful Player Turkey has always been on the investor radar due to the benefits of its huge population” or “owing to its large population. It is the 2nd most populated in Europe and had the 2nd highest country growth in 2011 in the OECD-, impressive economic growth and strategic importance as being one of the most powerful players in the world. The political stability and economic progress has uplifted Turkey into a different category as opposed to the perception of a “risky emerging market”. The political stability and economic progress has uplifted Turkey into a different category as opposed to the perception of a “risky emerging market”

In accordance with the sustainable economic growth and draft legislations such as new reciprocity law, disaster preparedness and change in the restrictions on foreigners buying properties, a positive improvement is expected in the Turkish real estate market in 2012.

Economic Outlook Currently, Turkey is the largest economy of Central and Eastern Europe and the 6th largest economy in Europe. Financial discipline has been implemented very seriously for several years in Turkey, and a stable political environment has led to an increase in the welfare level of the country. Despite all unfavourable economic and political developments in the European countries and in the Arab world, with which Turkey has the most extensive commercial relations, Turkey achieved an annual GDP growth of 8.5% exceeding expectations in 2011. With this GDP growth rate, Turkey again became the fastest growing country in OECD and the second in G20 countries, after China in 2011.Turkey’s consistent economic growth has significantly strengthened the country’s global position. It is expected that the economic growth of Turkey in 2012 will surpass the IMF estimates; however, there will be a decrease in the growth rate compared to 2011 which will allow Turkey to have a sustainable economic growth. Population, 2011 (Million)

Russia

Germany

Turkey

Poland

Czech Republic

Hungary

Population

142.4

81.4

74.7

38.1

10.5

10.0

Source: IMF

GDP Growth of Turkey versus Europe 2009

2010

2011

2012*

Advanced Europe

-4.1%

1.7%

1.6%*

1.3%

Euro Area

-4.3%

1.9%

1.6%

-0.5%

Emerging Europe

-6.0%

4.4%

4.4%*

3.4%

Turkey

-4.8%

8.9%

8.5%**

2.3%

Source: IMF, Regional Economic Outlook October- January 2011, Turkstat (**) 2011, (*) Estimates

Investment Market Retail, with its great potential, has been the most priority market for international investors. In order to benefit from the untapped retail market, a number of well-known developers and investors entered the market. Multi Corporation, for example, joined forces with Turkmall and developed a portfolio of shopping centres under the name of “Forum”. Amstar, a leading asset manager in the US and Europe partners with Renaissance Construction in a number of shopping centre projects. Some investors/developers, on the other hand, entered the market on their own and have been leading successful operations in the Turkish market. Corio, Redevco, ECE, Prime Development and Union Investment are examples of such. Canada Pension Plan Investment Board (CPPIB), for example, has taken an equity position in Multi Corporation’s Turkey Retail Fund and invested in their retail portfolio. Bank of America Merrill Lynch also invested in the Turkish real estate market having established an investment fund – Bosphorus Real Estate Fund- with their Turkish partner Krea in 2006. The fund developed a number of shopping centres and residential projects until June 2010. Pradera has also established an investment fund with Krea named “Pradera Turkish Retail Fund” targeting existing retail assets. For the office market, we have been observing an increasing foreign investor interest in the last few years, largely driven by Istanbul’s becoming an operational hub for multinational companies and prospects to become a financial centre. However, lack of institutional assets acts as the main barrier for trade by international investors. A positive progress in 2011 was that Tishman Speyer, US-based developer, opened an office in Istanbul showing their appetite for the Turkish office market. Additionally, prime office assets were the priority investment opportunity for investors in 2011. The logistics market is challenging for global investors for both development and acquisition opportunities. Development projects are in general difficult as high land prices and current rent levels undermine the project’s feasibility. The logistics market is, however, one of the most promising sectors in Turkey due to the country’s enormous trade capacity and significant retail market. When the occupier demand is strongly

9

FOCUS ON TURKEY

established, the development projects would become feasible, creating opportunities for many global developers/investors. The comparably strong position of the Turkish economy in the global economy expected in 2012 and strong economic prospects in the medium term will keep Turkey as an attractive investment destination. On-going negotiations on a few possible deals are expected to be completed successfully during the first half. Appetite for development projects will remain limited; however, investor demand for prime income bearing assets will remain strong as long as yield levels in Turkey move in line with the global markets. In this respect, we believe that the prime yield will move within the band of 7%7.5%, the upper band of which represents a 50 bps increase over end 2011. Despite the fact that 2012 in general is expected to be a difficult year for the global economy, it might be the year in which the Turkish investment market will re-emerge after a few long years of inactivity.

Existing Grade A Office Stock

Existing Grade A office stock in Istanbul is approximately 2.94 million sq. m., as at Q1 2012 while the total Grade A office space in Istanbul is projected to reach 3.57 million sq. m. by the end of 2013. Currently, the largest office market is the CBD, accounting for 40% of the total stock, with the Non-CBD Asia accounting for 33% and the NonCBD Europe 28%. However, it is expected that the growing pipeline on the Non-CBD will reduce the share of the CBD. The major projects in terms of GLA are largely situated in the CBD such as Kristal Kule to be developed by Soyak with a GLA of 50,000 sq.m, Çiftçiler project with a total GLA of 40,000 sq. m. and Torun Tower in Esentepe with 40,000 sq. m. leasable space. Two of the most major projects on the Asian side include Palladium Tower in Atas¸ehir with a GLA of 55,000 sq. m. and Buyaka in Ümraniye with a leasable area of 51,000 sq. m. 10

GLA (million sq. m)

CBD

1.17

Non-CBD

0.81

Europe Asia

0.96

Total

2.94

Source: Jones Lang LaSalle, Q1 2012

Currently, Turkey is the largest economy of Central and Eastern Europe and the 6th largest economy in Europe

This accelerating occupier demand in the office sector is expected to put upward pressure in late 2012 on prime office rents in Istanbul, which have been steady at €30 per sq. m. since the second half of 2009 while rental levels in Ümraniye on the Asian Side have increased approximately 60% since the beginning of 2009 due to offering new and high quality of office spaces and relatively low rental levels in comparison with the CBD. The occupier trend of relocation from the old and comparatively low quality Grade A office stock to new, accessible and high quality Grade A offices is projected to continue in 2012. Based on realised transactions and our regular communication with local vendors and global investors, we believe that the prime yield is currently 7%. This is likely to remain stable during the remainder of the year provided that political and economic stability remains. It should also be noted that a risk spread within the band of 100 bps should be applied for the development projects with leasing and development risk and the assets in nonestablished sub-markets.

Office Market Istanbul is the most developed and active office market in Turkey due to the fact that many multinational companies have designated Istanbul as their operational hub to serve the MENA and CIS regions. Activity in the office sector is currently dynamic due to strong demand from the occupier market. Unlike the retail market, the office development activity remains dominated by local developers, mainly large local land-owning families. However, a number of institutional developers are now becoming active in the market; Renaissance Construction, Soyak Group, Torunlar REIT and Eczacıbas¸i Group being a few examples.

Sub Market

The chart below displays the prime yield comparison between Istanbul and other benchmark markets in Europe as of Q1 2012, and the historical trend of prime yields in Istanbul over the last few years.

European Office Prime Yields, Q1 2012 Q1’12%

Q-o-Q Bps

Y-o-Y Bps

Barcelona

Office Prime Yield

6.00

0

+25

Berlin

4.95

0

-5

Brussels

6.00

0

0

Budapest

7.75

+25

+25

Frankfurt

4.80

0

-10

London

4.00

0

0

Madrid

6.00

0

+50

Milan

5.00

0

+15

Moscow

9.00

0

0

Paris

4.75

0

0

Prague

6.50

0

-25

Stockholm

4.75

0

0

Warsaw

6.25

0

-25

Istanbul

7.00

0

-50

Source: Jones Lang LaSalle

GUEST CONTRIBUTION

Retail Market

Shopping Centre Development, Unit & GLA

During 2011 retailer demand from both domestic and international brands was strong in line with the impressively growing economy and strong consumer spending. Additionally, the economic slowdown in Europe and the political ambiguity in MENA region have placed Turkey as one of the most attractive markets for retailer expansion. For retailers, location continued to be one of the most important factors shaping their expansion plans. The retailer demand has remained strong for modern shopping centres which are not only used as shopping schemes but also attraction centres and pass time platforms, both in major and secondary cities. Due to increasing competition, retailers have focussed more on innovation, by means of developing new concepts and taking place in various shopping platforms such as online shopping sites.

End 2010 Istanbul Rest of Turkey Turkey

Unit GLA (sq. m.) Unit GLA (sq. m.) Unit GLA (sq. m.)

Q1 2012

104 3.07 198 4.56 302 7.63

107 3.18 198 4.61 305 7.79

centre stock in Turkey with a GLA of 3.18 million sq. m. in 107 centres. Thus, Istanbul is the largest retail market in terms of GLA in Turkey. Some of the major shopping centres opened during 2011 and Q1 2012 were Marmara Forum-Istanbul (137,000 sq. m.), Akbatı-Istanbul (63,500 sq. m.), Ora Outlet Centre-Istanbul (65,000 sq. m.), Anatolium-Ankara (83,000 sq. m.), Nata Vega Outlet-Ankara (60,000 sq. m.), Optimum Gaziemir-Izmir (59,000 sq. m.), Optimum Outlet Centre-Adana (68,000 sq. m.), Terracity-Antalya (48,000 sq. m.), Trump TowersIstanbul (43,500 sq. m.), Buyaka-Istanbul (43,000 sq. m.), Prime Mall Antakya-Hatay (38,500 sq. m.), Sümer Park-Denizli (33,500 sq. m.), Cevahir Outlet CentreTrabzon (30,000 sq. m.), Tarsu-Mersin (27,000 sq. m.) and Ninova Park-Diyarbakır (22,000 sq. m.). The development prospect in the Turkish retail market is strong for 2012 and 2013. By end 2013 the shopping centre stock is expected to reach 9.97 million sq. m. in 368 centres with 2.18 million sq. m. leasable space under construction. In terms of GLA, the major share of the organised retail stock in Turkey is formed of regional centres at 34.5% followed by neighbourhood centres, outlet centres and super-regional centres respectively, at 26%, 19% and 18%. Power centres, life style centres, and theme and festival centres are still at the development stage.

Total GLA in Turkey reached 7.79 million sq. m. in. 305 shopping centres as of Q1 2012. Istanbul accounts for around 41% of the existing shopping

Source: Jones Lang LaSalle, as of H1-2011

96 2.85 174 3.93 270 6.78

End 2011

Source: Jones Lang LaSalle, as of Q1 2012

Within the context of strong retail performance and the positive outlook in the market, many well-known international brands such as Pinkberry, Converse and Payless entered the market. Additionally, luxury brands such as Marc by Marc Jacobs and Michael Kors opened their first stores, while Chanel and Hermes expanded by opening stores in Istinye Park. French menswear brand Zilli opened its first store on Abdi Ipekçi Street. Finally, during Q4 2011, Victoria’s Secret and Bath & Body Works opened their first stores in Turkey at City’s and Istinye Park shopping centres. After entering the market in Q4 2010, H&M opened 6 stores during 2011, while C&A continued growth, focusing more on secondary cities, along with Ankara and Istanbul. In line with the increasing demand for children’s retail, international brands such as Jacadi and Zippy entered the market causing stronger competition. Additionally, La Fayette plans to enter the Turkish retail market in 2013.

Shopping Centre Stock and Pipeline

92 2.65 171 3.87 263 6.52

Q1 2011

United Kingdom France Italy Russia Germany Spain Turkey Turkey

Netherlands Poland Existing Stock

Sweden Ukraine

Pipeline 2012-2013

Portugal Czech Republic Ireland Finland Romania Hungary Slovakia Belgium Greece

Total GLA in 000's Sq M

Bulgaria Luxembourg 0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

11

FOCUS ON TURKEY

Compared to other European countries, in terms of the GLA per 1,000 capita, which is the key criteria to measure the market density, Turkey remains at the lower end of the European ranking. As of end 2011, Turkey’s GLA per 1,000 capita at 102 sq. m. was compared to the European average of around 222 sq. m. Turkey’s retail density is also lower than most of the CEE countries such as Czech Republic, Poland and Hungary. However, it should be noted that these figures do not consider purchasing power in those markets; but rather the population. Turkey obviously benefits from its significant population placing the country down the ranking in terms of market density. The prime rent has been on a declining path since Q1 2008 from €90 per sq. m./month to €85 per sq. m./month during Q1 2009 and remaining stable at €75 per sq. m./month during the remainder of 2009 and 2010. With the revival of retailer demand and strong rebound in economic growth, prime rents have increased by €5 per sq. m./month and reached €80 per sq. m./month during 2011. Due to increasing density in the retail market and the serious depreciation of the TL against USD and EUR in 2011, the prime rent is expected to remain largely stable at €80 per sq. m./ month in 2012 with some possibility to reach €85 per sq. m./month in 2013.

GUEST CONTRIBUTION

In 2011 Turkey achieved an annual GDP growth of 8.5%, exceeding expectations. With this GDP growth rate, it became the fastest growing country in OECD and the second in G20 countries, after China

World Rank 2010

Germany Netherlands United Kingdom France

4.11 4.07 3.95 3.84

1 4 8 17

Czech Republic Poland Slovakia Turkey Hungary Greece Romania Bulgaria Croatia Serbia Russia

3.51 3.44 3.24 3.22 2.99 2.96 2.84 2.83 2.77 2.69 2.61

26 30 38 39 52 54 59 63 74 83 94

According to the World Bank’s Logistics Performance Index, Turkey’s ranking is above most of its close and developing neighbour countries, while it is lower than most of the long-established European developed logistics markets. The index provides the first indepth cross-country assessment, and states that the performance of customs, trade-related infrastructure, port efficiency, logistics services, information systems and inland transit are all critical to whether a country can trade goods on time and at low cost. In line with the economic conditions and increased activity in the retail sector, occupier demand in the logistics market has recovered well since the beginning of 2010. New trends in the logistics space have been observed, due to the changing requirements of retailers from logistics service providers. For example, demand for new generation and high quality logistics space has increased due to the rising amount of e-commerce in the market.

Industrial/Logistics Market Istanbul is a natural choice as it is the centre of trade in Turkey and by far its largest city, with the best road connections and infrastructure. Therefore, Istanbul accounts for over half of the trade volume of Turkey, and is the location of circa 38% of industrial enterprises. Prime Yield Comparison

12

Source

Various estimates indicate that Istanbul accounts for around 60-75% of all logistics activity in Turkey.

Despite the strong retailer demand in 2011, it is expected that retailers will follow a prudent path in 2012 for their expansion, especially in the competitive locations. However, retailer demand for secondary cities will continue increasing. Innovative retail concepts will continue to be an important differentiating factor in the medium term. Following strong performance during 2011, the development prospect of the retail market is strong for 2012-2013 periods; however, delays are possible due to the expected slight slowdown in the economy.

2006

2007

2008

2009

2010

2011

5.75

5.50

6.50

7.00

6.75

6.25

Q1 2012 6.25

4.50 5.00 5.75 5.75 7.00 9.50 7.00 4.75

4.25 4.50 5.75 5.50 6.25 8.50 7.00 5.00

5.75 5.75 6.75 6.50 8.00 11.00 8.00 6.75

5.75 5.75 7.50 7.00 9.00 12.00 8.25 6.50

4.75 5.25 7.50 6.50 8.25 10.00 8.00 5.50

4.75 5.00 7.00 6.00 8.25 9.00 7.00 5.50

4.75 5.00 7.00 6.00 8.25 9.00 7.00 5.50

Source: Jones Lang LaSalle

Country

Source: World Bank, 2010

Based on the potential transactions in which Jones Lang LaSalle is involved, we believe that the prime yield is estimated at circa 7% as of Q1 2012.

Czech Republic France Germany Hungary Poland Romania Russia Turkey UK

Logistics Market Index

Despite the fact that the market is mostly dominated by owner occupier stock, and the logistics leasing market is very limited, demand was strong particularly from the local and international third party logistics (3PL) companies in 2011, and it is expected that this demand will increase in the short to medium-term. It is estimated that the total logistics stock in Istanbul and the surrounding areas is approximately 2,500,000 sq.m (circa 75% of Turkey’s total stock). Major pipeline projects, which are currently under construction or about to start, are the 55,000 sq. m. Çelebi Logistics Park in Esenyurt, developed by Logiturk, the 101,000 sq. m. Ekol Logistics in Gebze, the 122,000 sq. m. and the 40,000 sq. m. developments by Logiturk and owned by local investor S¸ekerpinar, also in Gebze. Dr. Kıvanç Erman, MRICS Director, Capital Markets & Advisory Jones Lang LaSalle Turkey, Yes¸im Sok. No. 2 Akatlar, Levent, Istanbul 34335, Turkey

FOCUS ON TURKEY

Future Legal Amendments Regarding the Acquisition of Real Property by Foreign Individuals In Turkey, the acquisition of real property by foreign individuals is subject to specific principles and procedures establishing stringent requirements.

With a recent amendment dated 3 May 2012 (“Amendment”) to Article 35 of the Land Registry Law, Law No: 2644 (“Land Registry Law”), the acquisition of real property by foreign individuals in Turkey has been eased as the reciprocity requirement is abolished. The reciprocity has required that reciprocal rights exists for Turkish individuals to acquire real property in the country of the foreigner concerned. Herein we summarise these legal restrictions and explain the reciprocity principle and new changes, which aim to facilitate acquisition of real property by foreign individuals.

Legal Restrictions The legal restrictions consist of quantitative and qualitative limitations. Accordingly, foreign individuals are entitled to acquire ownership right or rights in rem on real properties, on a district basis, up to 10% of the total survey of the concerned district which is subject to private ownership. In any case however, the total space to be acquired by foreign individuals in Turkey cannot exceed 30 hectares. This may be increased up to 60 hectares by the Ministry of Council. Before the Amendment, the total space that could be acquired by foreign individuals was 2.5 hectares instead of 30 hectares.

With a recent amendment to Article 35 of the Land Registry Law, the acquisition of real property by foreign individuals in Turkey has been eased as the reciprocity requirement is abolished

Reciprocity Principle Under Turkish law, the reciprocity principle means that the rights given by a foreign country to its own citizens or legal entities must also be given to Turkish citizens and legal entities. The Land Registry Law specified that reciprocity must be both in law and in practice, which implies that the reciprocity principle applies depending on laws and particular treaties to which Turkey is party and de facto applicability between the relevant countries. The reciprocity requirement had to be satisfied to acquire rights in rem by foreign individuals other than mortgage right. Now with the Amendment, The Land Registry Law replaces this principle by referring to a list of foreign countries, whose nationals are entitled to acquire real property and rights in rem in Turkey for residential purposes. The said list shall be declared by the Council of Ministers. Under the previous regime, there were 89 countries whose citizens were restricted from acquiring real property or rights in rem, due to the reciprocity principle. The Amendment is expected to affect positively citizens of the Russian Federation, Arabic countries and Turkic republics, who were not allowed to acquire ownership or rights in rem in Turkey under the previous regime. The Amendment aims to increase the number of property sales in Turkey and hence attract significant foreign investment.

From the qualitative perspective, foreign individuals may not own real property located in military and private security zones. In addition, sales of land in areas under protection, as well as strategic areas that concern public interest and national security are not allowed.

Kaan Saadetlioglu, Associate

The total space to be acquired by foreign individuals in Turkey cannot exceed 30 hectares 13

FOCUS ON TURKEY

Introducing Basic Principles of Draft Public Private Partnerships Law in Turkey The long-awaited Draft Law for Certain Investments and Services to be Carried Out under the Models of Public and Private Sector Partnership (“Draft PPP Law”) has been on the agenda of the Turkish Grand National Assembly again.

The motivation and general mentality behind the Draft PPP Law is to implement investments and provide services when public resources are insufficient. In this respect, the Draft PPP Law aims to enhance investments in the fields of, inter alia, agriculture, irrigation, mining, manufacturing, energy, transportation, telecommunications, high technologies, city and urban infrastructure, and to offer the services currently provided by central or local public authorities to the public, based on the public-private partnership (“PPP”) Models regulated under the Draft PPP Law. The PPP projects are expected to: (i) establish an efficient partnership between the public and the private actors; (ii) enhance long term investments in the relevant sectors; and (iii) renovate the current facilities and construct new facilities. Among the main objectives of the Draft PPP Law, as stated by the draftors, is to allocate the risk on each project to the party (either public or private), which may be best suited to deal with it. Additionally, the Draft PPP Law aims for a smooth operation for infrastructure investments, where the projects are concluded in shorter time periods with higher budgets. The Draft PPP Law suggests that the smooth operation of such infrastructure investments can be achieved by unifying the relevant legislation and eliminating the lack of harmonisation in the relevant fields mentioned above. Examples of such lack of harmonisation may be observed in different sectors, where provisional regulations are scattered amongst separate pieces of legislation. The Draft PPP Law also aims to unify such legislation in a comprehensive manner.

PPP Models Under the Draft PPP Law, PPP projects will be coordinated via a central body, which will evaluate the risk factors and determine the type, amount and scope of the guarantees required for each project. PPP projects will be initiated via a tender followed by a bidding process, which will regulate the procedures 14

The PPP projects are expected to: (i) establish an efficient partnership between the public and the private actors; (ii) enhance long term investments in the relevant sectors; and (iii) renovate the current facilities and construct new facilities

to determine the public authority and the private body that will collectively carry out the PPP project. Once the co-working public and private bodies are determined, the operation phase of the projects will commence. There are four models of PPP regulated in the Draft PPP Law:

1.

Build-Operate-Transfer Model: The private body finances the project in terms of construction and operation of the facility for a pre-determined period and finally transfers the same to the public authority at the end of the operation period.

2.

Build-Operate Model: The private body finances the project in terms of construction and operation of the facility and keeps the ownership of the same.

3.

Build-Rent Model: The private body finances the project in terms of construction, and operates the facility and its units in part or in whole. The public authority leases the said facility for a pre-determined period from the private body, at the end of which the public authority shall take the ownership of the facility if stated in the agreement between the public and private bodies.

4.

Transfer of Operational Rights Model: The public authority transfers the operational rights of the facilities to the private body without transferring the ownership in lieu of an operation fee and for a certain period of time.

Procedure and Partnership of the PublicPrivate Actors The competent public authority in the relevant sector shall prepare a preliminary feasibility report with regard to the project to be undertaken. Subsequently, the project and the preliminary feasibility report along with the considerations regarding the use of land whereby the project will be constructed shall be submitted to the High Planning Council of Turkey (“HPC”) and the HPC evaluates the need to complete such project. When the HPC approves the project, the relevant public authority shall prepare the tender documents. The Draft PPP Law regulates the basic structure of PPP projects; the details of such

FOCUS ON TURKEY

approval process and the other operational issues will be addressed in secondary legislation. At the sole discretion of the competent public authorities, the tenders are held by one of the four following methods: (i) open tender, (ii) tender among certain bidders, (iii) competitive tendering, or (iv) negotiation.

Implementation Agreement and Financing

The Draft PPP limits the capital contribution of the public sector with 49% of the share capital of the partnership

The successful bidder and competent public authority shall enter into an agreement concerning the implementation of the PPP project which will be governed by civil law rather than administrative law. The term of the agreement varies depending on the features of the facility subject to the PPP project and the outcome of the feasibility report. However, the term of the projects cannot exceed 49 years in any event.

Head of Real Estate, Turkey

Barlas Balcıog˘lu is a partner and Head of Istanbul’s Real Estate Team.

Barlas’ real estate experience includes direct and indirect provision of equity to investment and development projects. His clients include owners, developers, investors, and others in connection with the development, purchase, sale, and exchange of commercial real estate such as business complexes, shopping centres, hotels and vacant land for development purposes. He has substantial experience representing owners in construction matters, including the structuring of complex hotel design-build and construction management arrangements.

Benefits of PPP Projects

Barlas Balcıog˘ lu, Head of Real Estate Turkey

Barlas ˘ lu BalcıoG

He specialises in structured finance transactions, in particular project finance, real estate finance and restructurings. His clients include commercial and investment banks, borrowers, institutional investors and project sponsors.

It is also noteworthy that depending on the type of the PPP project, equity contribution would be required from the public authorities. The Draft PPP limits the capital contribution of the public sector with 49% of the share capital of the partnership. The PPP Model presents a variety of benefits: planning new facilities, searching for alternative solutions how to finance new investments, and directing local and/or foreign private sector resources to invest in different sectors. Therefore, in addition to the public financing instruments such as the general budget, revolving fund, public domain selling/bartering, and local resources (civil society contribution, charitable contribution, municipality and special provincial administration contribution), it is of great importance to ensure local/ foreign private sector financial contribution through PPP Models.

ATTORNEY HIGHLIGHT

The PPP Model presents a variety of benefits: planning new facilities, searching for alternative solutions how to finance new investments, directing local and/ or foreign private sector resources to invest in different sectors

Barlas’ corporate experience includes mergers and acquisitions as well as domestic and international joint ventures, corporate restructuring, and providing written opinions in transactions, including de-mergers. He has also been involved in a wide variety of corporate matters and the development of profit sharing mechanisms and shareholder or member relationships involved in group-owned companies. In the course of his Frankfurt practice, he was involved in bank M&A deals and supervised and coordinated the regulatory filings of German clients in Turkey. In addition to his practice at Balcıog˘ lu Selçuk Akman, Barlas is a lecturer at Yeditepe University Law Faculty, where he teaches Mergers & Acquisitions to LLM and PhD students. A native Turkish speaker, Barlas is fluent in English and German and also speaks Dutch (proficient).

15

FOCUS ON TURKEY

Politics of the Turkish Government on Urban Redevelopment Deliberations on the necessity for urban redevelopment projects in major Turkish cities, especially in Istanbul, have significantly sped up during the last decade.

This has resulted in the preparation of a large number of projects. Most of these projects are of a residential nature; however, the most significant projects concern recreation, cultural or in some cases, commercial areas. Taking into account that Turkey is vulnerable to earthquakes, it was essential for the Turkish government to take an initiative to renew or reinforce existing, old buildings. In this respect, the Turkish government has co-operated with metropolitan municipalities to implement huge urban development projects for metropolitan cities. However, the current legal regime has not allowed such implementation in many aspects; therefore the need for specific legislation has arisen. Accordingly, a new law on urban development (“Urban Development Law”) has been drafted and entered into force following its publication in the Official Gazette dated 31 May 2012. The Urban Development Law covers the planning and redevelopment of areas that are exposed to natural disasters and will ease the process for urban planning efforts. The Urban Development Law entitles the Ministry of Environment and Urbanism of the Republic of Turkey (“Ministry”), The Housing Development Administration (a state-owned construction and development institution, known as TOKI) and the municipalities to expropriate buildings that they deem necessary for implementation. However, further amendments to certain existing laws such as the Condominium Law, Law No. 634, and the Land Registry Law, Law No: 2644, will also need to be integrated and have the support of the concerned individuals to these plans. From an economical point of view, it is expected that such an effort will significantly and efficiently influence the Turkish economy, which was negatively affected by the Euro-zone debt crisis. Nevertheless, the Turkish government’s primary aim is to increase the prosperity of Turkish citizens by providing them with earthquake-resistant buildings at no cost; or at a relatively low cost. Based on a statement issued by the Ministry, the expected costs associated with the contemplated urban redevelopment projects will raise up to US$ 16

Deliberations on the necessity for urban redevelopment projects in major Turkish cities, especially in Istanbul, have significantly sped up during the last decade

400 billion. The financing may also be a significant struggle that needs to be overcome, taking into account the economic recession that adversely affects the global economic climate. To the extent possible, the necessary funds will be made available by the Turkish state; however, the support of the private construction sector is also essential to attain the projected goal. Major private construction companies have highly appreciated the Turkish government’s initiative; however, their involvements may be limited as not all the urban redevelopment projects can be economically efficient. At this stage, this initiative can only be regarded as a necessary effort that was needed to be undertaken by the Turkish government. Its outcome can only become concrete once the Urban Development Law is efficiently implemented. Kaan Saadetlioglu, Associate

ATTORNEY HIGHLIGHT Özgür Nemutlu Associate, Turkey

Özgür Nemutlu is an associate in the firm. His practice focuses on corporate and real estate transactions. He advises multinational and Turkish companies in media, hospitality and leisure, real estate, and retail sectors in cross-border mergers and acquisitions, joint ventures and real estate deals. Prior to joining the Firm, Özgür worked in a leading law firm in Istanbul. He is a graduate of Middle East Technical University, Faculty of Economic and Administrative Sciences (BS, 1997) and Istanbul University, Faculty of Law (LL.B., 2003). He earned his LL.M degree from Leiden University, Faculty of Law in 2006 and currently is a Juris Doctorate student at Istanbul University. Özgür is a member of the Istanbul Bar and is fluent in English.

FOCUS ON TURKEY

The New Turkish Commercial Code In an effort to modernise existing legislation to international and EU laws and standards, a new Commercial Code (TCC 2012) has come into effect in Turkey on 1 July 2012. It will revolutionise Turkey’s commercial activity and conduct and have a considerable impact on transparency and corporate management practices in the country. It will also direct how company law is used and how mergers and acquisitions will be structured. One of the new Commercial Code’s aims is to help attract foreign direct investment into Turkey, in particular into non-listed companies which have been previously considered as ‘black boxes’ by international businesses, through delivering improved transparency and legal certainty. It is also hoped to act as a vehicle to eliminate the country’s grey market and consequently to raise much-needed tax revenue. The TCC 2012 has been in the pipeline for over a decade and the sudden revival of its enactment in early 2011 was very much solicited by the Turkish business community. Although Turkey is still considered as a major growth area in Europe, it too has suffered from a slower economic growth rate in the global downturn, and so the implementation of the TCC 2012 coincides with the Turkish government’s latest initiatives to help boost this.

Although Turkey is still considered as a major growth area in Europe, it too has suffered from a slower economic growth rate in the global downturn

For the legal market, the new Commercial Code is expected to be very good news. A large volume of businesses, from small to large, are expected to require detailed advice on the new changes, and for many, the measures will mean that they will require legal advice and support in the long-term.

There will also be greater protection for minority and majority shareholders in joint stock companies.

Questions, however, remain about how the new Commercial Code will be applied or whether any changes will be necessary to mitigate public concerns. Many of the articles may have to go through debate and be delayed, and the implementation process could become quite lengthy. Already in the weeks before the TCC 2012 came into force, the Turkish Customs and Trade Minister announced a number of amendments to accommodate criticism raised by the business community – highlighting the difficulty of implementing such large-scale changes. Naturally it will remain to be seen how serious these challenges will be and whether the Code will actually achieve its goals for the Turkish economy. What is, however, clear at this stage is that there will be significant opportunities in Turkey, and it will be up to the law firms there to take advantage of these.

One of the most significant changes in the new Code is the rule framing the relationship between controlling entities and their subsidiaries. It will aim to prevent parent companies from abusing their powers in forcing losses on their subsidiaries and acquiring financing from them. The subsidiary’s management will have to produce annual reports on an ex post basis, explaining the relationships with other entities in the group. All limited liability and joint stock companies, irrespective of size, will also have to disclose all their financial statements and auditor and director reports on their websites – something that reflects the Turkish government’s desire to bring the commercial sector into the 21st century. These will now have to be prepared by an independent auditor and meet International Financial Reporting Standards (IFRS), although small and mid-size enterprises will still be allowed to use a Turkish Certified Auditor or a CPA.

Minority shareholders will now have the right to demand full transparency and a replacement of company auditors if they are deemed to be partial, whilst a 90% or more majority shareholder may buy out an uncooperative minority shareholder that violates the company’s interests. It will also become easier to transfer shares, and legal deadlines, within which shareholders must contribute the share capital they have committed, will become shorter.

Excerpt from this article was published in The Lawyer on 9 July 2012. Selim Keki, Partner, Corporate

One of the most significant changes in the new Code is the rule framing the relationship between controlling entities and their subsidiaries 17

SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

Sleepless in Russia: The Challenges of Hotel Automation Approximately one year ago, pedestrians walking by the Yotel Times Square hotel in New York could marvel through a large glass window at Yobot, the world’s first robotic hotel luggage handler that stores your luggage for you, without the awkward “should I tip the bellboy?” moment.

While the value of the service (beyond a marketing coup) leaves some sceptical, it has the merits of highlighting a growing trend in the hotel industry: increased automation of services once reserved for humans – particularly in the lower segments of the hotel market. In Russia, where this segment is notoriously under-represented, the automation trend presents certain challenges but also offers interesting development opportunities. Hotel amenities have historically gone hand-in-hand with technological progress and the related decrease in the costs of certain services. Rooms with individual telephone lines were introduced at the Plaza New York in 1907; rooms with private baths were introduced at the Statler Boston in 1927. At the same time, services rendered by humans have multiplied exponentially, such as 24-hour room service introduced at the Westin in 1969. As a consequence, the industry has gradually become more and more labour intensive in order to deliver the experience hotel guests have come to expect. Payroll and related costs today comprise by far the largest portion of hotel operating expenses. Depending on the nature of the property, labour costs can range from around 30% in limited service hotels and all-suite hotels to approximately 46% at resorts or convention hotels. Needless to say, when the economy tanks and hotel revenues decrease, shedding staff is crucial to the survival of many properties. But if redundancies are often temporary adjustments to economic cycles, a deeper, structural movement is at work today as well. The service sector, which is the last great bastion of human workers, is succumbing to more and more automation. In the hotel industry in particular, operators are trying to benefit from the technologyinduced productivity enhancements that other industries have been exploiting for quite some time. In some cases, machines replace humans, such as in the completely automated check-in and departure systems that are implemented across many budget properties throughout Europe. Such form of automation represents a challenge in Russia for several reasons. When dealing with foreign guests, for example, Russian hotels have an 18

While the value of the service (beyond a marketing coup) leaves some sceptical, it has the merits of highlighting a growing trend in the hotel industry: increased automation of services once reserved for humans – particularly in the lower segments of the hotel market

obligation to register foreign citizens staying with them shortly after their entry on Russian soil. This administrative procedure entails the verification of the visitor’s passport and the physical exchange of a certain number of documents. In addition, automated check-in systems rely extensively on the use of credit cards, but credit and debit card penetration remains relatively low in Russia. According to Alexis Delaroff, the General Director of Accor Russia CIS, “As long as we do not have a developed credit or debit card system, the customer base is too limited for automated properties.” Automation also often implies less staff, but the remaining personnel are called upon to multitask and possibly take on more responsibilities. This requires additional training of the workforce, but hoteliers in Russia have often bemoaned the difficulty of finding well-trained personnel even for basic tasks. More generally, security may also be a concern for some travellers, especially for hotels that are on the outskirts of towns and are virtually staff-less.

SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

If these few hurdles can be overcome, there is no reason that the automated budget hotel segment should not develop in Russia. Automation does not necessarily imply the total absence of staff. Recently developed software packages called “property management systems” can take on and integrate a host of duties previously done by the employees, from reservation and room management, customer information and accounts receivable to arranging a guest’s wake-up call. Liberated from repetitive chores at the front or back desks, better-trained personnel can therefore dedicate more time to being in contact with the hotel guests and solving any issues that may arise. The existence in Europe of a well-developed network of budget hotels shows that the partially or fully automated hotel model is a viable one from an economic standpoint, without compromising on design, cleanliness and the general well-being of guests. The French Accor Hotel group operates around 100 budget hotels representing over 40,000 rooms through the hotelF1 and Etap Hotel brands, mainly in Europe and the Southern Hemisphere. In Russia, Accor plans to open an Ibis hotel in Moscow next year that will be partly automated. As the low-cost model has shown in the airline industry, clients in Europe have demonstrated that they are ready to forego a certain number of amenities in exchange for a lower price tag. In the lower segments of the service industries, clients in Russia are accustomed to being ignored while standing at the counter, only to be served thereafter by grumpy and bored employees. They will most likely find the prospect of inevitable automation quite enticing. Excerpt from this article was published in The Moscow Times on 29 May 2012. Alex Skoblo, Partner and Head of CIS Hospitality Practice Group Andras Haragovitch, Associate

ATTORNEY HIGHLIGHT Laura Tiuca Managing Counsel, Co-Head of Real Estate, Romania

Laura Tiuca is the Co-Head of Salans’ Real Estate Group in Bucharest and leader of Bucharest Hospitality and Leisure team. Described in Chambers and Partners 2012 as “a very pleasant and prompt lawyer” and also having “a robust reputation for handling investment structuring, acquisitions, leasing and development of all types of real estate portfolios”, Laura is one of the very few full-knowledge Romanian experts in both contentious and noncontentious real estate matters on the market. She is also recognised and recommended as a top real estate lawyer in the latest editions of Legal500 and PLC Which Lawyer and was a finalist for “The Professional of the Year” distinction at the prestigious Europaproperty’s South-Eastern Europe Real Estate Awards Gala held on 17 May 2012 in Bucharest. Laura’s more than 11 years’ experience encompasses M&A, banking and finance and PPP, and she is very skilled in dealings with local authorities, practiced during large privatisations or while assisting sophisticated developers for their greenfield projects. Prior to Salans, Laura was a Senior Lawyer with PricewaterhouseCoopers. She graduated magna cum laude from the University of Bucharest Law School and obtained an MBA certified by the University of Ottawa-Quebec and École des Hautes Études Commerciales. She is a member of the Bucharest Bar. In addition to Romanian, Laura speaks English and French. She regularly publishes articles about legal issues in real estate and hospitality and is frequently quoted by the Romanian business press on real estate stories. Her native creativity and optimism enable Laura to offer ingenious and ‘out-of-the-box’ solutions to clients’ needs and to identify the full half of the glass easily. “No matter how difficult a situation is, clients know they can count on our commitment to find the best solution for their business.” Laura is a nature lover, always willing to explore new places and cultures. She also finds time to get involved in CSR initiatives, which she actively supports in her spare moments.

19

SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

The Reality Test: Successful Stories or Not in the Hotel Field Many reasons exist behind the establishment of a new business, but the strongest are linked to the desire to develop a business that can be sold in the future in a profitable manner, either to another entrepreneur or investment fund, or linked to the establishment of a family business to be continued by following generations.

The lesser reason is not found so often, because the tradition to create continuity is no longer “trendy”, given that in the last 20 years the miracle of hitting the jackpot and making large profits has been too much of a draw card for a country burnt by years of communism and troubled by changes. However, creating a healthy business development framework is also essential for a family business. Years of crisis have presented a shock-test for the strength of businesses; we have witnessed the collapse of many sand castles with a lot of noise. We have seen circumstances under which serious people have succeeded in selling their business in the hotel sector profitably, even during tough years. But take note; they had prepared themselves for such an event long in advance. It all started by establishing a team of professionals in the hotel sector, able to cover all business aspects, from management, operations, F&B to financial and legal issues. In the first instance, the team in question examined the existing business, found its weak points and, using the owner’s support, implemented changes within the organisation and restructured it completely. To accept the fact that your organisation is not going well, that you have made many mistakes in the past and, in particular, to allow a team of professionals to work with no interference on your part, is an act of courage. The change within an organisation that has been operating for some time leads, in the first instance, to a reaction of full rejection on behalf of the people who have been working for the company for a long time and intervention in management and shareholding is required in order for the measures taken to be achieved in practice. In many cases, the process of change initiated by the team of professionals can last up to several years, and its success depends to a large extent on the support of the business owners. Additionally, in most cases, while being caught in dayto-day activity, one forgets to leave written traces of performed operations. Many times in the past we have found a dangerous recklessness concerning the examination of the property title at the time of the business acquisition. All of these apparently “weak 20

Years of crisis have presented a shocktest for the strength of businesses; we have witnessed the collapse of many sand castles with a lot of noise

Many times in the past we have found a dangerous recklessness concerning the examination of the property title at the time of the business acquisition. All of these apparently “weak points” become, miraculously, major sore points, when problems occur or when selling the business is contemplated

points” become, miraculously, major sore points, when problems occur or when selling the business is contemplated. There have been cases when the company’s archive had no documents regarding the property title. Upon selling, the purchasers (particularly during crisis years) and the funding parties check whether the seller’s property title is valid. Furthermore, the solidness of a business is always determined by the real property component. That is why the reconstruction or completion of the file related to the property title represents the first step which, unfortunately, in Romania can be quite time-consuming, especially if copies of the papers are held by the public authorities. We faced situations when the entire file concerning the property title had vanished completely from the authorities’ archive and, consequently, we had to reconstruct their archive as well.

SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

One of the lessons learnt by the Romanian entrepreneurs during the past several years is that the buyer should not be considered ignorant and bewildered by empty words and “gloss”, one who makes decisions without checking the real facts. In this respect, we refer to the fact that the business should enjoy transparency, and the management team should be made of serious, experienced, professional people. The reality is that there is money on the market and there are investors willing to buy, but not just anything and everything, because no one invests money in stories anymore; people want to see that the business is managed by the book. Regarding the successful selling of the Romanian hotel we are talking about, we have been involved in the legal part of the audit and restructuring. The audit, reorganisation and preparation process of all papers took almost three years; however, the expectations and invested money was worth the time, as the sale was achieved in just a few months. The purchaser, an investment fund whose teams of foreign auditors searched in detail for each issue of the business, had the confidence to invest in a year dominated by crisis. However, we have also seen unfortunate situations. For example in Spain when one of our clients intended to purchase a five-star hotel in Barcelona – a contemporary jewel seeming to have its origins in kings’ days – we discovered serious hidden irregularities after the audit, and those irregularities led to the conclusion that the business was nothing but a nicely varnished black hole. Thus, trust in the seller was lost and business arrangements were cancelled.

One of the lessons learnt by the Romanian entrepreneurs during the past several years is that the buyer should not be considered ignorant and bewildered by empty words and “gloss”, one who makes decisions without checking the real facts

The purchasers will always check certain essential aspects such as who are the real owners (who is behind the off-shore companies, existence of trusts, etc.); whether the negotiator has a valid power of attorney from the real owners, the real property and the location thereof; the validity of the property title and existence of a dispute pending with the courts or other investigations; financial issues; the business’ management manner and transparency thereof; possible affiliations to international chains, and existing agreements – all need to be examined. It does not matter if you intend to sell the business or not, it is always advisable to have it checked out in detail, in order to find out where the business sits in reality. In many cases such a test has actually saved the business from going to ruin. Laura Tiuca, Head of Bucharest Hospitality and Leisure Group

It does not matter if you intend to sell the business or not, it is always advisable to have it checked out in detail in order to find out where the business sits in reality. In many cases such a test has actually saved the business from going to ruin 21

SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

Hotels in Russia, the CIS and Georgia: Trends and Opportunities Most of the CIS countries showed significant growth in the mid 2000s, mainly due to their economies’ close link to the energy sector. Supported by the booming oil prices and high demand from industrialised nations, GDP growth in the region was above world-average in the years prior to the world economic crisis of 2008/09.

The global economic slowdown severely impacted GDP growth in Russia, the CIS and Georgia. Of the six CIS countries covered in this report, only Kazakhstan and Azerbaijan showed positive GDP growth in 2009, whereas Ukraine and Armenia exhibited the largest declines of 14.8% and 15.2% respectively. Even Russia’s economy, which is the largest in the CIS (and part of BRIC), registered a 7.8% decline in GDP growth. The years 2010 and 2011 saw the region gradually recover. Kazakhstan and Georgia registered the highest GDP growth in 2010 and 2011. Azerbaijan, on the other hand, went from being the leader in GDP growth to showing almost no change in 2011 (0.1%). It is important to note that once again Russia is not the leader in GDP growth. Out of the six countries covered in this report, Russia has shown the second-worst results in GDP growth in the past two years. Despite all the countries having shown significant progress in their recovery from the world economic crisis, the forecasts of GDP growth by both EIU and IMF are moderate in the short to medium term. Most of the countries are forecasted to grow their GDP by approximately 3-5% annually. Kazakhstan and Georgia should continue to dominate the region in GDP growth, while Azerbaijan is forecasted to remain at the bottom of the table. Nonetheless these growth rates are still higher than Western Europe (1.5-2%), but lower than China and India (7-9%) in the short to medium term. One of the main worries for the CIS countries has been high and unstable levels of inflation. High GDP growth has often been accompanied by rising inflation. In 2008 a record was set, with all the countries in the region except Armenia exhibiting double-digit inflation. From 2008 all the countries covered were able to lower their inflation to singledigit rates; however, inflation in 2011 still ranged from 8% to 9.5% for the region as a whole. While EIU and IMF have forecasted a reduction in these countries’ inflation levels to 5-5.5% in the short to medium term (with Ukraine as the only exception at around 7%), questions have to be raised whether or not such quick reduction is possible. 22

The combination of recovery in both occupancy and ADR assured not only positive, but doubledigit growth in RevPAR across the region

Russia will continue to remain the most attractive and prominent country in the CIS. Russia has been ranked fifth in global foreign direct investments (FDI) in 2010 and is expected to remain among the top five attractive destinations for international investors during 2010-12, according to a report on world investment prospects titled, ‘World Investment Prospects Survey 2010-2012’ by the United Nations Conference on Trade and Development (UNCTAD). Despite perceived instability and a certain economic turmoil, Russia, the CIS and Georgia continue to remain attractive investment prospects. Overall interest in the economies of these countries will be mirrored in hotel development in the region.

Industry Performance In 2011 hotel markets across Russia, the CIS and Georgia continued their recovery in occupancy, which most of them exhibited in 2010. Yekaterinburg (28%), Tbilisi (23%), Baku (16%), Kazan (13%), Samara (12%) and Almaty (11%) observed a double-digit increase in occupancy levels. Of these six markets, however, only Kazan, Baku and Tbilisi saw an increase in supply in 2011. Baku, in fact, was expected to see much larger supply growth; delays in construction have now allowed this market to recover some of its occupancy losses from 2009/10. Such strong increases in occupancy can be attributed to both a low base of the previous year, as well as to the economies’ steady recovery from the global slowdown. For example, Almaty, despite an occupancy increase of 10.5% in 2011, displayed the second largest absolute decline over the past five years (-10.4%). Moscow (2%) has shown the lowest increase among all the cities; however, it also had the largest base in 2010, meaning that even a 2% increase amounts to a significant increase in room nights sold. Furthermore, Moscow has been one of the most stable markets (in terms of occupancy) in the past five years, second only to Rostov, exhibiting a 1.1% CAGR in occupancy, as opposed to Rostov with a compounded occupancy increase of 0.3%. In addition to Moscow and Rostov, only Kazan (5%) and Yerevan (2%) demonstrated a positive CAGR over the past five years.

GUEST CONTRIBUTION

Chart 1: Key Operating Characteristics By Major City – Occupancy 2007

2008

2009

2010

2011

12 Month* Growth

Compounded Growth

Moscow

65,4%

65,0%

62,6%

67,1%

68,4%

1,9%

1,1%

St Petersburg

64,4%

60,2%

44,4%

52,7%

55,8%

5,9%

-3.5%

Yekaterinburg

55,4%

55.5%

31,0%

30,0%

38,4%

28,0%

-8,8%

Rostov

59,7%

57,8%

53,8%

56,7%

60,3%

6,3%

0,3%

Samara

56,8%

52,7%

36,3%

44,5%

49,6%

11,5%

-3,3%

Kazan

41,8%

49,3%

49,1%

45,0%

51,0%

13,3%

5,1%

Kyiv

64,5%

63,6%

46,6%

47,5%

51,7%

8,8%

-5,4%

Baku

64,4%

59,6%

46,6%

43,8%

51,0%

16,4%

-5,7%

Astana

58,0%

49,3%

40,6%

44,1%

47,4%

7,5%

-4,9%

Almaty

72,0%

60,0%

50,0%

42,0%

46,4%

10,5%

-10,4%

Tbilisi

75,5%

70,5%

46,4%

50,1%

61,6%

23,0%

-5,0%

Yerevan

48,3%

45,9%

49,9%

49,4%

51,6%

4,5%

1,7%

*Growth in 2011 (in absolute terms) expressed as percentage of the figure for 2010 Source: HVS Rearch

Despite perceived instability and a certain economic turmoil, Russia, the CIS and Georgia continue to remain attractive investment prospects. Overall interest in the economies of these countries will be mirrored in hotel development in the region

RevPAR growth (in local currency) in 2011 was sensational. All markets except one – Baku – exhibited not only positive but double-digit growth. Yekaterinburg led the way with an almost 42% increase in RevPAR in local currency, while Moscow exhibited the lowest growth at almost 11%. Yerevan is the only market to have demonstrated a decline in RevPAR in local currency (12%). In terms of Euros, all the markets showed positive growth: Yekaterinburg, the leader in RevPAR, had an almost 39% increase. Both Baku and Kiev, which recorded 5.3% and 14.2% increase in local currency respectively, demonstrated the lowest increases in Euros (0.6% and 7.4%) due to the depreciation of their local currencies. To further stress the importance of currency exchange, we look at the CAGR of RevPAR over the past five years. While in terms of local currency only eight markets exhibited a decline, in Euro terms it was all but one (Yekaterinburg). Fluctuations in the state of local economies affect hotel performance twofold: through changes in hotel operating results (occupancy and average daily rate) and currency exchange 23

SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

Chart 2: Distribution Of Existing And Proposed Branded Hotel Rooms By Major City Existing Supply 2010

Existing Supply 2011

Proposed Supply

Rank

Percentage of Total

Increase Over Five Years

Rank

Moscow

12 400

13 000

7 200

1

35%

55%

9

St Petersburg

6 470

6 800

1 700

4

8%

25%

13

Yekaterinburg

800

800

500

9

2%

63%

7

Rostov

100

100

1 200

6

6%

1200%

1

Samara

670

670

400

11

2%

60%

8

Kazan

630

780

330

12

2%

42%

10

Sochi

800

800

3 800

2

18%

475%

2

Kyiv

1 600

1 800

2 300

3

11%

128%

3

Baku

1 200

1 350

1 500

5

7%

111%

4

Astana

700

700

200

13

1%

29%

12

Almaty

1 400

1 400

550

8

3%

39%

11

Tbilisi

630

830

700

7

3%

84%

6

Yerevan

450

450

450

10

2%

100%

5

27 850

29 480

20 830

Total

71%

Source: HVS Research

rates. RevPAR growth shoud be read carefully as poor operating performance from 2009 weakened the base for growth, thus even a slight increase in absolute figures leads to a significant percentage change.

Hotel Supply The last decade can be characterised by increased development of new hotels in Russia, the CIS and Georgia. Despite real progress in the early- and mid-2000s, hotel development lost considerable pace in the past three years mainly due to the global slowdown. Many projects have been either cancelled or put on hold since 2008, while most of the development that took place in 2010 and 2011 consisted of unfinished hotels from before the crisis. Hotel supply in 2011 in the region only increased by approximately 6% (Table 2), with almost 60% of that increase due to new developments in Moscow and St. Petersburg. Nonetheless, forecasted increase in supply in the above-mentioned twelve markets, along with Sochi, is approximately 70%. Moscow continues to attract investors and is forecasted to expand its

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We can clearly see the effects of hotel markets recovery, which is not only mirrored by improved operating results, but also in the number of announced hotels in the region

hotel market by over 7,000 hotel rooms over the next five years, which accounts for 35% of the total supply in the thirteen markets. Due to the EURO 2012 and 2014 Winter Olympic Games, Kiev and Sochi are forecasted to increase their supply by 2,300 and 3,800 hotel rooms respectively, which rank these cities as second and third, both in absolute increase in supply and in percentage terms. Room supply in Rostov, which currently has the lowest base of quality hotel rooms, is forecasted to increase by 1,200 rooms in the next five years. Such a large pipeline ranks it at first place in percentage increase and sixth in absolute terms. It is important to note that the large percentage increases are mainly due to a combination of aggressive expansion and low existing base of quality hotel accommodation. It is important to note that the increase in hotel room supply by 3,800 in Sochi consists of the city of Sochi and Krasnaya Polyana. Imeretinskaya Valley is forecasted to have more than 12,000 guest rooms for the Olympic Games. Since most of this stock will be converted into residential projects for sale in the post-Olympic period and the exact remaining

GUEST CONTRIBUTION

hotel supply is unknown, we decided not to include Imeretinskaya Valley into our forecasts of future hotel supply.

Future Trends Our analysis of the hotel markets of Russia, the CIS and Georgia leads us to believe that while some markets have shown signs of improvement since the downturn of 2008/09, others are still struggling to recover. Furthermore many of the studied hotel markets have significant new supply in the short to medium term. Even though we anticipate that in the medium to long term most markets’ demand will match or outgrow the supply, certain markets are bound to experience pressure on operating performance in the short and even medium term. As local economies become more stable so should the exchange rates. Thus if hotels are reporting their operating performance in Euro terms, additional losses due to currency exchange should be minimised. It is important to focus on Sochi separately as the market is going through some drastic changes due to the 2014 Olympic Games. Over 15,000 rooms are being prepared for the Games, most of which will be sold as residential projects later on. Imeretinskaya Valley will experience enormous oversupply of both hotel rooms and residential projects, as by itself the valley is not a major attraction for visitors. Krasnaya Polyana, even though it is a ski resort, will heavily depend on the success of destination management

Even though we anticipate that in the medium to long term most markets’ demand will match or outgrow the supply, certain markets are bound to experience pressure on operating performance in the short and even medium term

by the local authorities. We anticipate that hotels in Imeretinskaya Valley and Krasnaya Polyana will experience pressure on operating performance in the medium term. Currently there are few investors in the region that can be characterised as institutional. As hotel markets in Russia, the CIS and Georgia continue to grow and mature we should start seeing more institutional investors. The maturing of the hotel market is usually accompanied by increased activity in hotel transactions. Thus, as the number of hotels increases, investors will have a choice between developing a new property or acquiring an existing one. Even though investor interest is increasing, it is important to understand that factors like oversupply, bureaucracy and delays in hotel development will deter some of the potential investment in existing and proposed assets.

Tatiana Veller, Managing Director Alexey Korobkin, Senior Associate, Consulting & Valuation Galina Kuzmina, Associate, Executive Search HVS Global Hospitality Services – Moscow 4/5 Gilyarovskogo Street Office 301, 129090 Moscow, Russia T: +7 495 608-9931

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CENTRAL AND EASTERN EUROPE

New Real Estate Developers’ Act On 28 October 2011, the Act of 16 September 2011 on protection of rights of a purchaser of residential premises or single-family house was announced in the Journal of Laws (Journal of Laws of 2011, no. 232, item 1377, the “Act”). The Act came into force on 29 April 2012.

The Act regulates the rules of protection of the purchaser’s rights vis-à-vis which purchaser a developer undertakes to: (i) establish separate ownership title to the residential premises and transfer the ownership title to the said premises to the purchaser, or (ii) transfer to the purchaser the ownership title to the property developed with a single-family house or the right of perpetual usufruct to the land property and the ownership title to the single-family house erected thereon constituting separate real property (Art. 1 of the Act, the listed rights shall be hereinafter referred to as the “ownership title”).

Drawing up the information prospectus together with appendices is the basic obligation of a developer

Other Documents At the request of an interested person, the developer ensures the possibility to read the following documents in the premises of the enterprise: Current status of the title and mortgage register of a real property on which the development project will be carried out;

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Copy of the building permit, architectural – building design; and Financial statement of the developer for the last 2 years, and in the case of a special purpose vehicle – a financial statement of a parent company.

Developer’s Responsibility Pursuant to Art. 32 of the Act, a developer, employee of a developer, or any other person obligated to draw up the prospectus who fails to do so is subject to a fine. Providing false information in the prospectus carries the penalty of imprisonment of up to 2 years.

Obligations of Developer Prior to the Execution of the Agreement Information Prospectus Drawing up the information prospectus together with appendices is the basic obligation of a developer. The prospectus should be delivered to the purchaser free-of-charge on a permanent data carrier (material or equipment which enables storing the recorded data as long as required considering the nature of information and the purpose of drawing up thereof in the manner which does not allow any amendments thereto). If the information included in the prospectus is changed, relevant information about the amendment is provided at the time which allows the purchaser to learn the information prior to the execution of the developer’s agreement, and it is delivered in the same form in which the prospectus was delivered (with the prior consent of the purchaser, the amendment may be delivered in a different form). The change should be delivered in the form of: (i) an annex to the information prospectus or an amendment to the appendix, or (ii) a new prospectus or a new appendix with a clearly marked amendment in such a manner that allows the purchaser to identify the amendment.

Extract from the National Court Register (KRS) or the Central Registration and Information on Business;

Developer’s Agreement Definition

Within the meaning of the Act the developer is an entrepreneur who, as part of its business activities, undertakes to establish the ownership title and transfer the said title to the purchaser under the developer’s agreement

The Act defines the developer’s agreement as an agreement under which the developer undertakes to establish or transfer to the purchaser upon the completion of the development project the rights as referred to in Art. 1 (the ownership title), and the purchaser undertakes to accomplish payment to the benefit of the developer on account of the purchase price for the said title. Within the meaning of the Act the developer is an entrepreneur who, as part of its business activities, undertakes to establish the ownership title and transfer the said title to the purchaser under the developer’s agreement. Pursuant to the Act only a natural person can be the purchaser.

Elements of the Developer’s Agreement The Act stipulates that the developer’s agreement should include, inter alia, the following: Information about the real property on which the development project is to be carried out, including information on the legal status of the real property including in particular existing mortgage encumbrances and easements; Description of the location of the residential premises in the building together with an indication of the surface area and the room layout and the scope and standard of the fit-out works which the developer undertakes to do;

POLAND

ATTORNEY HIGHLIGHT Tomasz Stasiak Partner, Poland

Tomasz Stasiak is a real estate partner in Salans’ Warsaw office. Tomasz specialises in real estate law. He has participated in many project finance investments (including public private partnerships and multinational joint ventures) representing both the developers and financial institutions. In his career he has been involved in all stages of property projects from purchasing land and commissioning contractors and consultants through arranging for funding and leasing to sale of completed products. Tomasz gained professional experience during four years at Clifford Chance in Warsaw. In 2007 and 2008 he was also heavily involved in setting up Clifford Chance’s office in Kyiv where he then led the real estate practice. Tomasz is recommended in the legal directory The Legal 500, 2012 in the field of real estate, where he is seen as a “calm, considered lawyer” who advises on project finance investments and CEE projects, with a focus on Ukraine. Also, Chambers Europe 2012 recommends him as a “talented practitioner”. Tomasz was admitted as a legal adviser in Warsaw in 2005. He is a graduate of Warsaw University (2000) and American Law Studies run by the Center for American Legal Studies at the Warsaw University with co-operation with the Florida University (1999). He speaks Polish, English and Russian.

A developer, employee of a developer, or any other person obligated to draw up the prospectus who fails to do so is subject to a fine

The commencement and completion dates of the construction works, the date of transferring the ownership title to the purchaser and the deadlines, amounts or conditions on which the purchaser accomplishes the payment to the benefit of the developer; Representation by the purchaser on accepting and reading the information prospectus together with appendices including the information that the purchaser was notified of the possibility to read the documents specified in Art. 21 (current status of the title and mortgage register, excerpt from the National Court Register (KRS) or the Central Registration and Information on Business, copy of the building permit, developer’s financial statement for the last 2 years and in the case of a special purpose vehicle – the financial statement of the parent company).

Disclosure in the Title and Mortgage Register Developer’s agreement constitutes grounds for disclosing in the title and mortgage register the claim to establish and transfer the ownership title.

Rescission by the Purchaser The purchaser is entitled to rescind the developer’s agreement within 30 days from the date of conclusion thereof, if inter alia: the agreement does not include elements specified by the Act or if the information included in the agreement is not consistent with the information prospectus; the prospectus includes data which is inconsistent with the factual background; the ownership title to the real property is not transferred to the purchaser upon the designation of 120 days for transferring the said title.

Trust Account Types The Act introduces two types of trust accounts: Closed residential trust account from which a oneoff withdrawal of the deposited funds is made upon transfer of the ownership title to the purchaser, and

27

CENTRAL AND EASTERN EUROPE

Open residential trust account from which withdrawal of deposited funds is made in accordance with the schedule. The developer is obligated to provide the purchaser with one of the following means of protection: Closed residential trust account; Open residential trust account and an insurance guarantee; Open residential trust account and a bank guarantee; or Open residential trust account.

Agreement on Opening the Account The aforementioned trust accounts are kept under the account agreement concluded between the developer and the bank. The bank under the concluded agreement registers deposits and withdrawals of funds separately for each purchaser. Only the bank is entitled to terminate the agreement, the termination of which can be done solely for important reasons.

Within the meaning of the Act the developer is an entrepreneur who, as part of its business activities, undertakes to establish the ownership title and transfer the said title to the purchaser under the developer’s agreement

POLAND

(iii) if the developer fails to deliver the prospectus together with appendices; (iv) if the data included in the prospectus or appendices is not consistent with the factual background as of the date of conclusion of the developer’s agreement; (v) if the prospectus does not include information specified in the Appendix to the Act; (vi) in the event the ownership title is not transferred to the purchaser within the time limit specified in the developer’s agreement; with reference to the developer: (i) if the purchaser fails to accomplish payment within the time limit specified in the developer’s agreement; (ii) if the purchaser failed to arrive for accepting the residential premises or a single-family house or to sign the notarial deed transferring the ownership title to the purchaser);

The developer has the right to dispose of the funds withdrawn from the open trust account only for purposes related to the performance of the development project for which the account is kept.

the bank promptly returns the funds (in the nominal value) which remain in the account and which are attributable to the purchaser. If the termination of the agreement is made for reasons other than those specified in Art. 29, the parties are obligated to present a unanimous representation specifying the manner in which the funds are to be distributed.

Withdrawal of Funds from the Account

Enactment

The funds from the open trust account are withdrawn to the benefit of the developer upon determination that a given stage of development is completed. The bank determines the completion based on the entry made by the site manager in the construction log, and the costs of the inspection are borne by the developer. If one of the parties rescinds the developer’s agreement pursuant to Art. 29 of the Act (namely, with reference to the purchaser:

The Act came into force after six months from the date of the announcement thereof, namely on 29 April 2012.

(i) if the developer’s agreement does not include elements as referred to in the Act; (ii) if the data included in the developer’s agreement is not consistent with the data included in the information prospectus or appendices;

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The provisions of the Act with reference to trust accounts apply to development projects in respect of which the sale started upon the date of enactment of the Act. If the sale commenced prior to the date of the said enactment, the developer includes in the information prospectus a relevant statement about not applying the measures in the form of the trust accounts.

Monika Sitowicz, Counsel

HUNGARY

New Rules on Government Property and the Shopping Mall Ban Two recent changes in the law have attracted special attention among investors as they are likely to have an impact on the real estate market of Hungary.

One of the changes is the enactment of a new act (Act CXCVI of 2011) stipulating the basic rules in the scope, acquisition, use, management and sale of government property, including the assets of both the central and local government (the “Government Property Act”). The other change is the introduction (by amending Act LXXVIII of 1997) of a ban on constructing shopping malls exceeding a certain size (the “Shopping Mall Ban”).

The Government Property Act The Government Property Act defines the scope of those assets that may constitute government property and classifies them into categories, on the basis of the limitations on disposal that are applicable to them. While the core assets listed in the strictest category may not be alienated or encumbered at all, the business assets of the government may be the subject of transactions generally on market terms. In between these two categories there are others imposing various levels of limitations on disposals. The Government Property Act also determines the basic rules on the establishment of companies and acquisition of business shares in a company by the central or local government. The utilisation and the sale of government property exceeding a certain value threshold are subject to tendering. The Government Property Act also lists the business activities that may be pursued exclusively either by the central or local government, or on the basis of a concession agreement with these entities. Aside from the above, the Government Property Act stipulates three major changes:

Transparent Organisations The Government Property Act defines transparent organisations, which may be certain public bodies and entities or international organisations, or furthermore, foreign or domestic business entities, with or without legal personality, fulfilling the following criteria: ownership structure and beneficial owner is recognisable (under the Act on the Prevention and Combating of Money Laundering and Terrorist Financing, the beneficial owner is, inter alia, any individual having voting rights or an ownership interest directly or indirectly exceeding 25% or

Two recent changes in the law have attracted special attention among investors as they are likely to have an impact on the real estate market of Hungary

exercising decisive influence), with the exception of public limited companies; tax residence in an EU, EEA, OECD state or in another state with which Hungary has concluded a double tax treaty; not a controlled foreign company (under the Act on Corporate Income Tax, a controlled foreign company is, inter alia, any foreign person or entity having a domestic beneficial owner for the majority of the tax year or the source of the majority of its revenue in Hungary, with certain exceptions); all legal or business entities having directly or indirectly more than 25% ownership interest, influence or voting rights in the business entity also fulfil the above criteria. The Government Property Act stipulates that only transparent organisations may enter into any agreement regarding the use or acquisition of government property or concession agreements. In respect of agreements on the use of government property that already exist, the business entities party to such agreements must reveal their ownership structure in accordance with the above until 31 December 2012.

Right of First Refusal of the Central Government

The Government Property Act defines the scope of those assets that may constitute government property and classifies them into categories, on the basis of the limitations on disposal that are applicable to them

The Government Property Act reserves a right of first refusal for the central government in case the real estate being sold is owned by a local government. This right of first refusal of the central government is first ranking, superseding all other pre-emptive rights on the real estate. The central government may exercise this right within 30 days following the delivery of the agreement on the transfer of the real estate. The unsuccessful expiration of this deadline results in the loss of this right.

Exclusion of Arbitration The Government Property Act prescribes that in civil law agreements concerning government property located within the borders of Hungary: (i) only the Hungarian language may be stipulated as the prevailing language; (ii) only Hungarian law may be stipulated as the governing law; and (iii) only an Hungarian court may be chosen as a forum. The 29

CENTRAL AND EASTERN EUROPE

Government Property Act excludes the stipulation of the jurisdiction of arbitration courts for the above agreements. The majority of the Government Property Act’s rules (including the above) entered into force on 1 January 2012.

The Shopping Mall Ban According to the Shopping Mall Ban, the construction of commercial buildings with a floor area exceeding 300 sq. m. and the expansion of existing commercial buildings over the floor area of 300 sq. m. is prohibited. The Shopping Mall Ban applies not only to shopping malls as such, but also to premises used for commercial purposes on the ground floors of office buildings, as well as buildings and parts of buildings primarily intended for the purposes of supply and storage, in which commercial activities are pursued. Accordingly, the new rules may not only affect companies involved in the development of shopping malls but also the investors planning the development of mixed-function office and warehouse buildings.

Exemption For buildings falling under the scope of the Shopping Mall Ban, theoretical building permits, lot formation permits and building permits may only be applied for after the applicant has obtained an exemption granted by the minister responsible for commerce. The investor shall apply for an exemption by the minister, who may grant the exemption in the course of an administrative procedure after having requested the opinion of a committee consisting of the ministers responsible for commerce, environment and rural development and after taking into consideration the criteria set forth by the Shopping Mall Ban. The government is authorised to adopt regulations on the composition and operation of the committee, the criteria to be taken into consideration by the committee during the exemption procedure and the minister responsible for commerce, and the specific rules of the exemption procedure. Based on the above authorisation, Government Regulation No. 367/2011 (XII. 30.) entered into force on 1 January 2012 regarding the operation of the Committee in connection with the establishment of certain commercial buildings and the content of the application for exemption. The Government Regulation sets forth the scope of the information that should be indicated in the application for exemption and that investors shall attach an impact study to the application for exemption for commercial buildings exceeding 5000 sq. m.

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The Shopping Mall Ban applies not only to shopping malls as such, but also to premises used for commercial purposes on the ground floors of office buildings, as well as buildings and parts of buildings primarily intended for the purposes of supply and storage, in which commercial activities are pursued

HUNGARY

Transitional Rules Under the transitional rules, the Shopping Mall Ban is also applicable in building permit procedures pending at the time of entry into force (1 January 2012), i.e., such procedures where the application for building permit was delivered to the competent authority but the authority has not yet granted the permit or in case of construction subject to notification, the notification has not yet been recorded as received. It is difficult to interpret the legislators’ intention regarding the new provisions which exclude the applicability of certain provisions on pending building permit procedures. According to such excluded provisions, in building permit procedures initiated on the basis of theoretical building permits, the authority would be bound to matters explicitly dealt with in the theoretical building permit, even if in the meantime the relevant legal regulations and the mandatory regulatory provisions have changed. The intention of the provision by which the validity of the theoretical building permits being effective on 1 January 2012 is extended is also ambiguous since (i) applications for extension may only be filed in cases of valid theoretical building permits and (ii) relief otherwise set forth by law shall only be considered in cases of applications for building permits filed on the basis of valid theoretical building permits; thus the extension of validity until the expiration of the Shopping Mall Ban (31 December 2014) does not benefit parties in possession of theoretical building permits for the reason that their theoretical building permits will expire on the very day when they are not yet entitled to apply for any building permit with the competent authority in the absence of the above mentioned individual exemption. The Shopping Mall Ban entered into force on 1 January 2012 and will remain in force until 31 December 2014. Ádám Kaplonyi, Of Counsel Andras Horvath, Associate

CZECH REPUBLIC

Real Estate Revolution in Czech Law is Knocking on the Door Czech civil and commercial law will change in 2014 as the new Civil Code (the “NCC”) will enter into force on 1 January 2014. The NCC will replace many laws (e.g., Act No. 116/1990 Coll., on lease and sublease of non-residential premises, Act No. 513/1991 Coll., the Commercial Code, etc.), and amend many others.

The NCC will serve as general statutory law regulating mutual relationships between individuals and entrepreneurs (private law). It should respect the parties’ free will more when agreeing on their mutual rights and duties otherwise than as set forth under the codified legal provisions. In addition, it returns to the classical principle of superficies solo cedit, applicable in most foreign jurisdictions, that buildings and other structures closely connected to the land are not separate things, but form part of the land (the “SSC Principle”). This article aims to introduce its readers to the basics of the transition to the SSC Principle under the NCC. It should also introduce the new legal institution known as the “building right” (právo stavby), which is meant to govern placement of structure on third-party lands in the future. The NCC sets forth that the land includes space above and below its surface and any structures built on such land, except temporary structures, are part of the land. This includes also anything that is embedded in the land or mounted on the walls. The Civil Code as it stands now contains just the opposite principle under which a building does not form part of the land. As of the date of effectiveness of the NCC, if the owners of the land and the building located on the land are the same persons/entities, their ownership titles, until that moment separate, will merge together by operation of law. From that moment it will be possible to dispose of the land only, and all such dispositions will also affect the building located on such land. However, as there are currently many cases in which the owners (of the land and of the building located on the land) are different, the NCC seeks to adjust such separate ownership titles gradually by establishing statutory pre-emption rights encumbering the land in favour of the building located on it and vice versa. An example: an owner of land on which a building owned by a different owner is located wants to sell the land. The land then has to be offered first to the owner of the building. If the owner of the building does not exercise its pre-emptive right, the pre-emptive right continues encumbering the land

Czech civil and commercial law will change in 2014 as the new Civil Code will enter into force on 1 January 2014

against any other owner who acquires it. If, however, the pre-emptive right is exercised by the owner of the building (i.e., the land and the building built on the land will be owned by the same person/entity), the pre-emptive right ceases to exist. The acquirer of the land will be then able to dispose of the land in the future only, i.e., any subsequent disposition with the land will also affect the building which will be from that moment part of the land (due to the statutory “merger” of the title to land and building). This method is inspired by the transition to the SSC Principle which was also undertaken after the reunification of Germany in 1990. Existing contractual pre-emption right encumbering either land or a building should prevent the statutory merger of the land and the building. However, in case that land and a building are owned by different owners (i.e., the merger described above does not occur due to such situation) and any of such real estate is also encumbered by the pre-emptive right, the situation is more complex. This is because the NCC does not resolve explicitly such conflict between contractually established pre-emptive rights and the statutory pre-emption rights mentioned above which are established by operation of law. As indicated above, in such case, the owner of the land and the owner of the building benefit from mutual statutory pre-emptive rights. However, the NCC does not provide anything about priority between the beneficiary of the statutory and the existing contractual pre-emptive right. The general principles of the NCC governing pre-emptive right suggest that in such a case, the pre-emptive right must be exercised collectively, but the explicit answer to such questions is missing. Developers benefiting from an easement or another contractual title to use third-party land for construction purposes do not have to be afraid of losing their title due to the SSC Principle transition. In case such title was established prior the NCC’s legal effectiveness, the building built on such land will not become part of the land. However, it will be still encumbered by the same pre-emption right as the one described above. The developers may note that the transition to the SSC Principle will not affect utility networks such as 31

CENTRAL AND EASTERN EUROPE

water mains or sewerage. Neither will it affect most buildings which are necessary for their operation and underground constructions which have their own purpose (such as an underground garage built under third-party land). On the other hand, the classification of such constructions retaining their own legal existence may be difficult due to the missing case-law, and the existing case-law will be largely of no use. The NCC will not restrict development projects on third-party land. The NCC contains for such purposes a building right allowing the builder (stavebník) to benefit from the building it constructs on someone else’s land. Despite being only a right, the building right will be considered by the NCC as standard real estate in the legal sense, which can be subject to various legal transactions. The building as such will be attached to the building right, and the SSC Principle will not apply during the existence of the building right. The essence of the building right is similar to an easement, i.e., it encumbers the land owned by a third party and entitles the builder to have located

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The New Civil Code returns to the classical principle of superficies solo cedit, applicable in most foreign jurisdictions, that buildings and other structures closely connected to the land are not separate things, but form part of the land

CZECH REPUBLIC

or constructed the building on or under the encumbered land. The main difference between the building right and the easement is, however, that the building right is not associated with the owner of other real estate or the builder as such. Thus the building right can be transferred and inherited as well. The building right will be registered in the Real Estate Cadastre. It can be subject to a mortgage, and it will be possible to encumber the building right with easements of third parties (e.g., for the placement of utility networks on the building right). The building right will be established as a temporary right with a maximum duration of 99 years. As was shown above, the NCC does not resolve explicitly certain issues related to the transition to the SSC Principle. Such issues will need to be resolved by case-law which will have to be redefined, as the current case-law will be largely inapplicable due to the revolutionary real estate change in Czech legal order. Václav Žalud, Associate

SLOVAKIA

New Rules of Bankruptcy and Restructuring Proceedings In 2011 the Slovak parliament adopted an extensive amendment of Act No. 7/2005 Coll. on bankruptcy and restructuring (the “Amendment”). The Amendment will, except for some provisions, apply to all bankruptcy and restructuring proceedings commenced after 1 January 2012.

The main changes brought by the Amendment are the following:

1.

Automatic joint and several liability of directors and other statutory bodies to pay the sum of the registered capital of the company into the bankruptcy assets, unless they adopt timely legal measures. Although at first glance it appears so, such measure is not necessarily only the actual filing for bankruptcy. Under the previous legislation a statutory body was liable to the extent of the damage caused by its “omission” to file for bankruptcy. Now, the liability of a statutory body is objective, which means that the statutory is obliged to pay, regardless of the damage caused to the creditors (i.e. even if the breach of its duties has no effect on the position of the creditors). The liability is, however, limited to the amount corresponding to double the minimum statutory registered capital of the company (i.e. €10,000 if debtor is a limited liability company and €50,000 if debtor is a joint stock company).

Under the previous legislation a statutory body was liable to the extent of the damage caused by its “omission” to file for bankruptcy. Now, the liability of a statutory body is objective, which means that the statutory is obliged to pay, regardless of the damage caused to the creditors

As from 1 January 2013, directors who no longer serve as a statutory body also will be liable if, during the four years preceding the bankruptcy proceedings, they failed to apply for bankruptcy. If two or more directors have to file for bankruptcy proceedings and the reluctance of the other directors prevents them from filing for the bankruptcy, the director willing to file for bankruptcy shall file a relevant notice into the collection of deeds.

2.

Rights of shareholders and related creditors (including creditors that were related in the past) will be limited in the bankruptcy and restructuring proceedings since: they will lose their voting rights in creditor committees, and their claims will be treated as subordinated claims, regardless of whether or not they are secured. A debtor must submit to a bankruptcy trustee a list of these related creditors.

3.

Criminal liability of the creditor may rise if the creditor fails to inform the bankruptcy trustee by a written notice about any circumstance that may cause termination of such creditor’s participation in the bankruptcy proceeding.

4.

A debtor does not have to file for bankruptcy due to its payment incapacity (platobná neschopnost’), i.e. because it has more than one creditor and it defaults with paying its debts more than 30 days. From 1 January 2013, the debtor will be obliged to file for bankruptcy only if it is insolvent (predlžený), which means that it has more than one creditor and the value of its assets is lower than the amount of its debts. Under the Amendment, however, the value of the assets will be considered also in the view of prospective future business development, and the debts will not include debts towards related parties.

5.

Creditors who fail to file an application in the bankruptcy proceedings on time will not be precluded from participation in the proceedings. However, creditors who fail to file their application within the statutory 45 days period will lose their voting rights and their claims will be treated as unsecured claims regardless of whether or not they are secured.

6.

As from 1 January 2013, directors who no longer serve as a statutory body also will be liable if, during the four years preceding the bankruptcy proceedings, they failed to apply for bankruptcy

The period for contesting (odporovat’) the legal actions of the debtor is prolonged from 6 months to 1 year. In addition, if the bankruptcy proceeding was preceded by a restructuring proceeding, the 1-year period will be counted from the commencement of the restructuring proceeding.

Katarína Pecnová, Counsel Matej Košalko, Junior Associate

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CENTRAL AND EASTERN EUROPE

Slovakia Adopts New Law on Environmental Burdens As of 1 January 2012, a new Act No. 409/2011 Coll., on Certain Measures in the Field of Environmental Burdens, entered into force in Slovakia after almost 10 years of preparatory work.

According to information from the Ministry of the Environment of the Slovak Republic (further “Ministry”), the adoption of this Act was one of the conditions to be able to receive financial support from the EU funds to deal with the old environmental burdens in Slovakia.

General The Act governs the environmental liability for old environmental burdens that occurred prior to 1 September 2007. The Act does not define the term “environmental burden” but refers to the existing definition used by the geological law. According to the geological law, environmental burden is generally defined as pollution caused by human activities which constitutes major risk for human health or rock conditions, groundwater and soil. The Act regulates: (i) rights and obligations of the entities and individuals in connection with the identification of the environmental burdens, (ii) determination of a so called “obliged person” with respect to the environmental burdens, (iii) obligations of the polluter, obliged person and respective ministry, (iv) powers of the respective public authorities and (v) liability for the breach of the obligations stipulated by the Act.

Identification of Environmental Burdens Anyone who has information on the existence of environmental burden in a certain locality can notify the Ministry or the Regional Environmental Authority. The Ministry shall examine and verify the existence of environmental burden in the given locality. If the environmental burden is identified, the Ministry shall register its existence in the Registry of Environmental Burdens (further “Registry”). The Registry forms part of the information system of environmental burdens; it is divided into 3 sections. Section A includes information on probable environmental burdens, i.e. such burdens which have not yet been identified officially but it is reasonably expected that they exist in a certain locality. Section B includes information on identified environmental burdens, and section C includes information on environmental burdens that have been removed.

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According to the geological law, environmental burden is generally defined as pollution caused by human activities which constitutes major risk for human health or rock conditions, groundwater and soil

The Registry is available on the internet portal of the Slovak Environmental Agency. After identification of the environmental burden, the Ministry shall also notify the respective Cadastral Administration for the purpose of registering such environmental burden in the Real Estate Cadastre. Following this, the owner or user of the burdened property and the respective municipality shall be notified about the identified environmental burden.

Liable Entity Generally, in line with the principle “the polluting party pays”, a person liable for an environmental burden shall be the polluter, i.e. anyone who caused the environmental burden by its activities. The polluter shall be obliged, inter alia, to prepare a plan for the clean-up of the environmental burdens and subsequently to carry out such plan and bear all costs related thereto. If a polluter is not known, is deceased, or has ceased to exist, the Regional Environmental Authority (further “Authority”) shall determine the so-called

SLOVAKIA

“obliged person” who shall bear the obligations of the polluter stipulated by the Act (including the obligation to perform a clean-up of the environmental burden). The obliged person shall be determined by the respective Authority in specific administrative proceedings. In the first instance, the legal successor of the polluter (save for certain exceptions provided by the Act) shall be determined to be the obliged person. If it is not possible to determine a legal successor of the polluter as the obliged person, the Authority shall determine the owner of the environmentally burdened property as the obliged person. The Act further stipulates exceptions when the owner of a property cannot be determined to be the obliged person. Such exceptions also include the situation when the owner – after acquiring the burdened property – did not continue to perform the polluting activity and at the time of acquiring the property could not know about the existence of the environmental burden. Other exceptions when the owner will not be liable is if it continues to carry out the activity which caused the environmental burden if, after the acquisition of the property, such activity no longer causes pollution of rock conditions, groundwater, soil or human health. It must be noted that the burden of proof is on the owner who has to prove to the Authority that conditions for liberation stipulated by the Act were fulfilled. If the obliged person cannot be determined by the above-mentioned procedure, the Government shall designate a respective ministry to undertake the obligations of the polluter (including the clean-up).

Despite the many years in preparation, the Act has many imperfections, e.g., it does not regulate the procedure to determine a polluter nor does it clearly stipulate the conditions for liberation from the liability for environmental burdens

Conclusion Despite the many years in preparation, the Act has many imperfections. For example, the Act does not regulate the procedure to determine a polluter nor does it clearly stipulate the conditions for liberation from the liability for environmental burdens. Moreover, it appears that the Authorities who decide on the determination of the obliged persons do not have the necessary qualifications. The Ministry plans to adopt guidelines in order to facilitate the implementation of the Act in practice, but nevertheless, it appears that the Act will have to be changed in the near future in order to remove its shortcomings.

Petra Novotná, Senior Associate

Restriction on Transfer of Burdened Property The Act further provides that if the polluter or the obliged person is also the owner of the environmentally burdened property, it may transfer such property to a third party only after it ensures that a geological survey of the environment with respect to such property is carried out. The report on such geological survey must be attached to the respective transfer agreement and any such transfer must be notified in writing to the Authority.

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CENTRAL AND EASTERN EUROPE

Real Estate Transactions under the Scrutiny of Romania’s New Civil Code 1 October 2011 was a milestone in the Romanian legal system, as it was the date the new Civil Code was enacted – almost 150 years after implementation of the old Civil Code. The Code is, as expected, a challenge; its assimilation, interpretation, and implementation represent a complex and intense process for legal professionals working in this area.

Best practice, along with doctrine and jurisprudence, will produce a wide-ranging legal framework to which subsequent legislation and other potential amendments will apply. One of the numerous provisions upon the New Civil Code coming into force, which raises questions, is that of new regulations for the sale and purchase of real properties concluded after 1 October 2011. The New Civil Code also stipulates provisions which shall apply to those agreements signed before 1 October 2011 (such as the provisions concerning payment notification to the debtor).

1 October 2011 was a milestone in the Romanian legal system, as it was the date the new Civil Code was enacted – almost 150 years after implementation of the old Civil Code

Special attention should be given during the period of negotiations, as under the new rules, negotiations made in bad faith can entail payment of damages to the other party. Moreover, the court may take into consideration, in determining the value of the damages, the costs of the other party during the period of the negotiations as well as loss of opportunity costs, such as the waiving of other potential offers. In addition, the parties should be very careful when drafting offers or signing any memoranda of understanding or letters of intent, because under certain conditions, such agreements can be recognised as binding contracts.

In conclusion, title to the real estate shall be transferred and/or constituted in the future, but only upon the completion of the cadastral works, solely through registration with the Land Book. It means that, as of such date, execution of the deed before 36

With regard to the seller’s guarantee against eviction (the loss under certain conditions of the acquired ownership right), this should apply solely if the claims of the third party are based on a right which occurred prior to the selling date and were not notified to the purchaser, until that date. Further, it is provided that the parties may agree upon the extension or limitation of such a guarantee obligation, the parties in question also being able to exempt the seller from any guarantee against eviction. Where the seller expressly assumes the risk of the occurrence of such eviction, the seller shall enjoy the possibility of not repaying the price. However, even if it is agreed that the seller owes no guarantee, it shall be held responsible for an eviction caused after the sale through its own deeds or for an eviction originating from causes kept secret from the purchaser and known thereby upon selling. This provision of the New Civil Code seems to be another Pandora’s Box in Romanian legislation. It is hard to believe that the presence of such a clause would be a cause of great enthusiasm to sophisticated purchasers or financing banks involved in the transaction.

With respect to the new rules, the New Civil Code specifies that if there is a promise to sell and the conclusion of the promised sale agreement is unreasonably refused, the other party may request, within six months from the date the agreement should have been signed, the issuance of a court decision to replace that agreement. With regard to the transfer of the ownership right, there are new provisions concerning the constitutive effect of registrations with the Land Book (i.e., the right arises through the simple act of registration); however, the new provisions concerning the constitutive effect shall apply solely in the future, upon completion of the cadastral works.

a notary public shall no longer be sufficient for the transfer of the right in question, and the right shall exist solely to the extent that it has been registered and described in the registration with the Land Book.

In addition, the New Civil Code provides that, if goods are usually sold by the seller, it is presumed that the parties have contemplated the price typically used by the seller. Where the parties do not otherwise agree in the contract, sale of goods whose price is determined on regulated markets is deemed to be concluded at the average price applicable on the nearest market to where the contract is concluded.

Special attention should be given during the period of negotiations, as under the new rules, negotiations made in bad faith can entail payment of damages to the other party

Just by going through the aforementioned provisions of the New Civil Code, it is apparent that a three to five year period of uncertainty can be expected concerning the progress of judicial practice, and that the analysis of the ownership titles will be much more complex (particularly because of the overlapping of the two civil codes); therefore special attention should be given when starting negotiations or signing any document. Laura Tiuca, Managing Counsel, Co-Head of Real Estate Romania

ROMANIA

Special Patrimony in the New Romanian Civil Code The New Civil Code provides that any natural or legal person can be the holder of a patrimony, which includes all rights and debts measureable in money and belonging to the holder. Patrimony is not defined as consisting in assets solely because it represents an intellectual authenticity.

The New Civil Code further stipulates that patrimony may be the subject of a division or specialised estate (“patrimoniu de afectatiune”) provided by the related law. With regard to the specialised estates, these are, for example, the fiduciary patrimony divisions and those related to persons practising an authorised profession (for example, certified physical persons, architects, doctors, lawyers, etc.)

Patrimony is not defined as consisting in assets solely because it represents an intellectual authenticity

In the chapter concerning in rem guarantees, the New Civil Code provides that assets representing the subject of a patrimony division practicing a profession authorised by law may be enforced solely by the creditors whose receivables have arisen in connection with the profession in question. In other words, such creditors (for example, tax authorities) may not enforce the other assets of such debtor (i.e., the assets not registered as the property of the certified physical person). Under such conditions, the question is how the individual professional patrimony is formally constituted; because Romanian legislation is, essentially, a formalistic one. We find an attempted answer in the very same New Civil Code, which provides that the increase, decrease, or constitution of the patrimony division meant to an individual practicing an authorised profession is determined through an act concluded by the holder thereof, based on observing the form and publicity conditions provided by law. It is not very clear what such provision would mean in practice – does it mean this act is just a simple unilateral act solely signed by the holder thereof without any other formality required? (E.g. notarisation) There are already voices according to which such act should be notarised. However, there is no solid motivation for such opinion, as long as the New Civil Code (which is, essentially, a “notarial” code) does not expressly stipulate notarisation – as it does for other acts. However, in the past, there have been circumstances under which the practice “hit hard” the legislation and, unfortunately, this excessively precautious spirit seems to prevail in many fields of our day-to-day

life and to have been infiltrated at the level of the authorities. In addition to those set forth above, the New Civil Code provides that, in case of division or specialised estate, the transfer of the rights and obligations from one patrimony division to another, within the same patrimony, shall be performed based on observing the conditions provided by law and without any prejudice to creditors’ rights over each patrimony division (for example, there should not be any fraud – which must be proved – and the transfer should not be subsequent to the fraudulent deed). One should note that if the intra-patrimony transfer fails to correspond to the specialised estate of the new patrimony division, such issue could constitute a fraud indicator. Another example (a little bit exaggerated, for the purpose of understanding the principle) would be the transfer of the ownership right over a professional kitchen to the patrimony division of a lawyer who renders solely consultancy services, with the transfer occurring a few days after the physical person who deals with the trading of such professional kitchens having received an executory title for failing to pay the VAT. In all these cases, the New Civil Code expressly stipulates that such transfer of rights and obligations from a patrimony division to another does not constitute alienation. (In other words, it should not be taxed.)

It is obvious that the aforementioned provisions have been promoted because most drafters of the New Civil Code are members of professional bodies regulated by their own codes and pursuing their own interests

It is obvious that the aforementioned provisions have been promoted because most drafters of the New Civil Code are members of professional bodies regulated by their own codes and pursuing their own interests. It is expected that the tax authorities are going to come with their own interpretation of such provisions and attempt to promulgate the amending laws. In other words, an uncertain period concerning the practice development shall also follow.

Laura Tiuca, Managing Counsel, Co-Head of Real Estate Romania

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SALANS: NEWS

Salans wins Europaproperty SEE Real Estate Law Firm of the Year award Salans’ achievements and expertise in the real estate sector were recognised by Europaproperty at the annual SEE Real Estate Awards Gala on 17 May 2012. Salans won the 2011 Law Firm of The Year Award for the third time, following on previous wins in 2009 and 2006. In addition, Laura Tiuca, Co-Head of the Bucharest Real Estate Group and Head of the Bucharest Hospitality Practice, was a finalist for the Professional of the Year distinction. The team is highly experienced in matters involving crisis management issues, asset management aspects, and real estate related disputes, including both litigation and arbitration, and is headed by Laura Tiuca and Bogdan Papandopol, two reputed real estate lawyers. Despite a continued weak market, Salans Bucharest has maintained its prominent position, having been involved in most of 2011’s few major real estate transactions. This award thus affirmed the firm’s Romanian real estate team’s status as among the most professional, innovative and deal oriented on the market. “It is gratifying that the SEE Europaproperty jury has once again recognised our team’s strength and contribution to the Romanian real estate market. I would also like to thank all our clients who nominated the firm and acknowledged in this way our leading position among Romanian real estate practices” said Christopher D. Berlew, Partner in Bucharest and Prague and Head of Salans’ Global Real Estate M&A and Private Equity sector group.

Salans top ranked by Chambers & Partners 2012 We are extremely pleased to announce that 21 Salans real estate lawyers are included in the 2012 edition of Chambers & Partners Europe Guide. Of those 21 individually ranked lawyers, we have two Star Individuals (Evan Z. Lazar, Co-Chairman of the Global Real Estate Group and Paweł De˛bowski, Head of Central Europe Real Estate), one Senior Statesmen (Henry Lazarski, France), and four Band 1 rankings (Olga Humlová, Czech Republic; Judit Ko˝vári, Hungary; Piotr Szafarz, Warsaw; and Jesús Varela, Spain). In addition to our individually ranked lawyers, we also have nine of our European jurisdictions ranked: three at 38

Laura Tiuca added: “I am very proud of our team, whose hard work and dedication made this award possible. On a personal note I am honoured to be among the finalists for Professional of the Year for the SEE region. We all look forward to continuing to serve our real estate clients in Romania and throughout the region.” Europaproperty provides comprehensive and up-to-date news, information and analysis on commercial real estate markets and related businesses, covering the whole of Central and Eastern Europe, Russia and the CIS. In addition to its publications, Europaproperty.com organises conferences on real estate matters and a range of other events at locations both inside and outside the CEE region.

Band 1 (Czech Republic, Hungary, and Poland); five at Band 2 (France, Romania, Russia, Slovakia, and the Ukraine); and our German real estate practice is a new entry this year. Also, the 2012 edition of Chambers & Partners Global Guide recognised Eric Rosedale, Co-Chairman of the Global Real Estate Group as a UK-based Foreign Expert for Corporate and M&A. Chambers has published the leading directories of the legal profession for more than twenty years. Their reputation is based on the independence and objectivity of their research. Their directories are known to be the most accurate and the most reliable.

SALANS: NEWS

Salans wins CEE Quality Award for the 2nd year running We are pleased to announce that for the second year running, our Global Real Estate Group has won the Quality Award for CEE Legal & Consulting Firm of the Year 2011. Paweł De˛bowski, Head of Central Europe Real Estate, collected the award on behalf of Salans. Our competitors this year were Allen & Overy, Clifford Chance, CMS Cameron McKenna, Hogan Lovells, Linklaters, Norton Rose and White & Case. The CEE Quality Awards is the annual real estate sector’s flagship event and main annual industry awards organised for the 9th time by CEE Insight Forum in association with the Financial Times. The awards were nominated by the sector and judged by a jury of senior representatives of real estate market leading companies active across Central & Eastern Europe and Southeast Europe. They cover the following CEE markets: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia, Poland and Ukraine.

Salans voted Law Firm of the Year at CEE Retail Real Estate Awards

Salans celebrates 15 years in Romania This year Salans celebrates 15 years since it entered the Romanian market and began advising on projects that have shaped the local business landscape.

We are pleased to announce that for the second year running, GREG has won another prestigious regional award – we were voted Law Firm of the Year at the 4th Annual Europa Property CEE Retail Real Estate Awards, held in February 2012 in Warsaw.

“In a young and dynamic economy like ours 15 years means a lot because we had to adapt to a constantly changing market,” said Anda Todor, the Bucharest office Managing Partner. “We would especially like to thank our clients who have entrusted us with their projects all these years, as well as our team and everyone else who has lent valuable support.”

Countries covered in the awards included Poland, Czech Republic, Hungary, Slovakia, Ukraine, Austria, Lithuania, Latvia and Estonia. Among our competitors were Clifford Chance, CMS Cameron McKenna, Allen & Overy and Lovells. The Award was presented to Piotr Szafarz, Head of the Warsaw Real Estate Team.

Salans entered the market in 1997 following the Firm’s recognition of Romania’s growing potential. Our first major clients included companies such as Gillette, Telesystem International Wireless (parent company of Connex), SABMiller, HeidelbergCement and Bank Austria Creditanstalt. During the Firm’s first 15 years in Romania, Salans advised on high profile projects such as A&D Pharma’s listing on the Main Market of the London Stock Exchange, the sale of a majority stake in Rompetrol to KazmunaiGas, the sale of Connex to Vodafone, the sale of the first and largest wind farm project by Continental Wind Partners to CEZ, and the development of Renault’s largest R&D centre outside France.

We are also pleased to say that Eric Rosedale was shortlisted for “Overall Professional of the Year” award. The CEE Retail Real Estate Awards represent the most outstanding and accomplished real estate companies, projects, retailers and individuals throughout the region, and also acknowledge winners’ contributions to the development of the retail commercial real estate market in the CEE for 2011.

Salans attorneys offer a full range of services in M&A, real estate, energy, infrastructure, banking & finance, litigation and international arbitration, competition, capital markets, restructuring and insolvency, tax and tax disputes.

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SALANS: NEWS

Salans Global Real Estate Group NEW MEMBERS Bucharest

Salans is Top Law Firm in Poland, Hungary and Slovakia, says Construction & Investment Journal Salans scooped the 2011 Law Firm of the Year titles at the CIJ Journal Awards in Poland, Hungary and Slovakia. For Poland and Hungary this recognition came for the second year in a row. Salans saw off fellow shortlisted international and domestic law firms to claim the prize, which was awarded “in recognition of outstanding service provided in 2011” in each of these three countries. The host of the event, Central & Eastern European Construction & Investment Journal, is an English language magazine for the property development & real estate industry in Central & Eastern Europe.

Irina Florian (Associate) Istanbul Barlas Balcioglu (Partner) Yasemin Zongur (Associate) Gozde Manav Kılıcbeyli (Associate) Ferit Esen (Associate) Arzu Inoglu (Associate)

Richard Benson (Associate) Sarah Rochelle (Associate) Madrid Javier Saínz García (Associate)

Marianne Syed (Associate)

Salans awarded 2012 Banking and Construction Law Firm of the Year in Russia

Warsaw

Salans has been announced the winner of the Construction Law firm of the Year in Russia and Banking Law firm of the Year in Russia and awards by DealMakers Monthly Magazine.

Piotr Niczko (Associate)

The vote is externally assessed against experience and knowledge of the industry, and provides a comprehensive list of those firms that are truly “Top Tier”. The award in essence sets the benchmark for all others to follow.

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Published for over twenty years, The Legal 500 Series provides the most comprehensive worldwide coverage currently available on legal services providers, in over 100 countries. Used by commercial and private clients, corporate counsel, CEOs, CFOs and professional advisers – as well as by other referrers of work both nationally and internationally – the series is widely chosen for its definitive judgement of law firm capabilities.

London

Myriam Mejdoubi (Associate)

This year’s winners were chosen by electronic voting, with 81,500 electronic forms being issued. The poll represents who the readership believe are the leading professional firms for that particular area of specialization and geographical region.

The 2012 edition of The Legal 500 global directory ranks 9 Salans real estate practices and mentions 19 individual attorneys in the real estate and construction sectors across Europe. Of these 9, five practices received the top, No. 1 ranking, i.e. the Czech Republic, Hungary, Poland, Romania and Russia.

Özgür Nemutlu (Associate)

Paris

The DealMakers Law Awards 2012 recognise a select number of leading professional firms across the globe for their individual areas of specialisation within their region.

Salans receives top rankings by The Legal 500, 2012

Anna Kopytowska (Associate) Jakub Nawrocki (Associate)

Eurobuild hands Salans Warsaw top honours We are delighted to announce that for the second year running our Warsaw real estate practice has won the Law Firm of the Year award of Eurobuild CEE magazine. Head of the team, Piotr Szafarz collected the award on behalf of Salans. The Eurobuild awards recognise and reward the success and dynamism to be found in the Polish real estate market. The jury takes into account the company’s activity, presence and reputation on the market, its lease and sales deal expertise, and the number and profile of clients represented.

Alicja Puławska (Associate)

Peter Figdor selected for New York Super Lawyers of 2012

Piotr Staniszewski (Senior Associate)

New York Partner Peter Figdor was once again selected for the New York Super Lawyers listing, real estate section. Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high-degree of peer recognition and professional achievement. The selection process is multi-phased and includes independent research, peer nominations and peer evaluations. The Super Lawyers selection process involves three basic steps: creation of the candidate pool, evaluation of candidates by the research department and peer evaluation by practice area. Super Lawyers magazine is published in all 50 states of the United States and reaches more than 13 million readers.

SALANS: NEWS

Paweł De˛bowski named Lawyer of the Decade by a premier Polish daily Salans Warsaw office was ranked No.1 in three key categories of the premier ranking of law firms in Poland conducted by Rzeczpospolita, a leading Polish business & legal daily: headline number of lawyers, number of advocates and legal advisers, as well as revenue for 2011. Rzeczpospolita in its 10th jubilee ranking gave special praise to Salans for its achievements over the decade: “We believe Salans deserves the title of most dynamic law firm of the last ten years, as it has experienced exponential growth during that time. This is borne out in terms of both its size and excellent turnover last year as well as its two awards of best law firm in the categories of real estate and energy law.” As part of the ranking, Salans and individual lawyers were recommended by other law firms in a number of practice areas. Salans, real estate team and individually Paweł De˛bowski, Head of Central Europe Real Estate, are recommended as leaders on the Polish market. Rzeczpospolita’s recognition comes to Paweł for the 8th time and thus he was named the Lawyer of the Decade.

Salans Prague wins Development and Real Estate award again Salans’ Prague office has won the Law Firm of the Year in Development and Real Estate award for the third time in a row. Organised by e.pravo, a major Czech publisher, the prestigious award is based on an assessment given by other law firms. The office was also shortlisted for the first time as a “recommended firm” in the Restructuring & Insolvency and Banking & Finance categories.

Piotr Szafarz, Head of Real Estate Team in Poland, is also recommended.

The award was presented at a gala dinner at the InterContinental Hotel and collected by Head of Real Estate, Olga Humlová, and real estate Counsel Michal Hink.

Salans awarded Financial Law Firm of the Year 2012 in Ukraine

Ladislav Štorek, Prague Office Managing Partner, said: “I am delighted our real estate team has won this prestigious award again. It is a true testament to their hard work, expertise and capability, and I am confident it will support our continuing growth in this market for years to come. I am also happy to see the recognition of our insolvency and banking teams as a reflection of our growth in these practice areas.”

Salans has been named Financial Law Firm of the Year 2012 in Ukraine in Finance Monthly’s Global Awards. Extensive research involving clients and peers was conducted for over six months by Finance Monthly’s research team. The end result was an awards publication which celebrates the success, innovation and quality of financial and legal firms across the globe. Finance Monthly is a global publication providing news, analysis and features on all the latest headlines within the financial sector. It examines the key issues affecting the corporate, financial and legal community globally, and covers the major regions such as the US, Europe and Asia.

Salans wins four Lawyer Monthly Legal Awards 2011 titles Salans has won four awards at the annual Lawyer Monthly Legal Awards 2011, organised by the Lawyer Monthly magazine. The firm was recognised as the Law Firm of the Year in Russia, the Banking and Finance Law Firm of the Year in Poland and Ukraine, as well as the Competition Law Firm of the Year in Germany.

Salans ranked No. 2 among 79 law firms in Russia by the Best Lawyers On 23 April 2012, Vedomosti, a leading Russian daily, published the Best Lawyers Guide listings for Russia. We are pleased to say that 20 Salans Russian practice lawyers have been listed, ranking Salans No. 2 among 79 law firms in Russia.

The awards recognise the achievements of those law firms and individuals who have engaged and responded most successfully to the demands of the global economic turmoil. They also serve as a legal guide for the magazine’s corporate readership.

From the Global Real Estate Group in Russia, Anna McDonald, Florian Schneider and Roman Kozlov, three Moscow partners, as well as two St. Petersburg partners, Karina Chichkanova and Artem Zhavoronkov, were listed in the guide.

Dariusz Oleszczuk, Global Managing Partner, said: “I am delighted four of our offices have won these prestigious awards by Lawyer Monthly magazine. Congratulations to them all for such a great achievement.”

The Best Lawyers is one of the most respected and definitive peer-reviewed guides to legal excellence in the U.S. and increasingly around the world.

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Salans in Spain Salans has marked its presence in Madrid and Barcelona since 2007 following its merger with two established Spanish law firms with over 20 years of experience. Our Spanish team includes 6 partners, 2 Of Counsels and 25 associates who provide a full range of legal services to domestic and international clients interested in doing business in Spain.

In common with Salans as a whole, our Spanish practice combines detailed knowledge of local law with the Firm’s international experience in similar specialisations. Our lawyers in Madrid and Barcelona work closely with colleagues from our other offices on a client-by-client basis to deliver tailored legal services that draw on the Firm’s collective expertise.

Areas of Specialisation Salans in Spain is a full-service commercial law firm offering quality advice in all areas of the law. We specialise in: Corporate / M&A Energy Regulatory & Public Law Real Estate Tax Employment Arbitration, Litigation and Alternative Dispute Resolution Banking & Finance Reorganisation, Restructuring & Insolvency

Clients have resoundingly praised Jesús Varela as an “exceptional lawyer”. They praise his “super-deep knowledge of the Spanish real estate sector”, his excellent commercial awareness and negotiation skills, and incredible work ethic. Peers also recognise him as ‘a superb real estate finance lawyer who looks for a win-win solution and always has a dynamic approach.’

Real Estate The real estate teams in Madrid and Barcelona comprise seven dedicated attorneys who advise on a full range of real estate transactions in Spain. Our clients include leading domestic and crossborder institutional investors, international financial institutions (including banks and investment funds), private equity and pension funds and developers, whom we advise in all types of real estate transactions including investment and divestment, acquisitions and sales, development, construction, real estate litigation, tax planning, leasing and financing related to offices, retail, residential buildings, business parks, hotels, tourist complexes and leisure centres in Spain and abroad. Our real estate practice comprises a multidisciplinary team drawn from our tax, corporate, commercial, finance and litigation departments. Our strength derives from our ability to combine real estate asset knowledge with corporate and financial expertise, bringing a sophisticated level of understanding to commercial transactions.

Chambers Europe 2012 Aleksandar Todorovic / Shutterstock.com

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GUEST CONTRIBUTION

Spanish Real Estate Investment Market: A World of Contrast Not that long ago the flow of international investment in Spain was phenomenal. International Funds of all profiles were struggling to get into the market and consolidate their market share in a seemingly always booming market. Banks and Saving Banks were strongly competing to finance deals, and the result was that the financing conditions subsequent to that strong competition made all investments highly profitable at very low yields.

Agents were always short in their optimistic predictions. At the zenith of the party, some Spanish real estate developers even dared to jump into London, New York or Paris or even acquire – with relative success – control stakes in the big petroleum companies or the main banks in the country. This sequence of excesses, although initially started in the residential sector, quickly expanded to all areas of activity.

What is Left Four Years After the Party?

Not that long ago the flow of international investment in Spain was phenomenal

The whole industry has collapsed, and the banks have become the main real estate owners. A significant part of their portfolios is still liquid and the loss attached is at reasonable levels, but for certain entities, the situation has become dramatic as they made a strong bet on residential land plots or even worse, they financed rustic plots at high prices in the hope of turning them into zoned land. Obviously today the value of those plots is directly related to

Main Investment Deals in the Offices and Retail Markets Market

Address

Location

Vendor Acciona

Purchaser Unibail-Rodamco

Yield

Area a/g (m2)

Investment Volume (€)

around 6,5% (net)

55.100

185.000.000 120.000.000

Retail

Splau!

Barcelona

Retail Retail

El Rosal Plaza Éboli

Ponferrada Pinto

Sonae Sierra

Doughty Hanson

8,00%

50.000 31.000

Offices Offices Offices Offices

Granada, 1 Cantón Pequeño, 18-21 García Barbón, 2 Paseo del Bome

Sevilla La Coruña Vigo Palma de Mallorca

BBVA

Pontegadea

6,25%

2.898 8.201 2.503 NA

75.000.000

Retail

APN Portfolio

several locations

APN

Värde

10% net (estimated)

81.618

70.000.000

Offices

FCC Portfolio (HQ in Madrid & Barcelona)

Madrid y Barcelona

FCC

Inversiones Subel

NA

60.000.000

Offices

Tripark (buildings B&C)

Las Rozas

Hines

Rilafe

7,25%-7,50% (estimated)

22,000

50.000.000

Retail

Parque Abadia

Toledo

Murias

Rockspring

7,5% (net)

55.500

50.000.000

Retail

22 supermarkets Eroski

several locations

Eroski

Rockspring

7,50%

29.000

45.000.000

Offices

Titán, 4-6 (ADIF HQ)

Madrid

Pramerica

Invesco

6,93%

10.308

39.000.000

Offices

Avda. Burgos, 18 (Repsol HQ)

Madrid

Aliseda (Banco Polular)

Cerquia

5,41%

8.000

38.000.000

7,45%

12.180

31.000.000

7,25% (estimated)

Offices

José Echegaray, 6B

Las Rozas

Pramerica

Blanco Villegas widow

Offices

Hewlett Packard HQ

Madrid

Orion Capital Management

Allegra

7,85%

11,032

29.300.000

Offices

Tripark (building A - DIA HQ)

La Rozas

Hines

REEFF

6,80%

10.500

28.000.000

Offices

Paseo de Recoletos, 17

Madrid

Inmouno

MDR

3,92% (net)

3.877

25.500.000

6,75%

7.600

25.000.000

7,50%

8.000

22.000.000

NA

2.500

22.000.000

Offices

Agustin de Foxa, 31 (CAM)

Madrid

Colonial

Mutua de la Abogacía

Offices

Serrano, 240

Madrid

Grupo Foxá

CPI

Retail

9 high street units

San Sebastián

Caja de Ahorros y Monte de Piedad de Guipuzkoa y San

Redevco

Offices

Building in Plaza del Ayuntamiento

Valencia

Generali

Grupo Zriser

Offices

Emisora 20 - ONO HQ

Pozuelo

ONO

Inversiones Subel

Offices

BBVA

Valladolid

REEFF

Offices

Diputación, 260

Barcelona

Offices

Fernández y González, 2

Offices

Volkswagen HQ in Mas Blau

4,72%

6.079

21.000.000

6% (estimated)

7.460

20.142.000

Private Investor

5,66%

4.346

18.000.000

Pontegadea

IVG

4,70%

3.706

17.500.000

Sevilla

Allianz Seguros

Private Investor

4,90%

6.700

17.000.000

Barcelona

GE Real Estate

Private Investor

NA

7.539

16.000.000

Source: Savills Research

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their ability to produce oranges in the best case. The most aggressive financial institutions have started an active process to clean the balance sheets either by means of retail sales of real estate through their own networks or by means of big portfolio sales to the so-called Op Funds. In any case they are actively managing their balance sheets, trying to lower their needs for liquidity and assuming the losses. Others are in a total stagnation situation as they cannot accept the losses without collapsing. In most of these cases the situation gets worse as time goes by, as the market keeps toughening and the search for available resources intensifies. All this financial mess has put the traditional real estate investment market in a completely new situation as it has dragged most of the available liquidity, and subsequently there is a dramatic shortage of financing available. In addition to that, most of the banks that remain open have toughened their financing criteria and so the focus is now not only on what they are going to finance but also on whom they are going to finance. This means that it is not just a matter of financing the correct product in terms of liquidity, LTV, quality of the tenant or strength of the lease, but also on the reliability and collateral strength of the borrower. This situation has reduced the availability of buyers to two main groups, basically strong family offices/ wealthy investors that are either cash buyers or that have a financial solvency that enables the financing at reasonable levels and some international cash buyers who are focused on Class A assets with strong income streams. It is worth noting that financing is very expensive even if you are very solvent as the minimum spread charged ranges between 250 and 300 b.p., pushing prices down. There is a third group of buyers who are actively looking at the Spanish market: the Op Funds. In this case, and given that they never collateralise their investment, the cost levels (400 b.p.) and low leverage ratios (55% max) have forced a dramatic upwards yield shift in their target products. With their current return requirements, there is no product available in the market and subsequently they have to return to transactions where there is vendors´ finance available at softer rates.

CBD Prime Rents – Historic Series and Forecasts

Source: Savills Research

Gross Take-Up in the Madrid Office Market – Historic Series and Forecasts

Source: Savills Research

Under These Circumstances, What is the Most Likely Scenario for 2012? We cannot anticipate how the sector will evolve in the following months, but we have some hints about it. First of all there will not be a sudden rise in the activity levels, basically because the fundamentals underneath the market are expected to remain in a stand still situation or to get slightly worse. Retail sales, office take up and rental levels do not have favourable perspectives as the latest tax increases will

44

We cannot anticipate how the sector will evolve in the following months but we have some hints about it

GUEST CONTRIBUTION

reduce the disposable income and unemployment will quite likely continue to grow. Besides, there is a wide consensus that the lack of finance will remain at least until the summer break and that, although Euribor could go slightly downwards, the spreads will remain close to the current levels. This means that we should not expect a recovery for exogenous factors. On the other hand the Torre Picasso transaction has set a new price/yield range in the market. Part of the lack of transactions in 2011 has been due to the lack of agreement between buyers and sellers. Basically, very few owners wanted to sell at the existing price levels set by the buyers. The stagnation situation has been suddenly broken by FCC, a corporation with a side interest in the real estate market that had a need to sell. Therefore, we have seen a rise in prime yields, and we should not expect these levels to move backwards. If real estate owners accept the new reality set by this transaction we might see a rise in the level of activity, as there is a strong latent demand at the right prices and the confidence in the country is slowly, but persistently, returning.

All this financial mess has put the traditional real estate investment market in a completely new situation as it has dragged most of the available liquidity, and subsequently there is a dramatic shortage of financing available

In the Spanish market there is hardly any new development (as can be seen with the concrete consumption back at 1987 levels) and in our view there is not an oversupply situation in the office sector and in the consolidated residential areas, and thus the market trend in those specific sectors could change rapidly with slight changes to demand.

There is also a great level of uncertainty regarding the impact of the government’s latest actions with regard to real estate assets in the banks’ balance sheets. The enforcement of massive provisions and

In summary, the general economic environment is not going to change for the better and will therefore not help to recover the activity levels in the real estate industry through an increase in demand, but with the new price levels set by the Torre Picasso deal, the increasing confidence in the country politics, the total lack of new developments, and the new price scenario set by the banks sales, there will be a solid foundation for a fast recovery as soon as there is a change in demand and an increase in the financing available for real estate.

José Navarro Pinagua Subdirector General FPD Savills Edificio Cuzco IV Paseo de la Castellana 141, 6ª pl., 28046 Madrid, Spain

Notwithstanding the above, we must point out that several projects have been delayed in their delivery to the market and are expected to be completed during this year. This situation has occurred mainly in peripheral areas, and not only for speculative projects. Most of the new projects expected to be entered onto the market by the end of 2012 (almost 40% of the total) are already compromised for pre-lettings contracts (such as Cuatrecasas new HQ, 14,000 sq.m.) or for owner occupation (such as Repsol Campus, 60,000 sq.m.). The gloomy perspectives for the Spanish economy do not help to support any rent recovery perspectives; however, taking a look at the historical prime office rental level series, we are at the bottom of the cycle or very close to it. Our forecast for 2012 total takeup (in the region of 350,000 sq.m. in Madrid) will mean that the availability levels will increase slightly, and therefore a slight rental decrease in nominal rents back to 2004 levels can be anticipated. In real terms this is a decrease in the cost of space for corporations of more than 20%.

write off that could create a second wave of mergers in the banking sector could imply a massive flow of property into the market at liquidation prices. The effect of these actions (that were massively discounted by the main players during Q3 and Q4 of 2011) will be focused mainly in the residential sector, where we can anticipate significant price drops in the most competitive areas. Having said that, its effect on the office and retail sectors will be very limited and those will remain linked primarily to the overall pulse of the private consumption and the corporate activity, despite the actions taken in the financial sector.

There will be a solid foundation for a fast recovery, as soon as there is a change in demand and an increase in the financing available for real estate

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Debt Trades with International Banks in the Spanish Property Market The existing global financial crisis has left debris of huge amounts of real estate debt in the books of financial institutions and very little liquidity in the hands of the borrowers to sustain it.

Consequently, the need of the financial institutions to deleverage together with up-and-coming new regulatory requirements has boosted a new debt market between financial institutions and a number of new investors, “new kids on the block” with a different profile. In the Spanish real estate debt market, this trend has had a different impact depending on the profile (and the regulatory requirements) of the financial institution at hand. Spanish financial institutions (who have a huge exposure following the burst of the Spanish real estate bubble) have been somehow reluctant so far to sell real estate debt at a discount (and consequently, to account for the relevant loss) based on the shield created by the accountancy rules of the Bank of Spain. These accountancy rules are based on the principle that the real estate asset securing the relevant loan always keeps a minimum determined value (irrespectively of its real market value).

The need of the financial institutions to deleverage together with up-and-coming new regulatory requirements has boosted a new debt market between financial institutions and a number of new investors, “new kids on the block” with a different profile

However, these accountancy rules do not apply to international financial institutions that operate in Spain, which usually apply the more extended “mark to market” accountancy principle where the real estate assets are accounted for their market current value which in many cases may be close to zero (or even less than that, taking into account the payment of real estate taxes and zoning costs, as it may be the case of rural plots of land. This, together with the decision made by many international financial institutions to “retrench” from the Spanish market, has triggered an increase of these kinds of transactions in Spain. The product for trade in this market can be easily divided into (i) bilateral loan agreements (commercial real estate) where an entity receives the financing to fund the acquisition of a certain real estate asset, or (ii) pieces of debt in syndicated facilities granted to Spanish property companies.

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On the one hand, commercial real estate loans have become a very attractive product given that many of these loans are about to reach maturity while the borrower is currently not in a position to refinance them (let alone repay them) when they fall due. Investors have used this as leverage to (i) negotiate juicy discounts and (ii) request vendor financing to the international financial institutions whose difficult situation does not leave them with much room to counter-offer. A key issue in these transactions (due to its impact in the acquisition costs) is the structure to follow for the acquisition of the debt. Some investors have chosen to enter into sub-participation agreements subject to English law where the original lender remains doing the fronting vis-à-vis the borrower as beneficiary of the mortgage-secured loan while the investor is mainly the owner of the economic rights derived from the loan. The beauty of this structure is that the investor would avoid the payment of the stamp duty derived from the registration of the investor as the new beneficiary of the mortgage with the Spanish Land Registry (which can be up to a 1.5% of the relevant mortgage liability). Notwithstanding this, there have also been transactions where the investors have preferred to have a direct contact with the borrower and to secure their investment becoming the beneficiaries of the mortgage (and paying the relevant stamp duty) by means of a direct assignment/purchase of the debt subject to Spanish law.

Spanish financial institutions have been somehow reluctant so far to sell real estate debt at a discount based on the shield created by the accountancy rules of the Bank of Spain

On the other hand, the acquisition of pieces of debt in syndicated facilities granted to Spanish property companies have been a very much coveted trophy for investors of an opportunistic profile. Pieces of debt in these usually complex syndicated facilities where there are many banks participating tend to include express regulation to facilitate the trading. Likewise, the fact that the security package of these kind of syndicates

FOCUS ON SPAIN

are typically granted in favour of a security agent elected by the banks avoids the payment of the stamp duty referred to above deriving from the change of the beneficiary of the mortgage. Another interesting feature of these transactions is the veto right that a holder of a piece of debt can have in the syndicate, since unanimity is often required for most key decisions. What has been seen in the market in this respect is that the strategy of certain aggressive investors which have acquired pieces of debt in a syndicate has been to veto every single proposal made by the syndicate of banks in order to block the normal operation of the facility. The ultimate goal of this position is obviously to seek that the other banks (or third parties at the request or offer of the banks) purchase the piece of debt held by the investor at a higher price than that originally paid by the investor.

A key issue in these transactions, due to its impact in the acquisition costs, is the structure to follow for the acquisition of the debt

Finally, what is going to happen in this debt market in 2012? Our view is that the debt market in Spain will definitively continue growing in volume. 2012 is a year where many real estate loans will mature, which will give again an opportunity to the investors to continue getting good deals as the recovery of the financial institutions is still slowly underway. On the other hand, international banks with positions in syndicated facilities and a declared strategy to abandon the market have allocated teams to prepare packages of syndicated debt to be traded. Carlos Soler Vock, Senior Associate

This sounds like a perfect business; however, there have been cases where the process has been migrated to the UK to cram down these investors through a Scheme of Arrangement (which is not foreseen under Spanish law). A good example of this was the case of the restructuring of the manufacturing business La Seda de Barcelona where a 25% in value was crammed down when 75% by value and over 50% by number of the syndicate of banks approved the restructuring, 3% voted “no” while others demanded different conditions. The market has been active, under either alternative (acquisitions of both bilateral commercial loans and debt trades in syndicated facilities). We can quote as valid examples the acquisition in the first quarter of 2011 by Perella Weinberg Partners of a pool of real estate loans with a face value of €286 million from The Royal Bank of Scotland (codenamed “Project Campeón”), and a number of debt trades in facilities to Spanish companies Metrovacesa, Reyal Urbis and Colonial.

2012 is a year where many real estate loans will mature, which will give an opportunity to the investors to continue getting good deals as the recovery of the financial institutions is still slowly underway 47

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Spanish Real Estate: Sale and Lease-Back Opportunities The measures for the reduction of the public debt imposed by the Spanish Government (acting under heavy pressure from the financial markets and the European leaders) have strongly affected the majority of regional and local authorities.

It has been suggested that regional authorities sell their (very significant) portfolios of real estate assets in order to improve their heavily indebted balance sheets. This situation has opened attractive windows in the field of sale and lease-back transactions for international investors interested in the acquisition of high-quality assets occupied by solvent long-term tenants. Sale and lease-back transactions have become a major trend in the Spanish market during the last few years. From 2007 to 2011 these transactions have normally been undertaken by major financial institutions in search of liquidity; just to give a few examples: Santander, BBVA, Sabadell, or the savings bank Caja Madrid have completed sale and leasebacks comprising their headquarters and their portfolios of bank offices. The legal, commercial and tax question-marks and challenges affecting these transactions during 2007 and 2008 have mostly been cleared since then, and the sale and lease-back has now become (at least in theory) a more standardised and simple product which can be finalised in a relatively short term. This positive experience has probably encouraged the local and regional authorities to study the ways to translate the sale and lease-back structure to their own assets. The most relevant regional process was started by the government of the Region of Catalonia in the last quarter of 2011 and comprises two office portfolios with a total value of €450 million; (it is expected that the Region will be including other more complex assets, such as hospitals or even schools, in future offers). Although the exact figures will not be known until closing, it seems that the value of the properties has been subject to substantial discounts and that the minimum yields will finally be in the region of 7%. This, added to the long lease terms (from 10 to 25 years) and the covenant of a public authority, has made it very attractive for investors. The fact that the Region of Catalonia will still own approximately 200,000 sq.m. of office areas in Barcelona is a 48

The measures for the reduction of the public debt imposed by the Spanish Government have strongly affected the majority of regional and local authorities. It has been suggested that they sell their portfolios of real estate assets in order to improve their heavily indebted balance sheets

good indication of the importance that this kind of transaction will have in 2012. However, potential investors are encountering two main deterrents. On the one hand, there is an increasing difficulty to raise financing due to the credit block-out affecting the Eurozone. And, on the other side, investors are paralysed by the uncertainties hanging over the future of the Spanish economy and the capacity of public authorities to meet their obligations. There are some interesting indicators that justify these doubts: (i) the rating agencies have

ATTORNEY HIGHLIGHT José Miguel Domenech

Senior Associate, Spain

José Miguel Domenech is a senior associate in the real estate and banking department of Salans’ Madrid office.

This positive experience has probably encouraged the local and regional authorities to study the ways to translate the sale and leaseback structure to their own assets

He has extensive experience in real estate acquisitions, restructurings, real estate financing, real estate related investments and operations of “sale and lease back”. José Miguel has more than seven years of experience advising banks and investors. He has represented RBS, Deutsche Pfandbriefbank and Santander in real estate financing transactions, Credit Suisse and Pramerica Real Estate Partners in real estate acquisitions, as well as Barclays and Morgan Stanley’s real estate funds in complex restructurings. Prior to joining Salans, José was a senior associate at Linklaters’ Madrid office.

FOCUS ON SPAIN

downgraded the Catalonian debt this year (it is now A2 according to Moody’s and A+ according to S&P, and it currently makes the worst credit rating among the regions of Spain); and (ii) the liquidity/working capital needs of the Catalonian government have led it to make several extraordinary bond issues addressed to Catalonian individuals, which have been mockingly nicknamed by the media as the “patriotic” bond issues. In fact, rumours in the market point out that several investment funds (who were familiar with the Spanish real estate market and had participated in the sale and lease-backs of bank offices of 2007 to 2010) have withdrawn from the process due to these uncertainties, or are keeping them “on hold” until they solve their doubts on the solvency of their potential new tenants. Similarly, the Region of Andalucía has been working since July 2011 in a sale and lease-back transaction comprising 94 administrative buildings with an approximate surface area of 350,000 sq.m. The purchase price would be approximately €700 million. However, the transaction has also encountered some problems that have delayed closing and given rise to serious doubts on whether it will be completed in the first months of 2012 (which would put in risk the fulfilment of the debt reduction commitments assumed by the Region of Andalucía vis-à-vis the Spanish government; in this case, the uncertainties on the solvency of the Region, and the regional election and political changes expected in the government of the Region in March 2012 seem to be the main reasons for the delay). This shows that political factors can influence the success of these “public” sale and lease-backs in a more marked way than ordinary transactions among private entities. There is a third Region that will probably be in the spotlight in 2012. The government of the Region Valencia, one of the most dynamic and fast-growing regions of Spain during the last years, is also suffering financial difficulties and debt down-ratings. So far its delegate for economic matters has stated that he will not resort to the issue of patriotic bonds as his Catalonian counterpart, but has left the door open to the sale of real estate assets. Considering that most of the other 14 Spanish regions (and also many of the most important local authorities) are in a similar

It is worth noting that investors expect changes in legislation that will improve the accounting treatment of the assets acquired through sale and lease-back transactions

Our impression is that sale and leaseback transactions will remain a very interesting product for investors who have access to funding and are not risk-averse, and that they will become again more complex from a legal and commercial point of view

financial situation, the market is expecting that at least a few of them will be starting sale processes in 2012. It is worth noting that investors expect changes in legislation that will improve the accounting treatment of the assets acquired through sale and lease-back transactions. On the other hand, the fact that the sale and lease-back will not always be a useful tool to improve the credit ratings of regions might disincentive the authorities at the time they choose their preferred way to obtain liquidity. For instance, S&P has stated that it will treat the proceeds to be received by the Region of Andalucía as long term debt, rather than as a regular sales income. The underlying reason is surely that the region will assume (i) an obligation to pay rent under the relevant lease agreement signed with the investor (this obligation would be similar, for accounting purposes, to the obligation to repay an ordinary financing), and (ii) a right to repurchase them for their market price at the end of the term of the lease (through the exercise of the purchase option). If this accounting treatment is generalised, sale and lease-backs would have a neutral impact on the credit rating of the regions. Our impression is that sale and lease-back transactions (i) will remain a very interesting product for investors who have access to funding and are not risk-averse, and that (ii) they will become again more complex from a legal and commercial point of view (as it happened in 2007 and 2008), given that it will be necessary to adapt the transaction to the specific needs and constraints of the public authorities, and to a wider and more complicated range of assets, such as public hospitals. José Miguel Domenech, Senior Associate

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Spanish Banks Exposure to the Real Estate Sector: Potential Opportunities in Light of New Accounting Regulations One of the main consequences of the abrupt end of the property bubble in Spain has been the avalanche of defaults under property loans and the repossession of real estate assets by Spanish banks and “cajas”, who have taken thousands of properties in their books as a result of enforcements and repossessions; however, this oversupply has not yet been marketed significantly.

Spanish savings banks are holding huge portfolios of delinquency loans (most of them for developments and land acquisitions) and properties (mainly residential). They are also trapped in Spanish property companies, as their unhappy majority stakeholders. Consequently, Spanish Banks have become the main property owners in Spain. This situation was not worrisome at the beginning of the crisis, basically because Spanish bankers had in the back of their minds the same strategy as they followed in the 1990s, when they created today’s big property companies (or what remains of them) with repossessed assets. This explains why investors who approached Spanish bankers to buy “toxic property assets” from them on a “thirty cents on the dollar” basis and who were abruptly kicked out of the banks’ headquarters used to say that Spanish bankers were “in denial”. But Spanish banks were not the “forced vendors” that investors expected, or at least they did not feel to be so. The Bank of Spain imposed on them a plethora of helpful accountancy rules whose fundamentals were far from the “mark to market” radical approach that other banks were applying worldwide. Those accountancy rules, basically gathered in an annex (number IX) of a very technical Bank of Spain order (Circular 4/2004), which has become many people’s night table reading in this market, allocated an abstract (if not artificial) value to the property offered as collateral and provided for a long-term calendar for provisions which helped Spanish banks to cope with the property tsunami. Those rules have been modified recently. On 12 May 2012, the Spanish government passed a new set of regulations applicable to Spanish banks, in the aftermath of a previous reform of 3 February 2012. These new pieces of legislation (which amend Circular 4/2004) are the Spanish Government’s response to the clean-up and recapitalisation needs of Spanish banks in light of their exposure to the real estate sector. 50

Spanish savings banks are holding huge portfolios of delinquency loans (most of them for developments and land acquisitions) and properties (mainly residential)

This exposure has been recently quantified in app. €310 billion, of which three-fifths are considered “problematic”, and €80 billion are repossessed assets which are said to be a “killer” of core capital for banks. The overall goal, in terms of reducing this exposure, is to cover up to 45% of it (up to €137 billion). Thus, the regulations of 3 February set an objective of €54 billion, and the regulations of 12 May imply an additional cushion of €30 billion that would add to the provisions already made until the end of 2011. Some consider that this cover will suffice for what many consider the ultimate goal: a soft landing from the peak of the property bubble for Spanish banks. The new regulations put in place new tools to help Spanish banks achieve this “real estate deleveraging” (in addition to the new provisions and capital buffers): 1. Higher levels of “cover” on “problematic assets”, by way of new specific provisions, a generic provision and capita add-ons; 2. A potential injection of capital by rescue fund FROB (new State money up to €15 billion); and 3. The creation of property companies attractive to investors which would eventually deconsolidate from the banks’ balance sheets.

New “Cover” on “Problematic Assets”

These new pieces of legislation are the Spanish Government’s response to the clean-up and recapitalisation needs of Spanish banks in light of their exposure to the real estate sector

The New Regulations impose higher levels of “cover” for all those “problematic assets” (property loans, even normal ones, and repossessed assets). This “cover” translates into three different mechanisms that Spanish banks will need to apply onto their legacy “problematic assets” (as of 31/12/2012): (i) additional specific provisions; (ii) a new generic provision on “normal” property loans; and (iii) extra capital add-ons.

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This is important: when the press (and Bank of Spain itself) published, after the passing of the new regulations, that the new “cover” would be up to 80% (land), 65% (developments) and 35% (finished developments/housing), this “cover” needs to be implemented, in practice, through a combination of the three mechanisms (specific provisions, generic provision, and capital add-ons). The law focus on developments and land (in the books of banks as either both debt and already repossessed assets); those are “problematic assets” on which banks need to take care at once (the new “cover” requested for those assets needs to be put in place by the end of this year as a general rule). New property-related assets entering the books of Spanish banks after 31 December 2011 will have to be dealt with under the old accountancy rules, but the clean-up of existing balance sheets will be done now by the end of 2012. Banks which decide to undertake a merge instead will be able to buy some extra time (until 31 December 2013 at the latest) to put the new “cover” in place.

New “Bad Bank-Like” Property Companies Banks are also required to create property companies (“Sociedades de gestión de activos”) where they will allocate and warehouse all repossessed assets: (a) Plain Vanilla Companies. They will be private corporates (“sociedades de capital”), with no regulatory or other requirements; (b) Value of REOs at Entry. The entry value of the property assets will be equal to their “reasonable” market value minus the provisions applied under the New Regulations (the assets will be transferred after the provisions have been effectively made by the banks); (c) Deadline. The transfer shall be completed by 31 December 2012 (with the exception of merging banks, which will have 12 months after the merging plan is approved by the Bank of Spain);

The new law has been envisaged as a triggering event, and its ultimate goal is to push Spanish banks to sell these “problematic assets” in the market, in particular, the very illiquid plots of land

ATTORNEY HIGHLIGHT Jesús Varela Partner, Head of Real Estate, Spain

Jesús Varela is the head partner of the banking and real estate departments in Salans’ Madrid office. He joined Salans in 2011 from the real estate department of Linklaters in Madrid, where he was also a partner. His areas of expertise are real estate financing and structure finance, acquisitions and disposals (including sale and leaseback transactions) of offices, retail and shopping centres and industrial warehouses, as well as joint venture and shareholders’ agreements and turnkey construction projects. He has recently advised on a number of significant restructurings and refinancings and also on some of the most important (in terms of volume and technical difficulties) trades of commercial debt in the Spanish market. Jesús regularly advises a wide range of banks (RBS, Crédit Agricole, Deutsche Pfandbriefbank, Santander, BBVA, HBOS, La Caixa, Natixis) as well as domestic and international institutional investors (Morgan Stanley, Pramerica, Henderson, UBS, AXA, MEAG and Apollo). Jesús is top ranked by Chambers Europe 2012 as a leading individual in the real estate practice in Spain. Clients are resounding in their praise for this “exceptional lawyer” and stress out his “super-deep knowledge of the Spanish real estate sector,” excellent commercial awareness and negotiation skills, and incredible work ethic. Peers also recognise him as “a superb real estate finance lawyer who looks for a win-win solution and always has a dynamic approach.” Jesús speaks Spanish, English, French and German.

(d) Business Plan. The property companies will be obliged to sell at least 5% of their assets every year (which implies a de facto maximum 20-year duration); (e) Off-Balance Sheet. These companies will deconsolidate if (i) they hire an independent manager and (ii) other investors unrelated to the bank hold a stake of at least 51%; and (f ) Tax Neutrality. There are some other benefits including tax “neutrality” and reduced notary and Land Registry fees. The new law has been envisaged as a triggering event, and its ultimate goal (declared by the law itself, in its preamble) is to push Spanish banks to sell these “problematic assets” in the market, in particular, the very illiquid plots of land. Everyone’s expectations are that it will open a new, definitive opportunity window for players interested in buying

residential properties (completed or not) from Spanish banks with significant discounts. But returns are likely to be low if investors cannot access vendors’ or other acquisition financing to leverage the deals, and their key “management issue” post-completion still lies in the big amounts of land held by banks and what to do with them (an issue which goes beyond accountancy and to which Spanish authorities at all levels should probably give some thought). Jesús Varela, Partner, Head of Real Estate Spain 51

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Termination of Loan Agreements in Case of Loss of Value of Secured Real Property (LTV-Covenant Breaches) Pursuant to German Law Within the context of commercial financing of real property so-called Financial Covenants are agreed upon in loan agreements between the financing institutions and the borrower.

In doing so, the borrower undertakes to observe the defined financial ratios in particular regarding the ability to service the loan (DSCR, Debt Service Cover Ratio), the ability to service interest payments (ICR, Interest Cover Ratio) and the ratio between loan capital and market value of the secured real property (LTV, Loan to Value). The loan agreement usually contains a LTV covenant stating that a borrower will not permit the LTV ratio to exceed a specified percentage (as defined in the loan agreement). Furthermore, such loan agreements usually do contain clauses stipulating that the borrower would have to provide valuations of the secured property on a regular basis, which enables the financing institution to monitor the LTV ratio as agreed in the loan agreement. The term market value is legally defined in § 16 para. 2 sent. 3 PfandBG (Pfandbrief Act) and means the estimated amount as to which a lending object can be sold on the effective date of evaluation between a seller ready to sell and a buyer ready to buy after an adequate period of marketing by a transaction in the ordinary course of business; whereby each party acts with expertise, prudence and without necessity. However, the LTV ratio does not necessarily allow conclusions on the other solvency of the borrower on a regular basis and thus on the future service of the loan. At the same time, exceeding the agreed LTV ratio may be the first sign of the loan’s financial imbalance. The consequences of a breach of one of the financial ratios can be shaped differently in the loan agreements. It is possible to include an obligation of the borrower to make additional contributions of equity (equity injections), a liability to provide subsequent and additional security, additional redemption covenants or access to cash-flowsurpluses (cash-sweep), temporary payments to a secured bank account (cash-trap) or also a rise of spread in favour of the bank due to an increased risk of loan default. Direct consequences of a breach of financial ratios from the Financial Covenants can be the right to withdrawal by the financing institution with respect to other loan commitments of the borrower or the blocking of further release of cash or pay-outs within the sequential financing procedure. 52

The LTV ratio doesn’t necessarily allow conclusions on the other solvency of the borrower on a regular basis and thus on the future service of the loan but, at the same time, exceeding the agreed LTV ratio may be the first sign of the loan’s financial imbalance

The most serious consequence, however, is the right to terminate the whole loan agreement by the lender (Event of Default) as agreed in most of the loan agreements.

Contractual Right of Termination in Case of Breach of LTV-Ratio The issue as to whether the termination right, in case the LTV-ratio is breached (LTV-Breach), can lawfully be agreed upon is particularly disputed in the German jurisdiction and is not answered consistently, although this issue will gain more and more importance in the future. While banks often financed real estate with high LTV-ratios (in some cases more than 90%) during the years of the housing boom before the global financial crises, the LTV-ratios could in many cases no longer be maintained during the following years of crises. However, breaches of LTV-ratios had been regularly tolerated by the banks. Meanwhile, however, the demand for commercial property has grown again noticeably and banks now expect to be able to realize the outstanding loan amount in case of a liquidation or seizure of the secured property. In addition, with respect to the reform package Basel-III and the related strengthening of the regulations of equity requirements of banks and financing institutions as a consequence of the European sovereign debt crises, several banks have an increased interest to reduce funding in particular in cases in which breaches of financing covenants have occurred and have not been remedied. Furthermore, and as a result of the on-going sovereign debt crises and the current economic climate, both borrowers and financing institutions are becoming increasingly concerned about the likelihood of a breach of an LTV covenant in the loan agreement. Consequently, the possibility of termination for breach of LTV-ratios becomes more and more attractive to many banks. However, legal experts’ opinions as to whether a termination can (only) be based on a breach of respective LTC-clauses diverge.

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Cause for the discussion hereby is especially the expressiveness of the LTV-ratios as usually agreed in loan agreements.

The Legal Problem From a legal point of view, two issues are important: Is it possible, on the one hand, to conclude an effective agreement on a termination right for cause of breach of LTV-ratio while the rest of the service of the loan is according to the rules without any other breaches of financial covenants or regulations of the loan agreement, and on the other hand, even in case of an effective agreement of the termination right, its execution is permissible under the said circumstances?

Consequently, the possibility of termination for breach of LTV-ratios becomes more and more attractive to many banks

The Effectiveness of the Agreed Right of Termination Given that Financial Covenants are terms of contract which are pre-formulated by the financing bank for a multitude of contracts and thus general terms and conditions (AGB), the ineffectiveness of such clauses due to a breach of the German AGB-law (§§ 307 seq. German Civil Code (BGB)) is discussed. Basically the question is whether the envisaged contractual right of termination of the loan agreement due to breach of LTV-ratio is consistent with essential fundamental ideas of the legal regulations on the contractual law on loan (§ 307 para.1, 2 No. 1 BGB) or not. In this respect, it can be stated that the German Civil Code (BGB) also provides for an extraordinary termination of the loan agreement in case an essential decline regarding the recoverability of a security given for a loan occurs or threatens to occur (§ 490 para. 1 BGB). However, the prevailing opinion in professional publications interprets the legal rule in a way that at the same time the claim of repayment of the loan also must be at risk. The result is that according to the prevailing legal opinion, an essential deterioration of the financial circumstances is significant for terminating a loan for cause. If this is not the case, the legal termination right pursuant to § 490 paragraph 1 BGB does not apply. A contractual termination right, agreed in the general terms and conditions (AGB), which only aims to the previously fixed LTV-ratio, disregards the other financial circumstances of the borrower and thus

also the question as to whether the repayment of the loan is at risk. According to the opinion of many professional authors, the contractual termination right, which only regards the LTV-ratio exceeding, deviates substantially from important legal guiding principles of the contractual law on loans, stating that such a clause may be ineffective. Other authors argue that this interpretation may be too narrow and does not satisfy the particularities of a loan business by use of Financial Covenants, as the used ratios are early warning measures of crises. Financial Covenants place certain obligations on the borrower to meet defined financial performance measures and enable the financing institution to review and monitor at regular intervals the ability of

ATTORNEY HIGHLIGHT Thomas Kaspelherr Counsel, Germany

The issue as to whether the termination right, in case the LTV-ratio is breached, can lawfully be agreed upon is particularly disputed in the German jurisdiction and is not answered consistently, although this issue will gain more and more importance in the future

Thomas Kaspelherr is a Counsel in the Berlin office of Salans LLP and member of the firm´s Global Real Estate, and Banking and Finance Practice Groups. Thomas advises national and internation clients on all aspects of real estate law. His main focus is on advising clients on acquisitions and sales of real estate, asset management and in relation to financing matters. Thomas has also acted for various lenders in relation to property financing and loan restructuring. Thomas joined the company in 2007. Prior to Salans, he practiced real estate law at Travers Smith. In 2000 Thomas graduated from the University of Bielefeld. He is a member of the German-Irish lawyers and business association and speaks German and English.

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the borrower to fulfil its payment obligations under the loan agreement. It may be essential to indicate/ know whether the respective ratio is a “feasible indication” for a remarkably increased risk of default. However, some authors argue that the LTV-ratio does not fulfil this pre-condition either, as it does not give evidence as to whether the loan can be serviced in future, but only measures the recoverability of the loan security.

Effectiveness of the Execution of the Agreed Termination Right Further, there are also part objections with regard to the execution of a contractual termination right in case of breach of fixed LTV-ratios. In this respect, a breach of the principle of good faith is discussed, because by executing the termination right a legal position is exercised inappropriately. The whole purpose of Financial Covenant Clauses would be to react early to identified crises and to minimise the risk of the lender so that the loan cannot be serviced any more in the future. However, here it is also pointed out that the LTV-ratio does not permit drawing any conclusions on the other financial circumstances of the borrower and no prediction in respect of the future servicing of the loan is possible. Thus, the termination would not meet the intended spirit and purpose anymore and would allow it to appear improper. This could be regarded as breach of the principle of good faith, which would, in most cases, invalidate the execution of the termination right.

Conclusions for Practice Even though there are serious arguments against an effective termination in case of breach of LTV-ratio, it cannot be excluded that this is assessed and decided otherwise by a German court. To date, no relevant court decision is known; hence extreme caution is necessary in cases of breach of contractually agreed LTV-ratio. The borrower should first scrutinise the valuation report, which technically determines a breach of LTV-ratio. In case of apparent estimated errors, the valuation might not be qualified to prove a breach of LTV-ratio and a termination for cause. Ideally, this should already be considered at the time the agreement is concluded, and with respect to the 54

To avoid a legal dispute with the financing bank from the outset, an agreeable regulation with the financing bank may be the most functional solution for the borrower

valuation, a 30-day-period examination right should be agreed upon in favour of the borrower. In this regard, the parties of the loan agreement should also envisage the costs of the valuation in relation to possible assessment intervals. The bank will be interested to be entitled to demand the presentation of a valuation which examines the observance of the LTV-ratio. Depending on the appropriation of costs between the contractual parties, this cannot cause a negligible encumbrance of the borrower. Usually, fixed dates should be set (i.e. once per year) or a clause agreed upon, which grants the bank the right to request the presentation of a respective valuation only in case of a changed market situation which appears to necessitate a re-assessment. To avoid a legal dispute with the financing bank from the outset, an agreeable regulation with the financing bank may be the most functional solution for the borrower. A “Waiver Letter”, where the bank expressly waives the execution of a possible termination right in case of breach of contractually agreed LTV-ratio in future, can be an option. However, post-negotiations of the loan agreement as a whole would have to be expected on a regular basis, e.g., to replace or alter the LTV ratio or other financial covenants in the loan agreement in order to re-structure the loan agreement. Thomas Kaspelherr, Counsel Dr. David Lange, Associate

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Tenant’s Servitudes in the Practice of German Real Estate Law Over the past years, tenant’s servitudes developed to widely used means of security in particular for long-term commercial lease contracts on supermarkets and shopping malls or within the framework of sale-and-lease-back transactions.

The purpose of tenant’s servitudes is to maintain the tenant’s right of use of the leased object and to secure the investments costs of the tenant for the leased object, also in cases of compulsory auction or sale of the leased object by the insolvency administrator in the event of the landlord’s insolvency, because in these cases, the purchaser of the real property is entitled to an extraordinary termination right pursuant to § 57a ZVG (Zwangsversteigerungsgesetz, Compulsory Auction of Immovable Property Act).

Purpose of Tenant’s Servitudes Tenant’s servitudes are limited personal servitudes which will be entered into the land register of the respective real property. The registration of a limited personal servitude enables the tenant to protect himself against the execution of the extraordinary termination right by the potential purchaser in case of compulsory auctions or sales of the real property. Although the purchaser can terminate the lease, the tenant, however, keeps his right of use of the property that accrued from the tenant’s servitude registered with the land register.

Tenant’s Servitude in Case of Compulsory Auction An important reason for registration of a tenant’s servitude is the extraordinary termination right pursuant to § 57a ZVG. Although the successful bidder for the leased object becomes the new lessor, he is however entitled to a proper notice of termination of the lease by observing the legal termination period. This raises the question as to whether a tenant’s servitude is invalid, because it constricts the successful bidder’s legal right of termination pursuant to § 57a ZVG. This could be regarded as breach of mandatory legislation. i) Effectiveness of Tenant’s Servitude in Respect to § 57a ZVG So far, there is no jurisprudence of higher courts regarding this issue in Germany. From the existing legal decisions, however, which allude to this topic only marginally, a tendency can be deducted to the effect that the registration of a tenant’s servitude is

Tenant’s servitudes are limited personal servitudes which will be entered into the land register of the respective real property

not an illegitimate circumvention. In the professional legal literature, it is argued that the loyal tenant is particularly in need of protection vis-à-vis the creditor pursuing the compulsory auction. The tenant could mostly not be held responsible for the compulsory auction on the assets of his lessor, and basically is not able to protect himself thereof. On the one hand, the loss of his right of use of the property, in particular if it is commercial property, brings about considerable disadvantages for the tenant (e.g. lost profits and lost investment costs). On the other hand, the successful bidder is entitled to the full lease payment, thus the continued use of the property by the tenant is not an economic disadvantage for the successful bidder. Insofar, the effectiveness of the tenant’s servitude with regard to the extraordinary termination right pursuant to § 57a ZVG is supported by the majority view. ii) Prior-Ranking or Lower-Ranking Tenant’s Servitude? Basically, tenant’s servitude can be designed as prior-ranking or lower-ranking to the encumbrances (land charge, mortgage) to be registered with the land register. Lower-Ranking Servitude In case the tenant’s servitude is agreed and registered as lower-ranking to land charges, and the compulsory auction is executed by the prior-ranking land charge, the tenant’s servitude will not be subject to the socalled “lowest bid”. The “lowest bid” is the minimum bid that has to be reached in order to be admitted by the court competent for the compulsory auction. The amount of this minimum bid has to be sufficient to cover certain prior-ranking rights. This concerns in particular the rights registered in the land register prior to the one of the creditor. The rights ranking lower to those of the enforcing creditor, however, are not covered by this “lowest bid” and expire by acceptance of the bid. This is disadvantageous for the tenant as he may be threatened with the loss of his right of use of the property if the successful bidder is executing his extraordinary termination right, and he will only be satisfied from the rest of the proceeds of the compulsory auction after the land charge creditors have been satisfied. 55

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Prior-Ranking Servitude Hence, from the perspective of the tenant, the registration of a prior-ranking servitude, which in case of compulsory auction by the lower-ranking creditor of encumbrance (the bank) is covered by the lowest bid (and also keeps the tenant from extraordinary termination right by the successful bidder of the insolvency procedure), makes sense. The lowest bid covers only those rights that are prior ranking to those of the executing creditor. From the perspective of the banks, legal problems in relation to coverage and lending value may occur in addition to the risk of lower profit in case of liquidation, because the tenant cannot be given notice and therefore the loan may not be returned completely. Therefore, tensions exist between the interest of the tenants in registration of prior-ranking tenant’s servitude and the interest of the financing bank in its prior-ranking registered land charges.

Tenant’s Servitude in Case of Insolvency of the Lessor In case of insolvency of the lessor, basically two questions gain importance with respect to tenant’s servitude. The first question is whether the tenant’s servitude can effectively be registered with regard to a possible circumvention of the extraordinary termination right pursuant to § 111 InsO. The other question is whether the insolvency administrator can appeal against the registration of the tenant’s servitude. i) Effectiveness of Tenant’s Servitude in Respect to § 111 InsO So far, there is no jurisprudence of higher courts regarding a possible illegitimate circumvention of the extraordinary termination right. However, the prevailing opinion in professional literature with respect to § 111 InsO tends also to accept the effectiveness of the registration of tenant’s servitudes. Though, the extraordinary termination right pursuant to § 111 InsO cannot be contractually excluded, and the agreement of a tenant’s servitude could factually thwart the extraordinary termination right. However, the tenant’s servitude would not pose a major obstacle for liquidation than would other existing 56

The purpose of tenant’s servitudes is to maintain the tenant’s right of use of the leased object and to secure the investments costs of the tenant for the leased object, also in cases of compulsory auction or sale of the leased object by the insolvency administrator in the event of the landlord’s insolvency

encumbrances. Additionally, it is argued that in case of an overall view, the legislator would give priority to the holder of a real property right, like a tenant’s servitude over public protection of creditors’ interest. ii) Defeasibility of the Tenant’s Servitude in Case of Insolvency As a matter of principle, agreements can be appealed that impose disadvantages to a party in case of his insolvency which exceed the legal consequences and are not primarily necessary for achieving the contractual purpose. However, an appeal will regularly fail for a pure formal reason to do with the fact that the periods of appeal have already expired. The registration of the servitude also may not be a deliberate disadvantage. One probably cannot imagine a practical case where the lessor registered a tenant’s servitude in order to detriment his creditors. This view is shared by a considerable part of the professional literature.

Principles of the Association of German Mortgage-Lending Institutions Since the beginning of the financial crisis, loans for real estate investments are granted almost exclusively by mortgage lending institutions. As mortgage lending institutions refinance themselves solely through German covered bonds (Pfandbriefe) which are subject to the strong requirements of regulations amended with effect of 26 March 2009 of the Pfandbrief Act. The issuance of covered bonds is in particular tied to the coverage and thus to the assessment of loans secured by mortgage. The charging of a real property by prior-ranking tenant’s servitudes is regarded increasingly as negative by the mortgage lending institutions. Therefore, since the middle of 2009, the mortgage lending institutions have increased the requirements with respect to the servitude on securing leases for granting loans. The tenants who insist on including servitudes on securing leases are often retail store chains with strong negotiating abilities and therefore anchor tenants whose leases are a precondition for the repayment of loans secured by land charge. Investors of such commercial properties have to make efforts to compromise between the anchor tenants and the

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financing bank with respect to servitudes on securing leases in order to ensure their financing. The “Working Group tenant’s servitude” of the Association of German Mortgage-lending Institutions (“VDP”-Verband deutscher Pfandbriefbanken) published a resulting paper in July 2009 which provides recommendations on how mortgage-lending institutions may deal with tenant’s servitudes. In order to get an acceptable compromise regarding the above described conflicts between the interest of the tenant and the interest of the financing bank, the following corner points are suggested: i) Compensation It is recommended to arrange the tenant’s servitude against payment according to the regulations of the lease agreement in order to insure that the tenant will only be able to use the property also in case of termination of the lease agreement against payment on the basis of the tenant’s servitude. ii) Maximum Amount Further, the VDP recommends setting a maximum amount as compensation for lost value through compulsory auction pursuant to § 882 BGB (German Civil Code). In case of a compulsory enforcement from an encumbrance prior-ranking to the tenant’s servitude, this agreement on a maximum amount leads to the effect that the tenant’s servitude will only be satisfied with the set maximum amount and the creditors ranking after the tenant’s servitude in the land register can more effectively determine the feasibility of their satisfaction in case of compulsory auction.

Already existing tenant’s servitudes which do not meet the criteria of the resulting paper could lead to disadvantageous evaluations of the property with respect to financing or re-financings, which might only be avoided by subsequently accepting the observance of VDP’s requirements

possible, VDP advises a more intense review of the value of the real property and the hereon based lease agreement. iv) Covenant Under Law of Obligation Finally, VDP recommends including a regulation according to which the parties of the lease agreement commit themselves also vis-à-vis the land charge creditor and with regard to the content in rem of the tenant’s servitude.

Conclusions for the Legal Practice The importance of tenant’s servitudes will increase in the near future. VDP’s resulting paper might be relevant for most financing banks with respect to dealing with tenant’s servitudes. Already existing tenant’s servitudes which do not meet the criteria of the resulting paper could lead to disadvantageous evaluations of the property with respect to financing or re-financings, which might only be avoided by subsequently accepting the observance of VDP’s requirements. However, each amendment of the already agreed tenant´s servitude requires further negotiations with the tenant and amendments of the existing lease agreement. Thomas Kaspelherr, Counsel Dr. David Lange, Associate

iii) Condition Subsequent/Trust Solution According to VDP’s point of view, it has to be ensured that the content of the tenant’s servitude cannot be amended without the approval by the other encumbrance creditors. This can be done by a regulation in rem of all reasons for a rescission which will be registered in the land register. VDP holds the view that by registration of real causes for a rescission in the land register, the risk of the lowerranking creditors would decrease. If this should not be 57

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Asset-Backed Securities and Refinancing of Mortgage Debt At a time when a large number of loans financing the great waves of highly leveraged acquisitions in the years 2006-2008 are maturing (and may be extended), securitisation by the issuance of debt instruments such as asset-backed securities could present certain interesting opportunities for their refinancing.

There are quite a few advantages with this kind of operation, for the borrower, who gains access to a less expensive loan thereby optimising the profitability of his investment, and for the lender as well, who gains the benefit of sureties with an assured value and whose enforcement resists bankruptcy. Finally the new constraints imposed by the Solvency II directive and the Basel III agreements can only add to its interest. Securitisation by the asset-backed securities (ABS) method consists of the contribution (or transfer) by a company to a securitisation vehicle (securitisation institution or OT) of a portfolio of receivables which is backed by a bond issue enabling this acquisition to be financed or the contribution to be remunerated. Payment of the interest and repayment of the borrowed capital are ensured by the portfolio of receivables and the flows of funds it generates, in this case the rents according to the diagram shown below.

Diagram of Securitisation by Asset-Backed Securities:

At a time when a large number of loans financing the great waves of highly leveraged acquisitions in the years 2006-2008 are maturing, securitisation by the issuance of debt instruments could present certain interesting opportunities for their refinancing

ATTORNEY HIGHLIGHT Jean-Luc Bédos Partner, Co-Head – Global Private Equity Group

Jean-Luc Bédos is a partner in Salans’ Paris office. He co-heads Salans’ Global Private Equity practice and is a member of the M&A group in Paris. Jean-Luc concentrates on M&A/Private Equity and stock-market transactions. Jean-Luc Bédos has been working in the Private Equity sector for more than 20 years, mainly representing investment funds in the negotiation and establishment of leveraged acquisitions (LBO, MBO, OBO, MBI, etc.). He works alongside executive teams in the negotiation and structuring of management packages. He also operates M&A transactions and corporate reorganisation for large French groups, including listed companies. He regularly advises clients on acquisitions and fund structuring in North and Sub-Saharan Africa. Before joining Salans in 2010, he was a partner at Lefèvre Pelletier & Associés (from 1999). Jean-Luc practised law in the Paris and New York offices of Debevoise & Plimpton (1987 – 1989) as well as White & Case (1983 – 1987). In 1995 he founded the Association “Droits d’Urgence”, the largest French legal aid society. He graduated from the University of Paris II (Doctor of Law, PhD), Harvard Law School (Master of Law, LL.M.), University of Paris, DESS Droit Commercial International and DEA Droit Public Approfondi as well as the University of Toulouse (Master of Law and Master of Political Science). Jean-Luc speaks French and English.

Given the costs inherent in setting up such a structure, it is generally only contemplated for an asset or portfolio of assets where the financing is considerable, in practice at least €500 million or more. 58

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Asset Revaluation and Best Price Financing When the ownership of assets to be financed, which might have a very low book value in view of depreciation, is transferred to a company of the group (NewCo), they can be revalued at their market value and thereby improve the group’s balance sheet. In addition, as each transaction is a separate one in NewCo, the resulting debt is not reflected in the transferor’s balance sheet. Finally, this securitisation has the effect of reducing the financing costs by lowering the required equity levels.

Estimating the Value of the Sureties with the Upward Variation of the Cost of Construction Index When the rents whose receivables are assigned are indexed, as is almost always the case, the surety granted to the OT is improved. The INSEE cost of construction index (ICC), which is still very predominant in commercial leases, has been increasing quite consistently by more than 3% a year over the last 20 years, 5% a year over the last 10 years and almost 7% over the last year. This long term variation as viewed by the rating agencies can justify a better risk note being given to the instrument issued by the OT, even taking into account the risk inherent in the option allowed to tenants, which are the debtors of the securitised receivables, to obtain a reduction of their rent on the basis of Article L145-39 of the Commercial Code (these provisions allow the parties to a lease, in practice the tenant, whose rent has varied by more than 25%, to ask for the rent to be fixed at the rental value). On the other hand, a significant downward variation of the ICC can never be ruled out and must be provided for.

Sureties which Resist Bankruptcy The 25 February 2010 judgment (CA Paris, 9th ch. 25 February 2010, Nos. 09/22756 and 09/21184 – RDBF No. 3 May-June 2010) of the Paris Court of Appeal in the Cœur Défense case is an illustration of the practical scope of the discussion that had been closed by the French Supreme Court on 7 December 2004 (Com., 7 December 2004, JCP. E. 2005. 231, note S. Raby). The Court of Appeal confirmed that the rent receivables which had been assigned by the borrower to the lenders by means of so-called Dailly

Securitisation by the asset-backed securities method consists of the contribution (or transfer) by a company to a securitisation vehicle of a portfolio of receivables which is backed by a bond issue enabling this acquisition to be financed or the contribution to be remunerated

forms, to guarantee the mortgage loan which the lenders had granted it at the same time as such forms, left the borrower’s assets to become part of the lenders’ assets. The logical result was that the start of a safeguard procedure implicating the borrower could not have any effect on the exercise of this kind of surety, which confirms its efficacy and therefore its value. The above position adopted by the Court of Appeal, which was not appealed, could support the lenders’ position, which seems to have prevailed, in a recession context where the value of financed real estate stagnates or even falls, of attaching particular importance to the capacity of these assets to generate revenues able to cover the interest on the loan (ICR ratio), rather than complying with the loanto-value ratio (LTV ratio). Thus the mortgage loan market over the last two years has been animated by a considerable number of loan term extensions for high-performance portfolios.

The Solvency II Constraints and Basel III Agreements On the eve of the entry into force of the Solvency II directive and the Basel III agreements on 1 January 2013, the banks, which are traditional lenders, are already being forced to increase the percentage of their equity in their financing commitments, if they have not already done so, to be ready for the beginning of 2013. For each new financing project, particularly real estate, the banks will now have to analyse its impact on their global debt equity ratio and allocate a separate risk note to it. To reduce the scale of this readjustment, the banks will therefore certainly have to collateralise their transactions and, to do so, find a way to enhance the value of the underlying assets. A portfolio of good quality rent receivables could turn out to be a reliable asset to do so. Antoine Mercier, Partner

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WESTERN EUROPE

Commercial Lease Break Clauses Set against the background of a persistently chilly economic climate, estate rationalisation is still very much at the forefront where cost-saving measures and estates strategy are concerned.

The decline of the market has meant that supply often outstrips demand for commercial leases. This makes finding and keeping tenants fiercely competitive. Tenants want flexibility for their business while landlords are keen to maintain cash flow and avoid the hardship of empty rates. So, in trying to find a delicate balance between two competing interests, the right to break early is an often used incentive by the landlord which can be a big draw for tenants, but there do need to be checks and balances; break clauses can offer a way out, but only if exercised properly. The recently reported cases of Avocet Industrial Estates LLP v Merol Limited Tudor Rose International Limited [2011] EWHC 3422 (Ch) and NYK Logistics (UK) Limited v Ibrend Estates BV [2011] EWCA Civ 683 both provide a very harsh reminder to tenants seeking to exercise a right to terminate their lease early that any pre-conditions attaching to that right must be fully satisfied to bring the lease to an end successfully. The cases also raise a number of points which will be of interest to investors and those managing investment property on their behalf. In Avocet Industrial Estates LLP v Merol Limited Tudor Rose International Limited, the tenant had a 10 year lease of a commercial property containing a conditional break clause under which it was entitled to bring the lease to an end after five years, subject to the tenant having first complied with certain conditions. These included a requirement to pay a break fee and to have settled all amounts outstanding under the lease at the break date. Elsewhere, the lease required the tenant to pay interest on any sums paid late. Historically, the tenant had occasionally been late with its quarterly rent payment and the landlord had sometimes, but not always, demanded interest on the late payment. The tenant served a break notice in accordance with the lease and, on the day before the break date, handed over a cheque for the break fee and the keys to the property. The landlord argued that the tenant’s break was ineffective because (a) it had paid the break fee by cheque rather than cleared funds into its bank account by the break date and/or (b) interest on various amounts due under the lease, which it

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The decline of the market has meant that supply often outstrips demand for commercial leases. This makes finding and keeping tenants fiercely competitive

accepted had not been formally demanded, remained unpaid on the break date. The default position in respect of any payment is that it must be made by legal tender (which a cheque is not). The court decided, however, that because the landlord had previously accepted cheques on a regular basis, this established course of dealing operated to displace the general rule and that the tenant had successfully paid the break fee. The court held that there was no obligation on the landlord formally to demand interest to trigger the tenant’s liability to pay it. The lease was clear in that interest was payable whether formally demanded or not. The tenant had therefore failed to pay all sums due under the lease at the break date, leaving it liable for rent of over £67,000 per year and all the onerous lease obligations for the remainder of the term – a further five years. In NYK Logistics v Ibrend, a break clause requiring vacant possession of premises at the purported termination date was found not to have been exercised correctly where a tenant, NYK Logistics, had remained on the premises carrying out dilapidation repairs after the specified date. The requirement for vacant possession was not satisfied by the fact that the tenant had no intention of excluding the landlord from access to and occupation of the premises during that time. The break clause in the tenant’s lease provided that for it to be effective, the tenant had to have delivered up vacant possession of the premises on the break date, 9 April 2009. The tenant gave the Landlord, Ibrend, notice of its intention to terminate the lease on 9 April 2009. The landlord commissioned a schedule of dilapidation repairs which were to be performed pursuant to the tenant’s obligations under the lease. The tenant agreed to carry out the outstanding dilapidations and indicated that it would send someone to collect the keys to the premises, although this did not happen before the termination date. The tenant’s contractors completed the repairs six days after the termination date. The landlord issued proceedings against the tenant seeking a declaration that the break had not been executed validly and confirming its entitlement to rent, which

UNITED KINGDOM

ATTORNEY HIGHLIGHT Sarah Rochelle Associate, London

Sarah Rochelle joined as an associate in Salans’ London office in June 2012. She is a member of the firm’s Global Real Estate Group. Sarah qualified as a solicitor in March 2012, having completed her training contracted at Jeffrey Green Russell and having previously worked at Macfarlanes and Blake Lapthorn. In addition to classic English real estate work, she is involved with global real estate matters and cross practice group engagements. Sarah’s experience includes acquisitions and disposals of properties within the leisure and retail, office and warehousing sectors. She also has experience in landlord and tenant matters.

the tenant had continued to pay on a without prejudice basis from April to December 2009 when it was common ground that the lease was validly terminated. The judge found that the tenant had not delivered up vacant possession of the premises at the termination date in April 2009, and that by offering to send someone to collect the keys from the landlord, had not waived the requirement for vacant possession. He therefore concluded that the break clause was not validly exercised and so, the tenant was liable for the rent from April to December 2009.

The recently reported cases provide a very harsh reminder to tenants seeking to exercise a right to terminate their lease early that any pre-conditions attaching to that right must be fully satisfied to bring the lease to an end successfully

by midnight on the designated date and not a minute later. The concept of “vacant possession” in that context was not complicated: it meant that at “the moment that “vacant possession” is required to be given, the property is empty of people and chattels and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it”. The court went on to say that with regard to chattels left in the property, this is only likely to invalidate the break clause if such chattels substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property. NYK Logistics v Ibrend demonstrates the importance, where a break option is subject to giving the landlord “vacant possession”, for the tenant to make suitable arrangements, well in advance of the break date, to vacate.

Service of Break Notices The case of Orchard (Developments) Holdings plc v Reuters Ltd [2009] EWCA Civ highlights the importance of not leaving service of the break notice until the last minute. The lease contained a tenant’s break clause after the fifth and tenth years of the term, by giving the landlord six months’ notice. The lease also provided that unless the receiving party or its authorised agent acknowledged receipt, the break notice would only be valid if it was sent by registered post or by recorded delivery. The last date for the service of the break clause in the lease was 30 July 2005. The tenant issued the break notice on 29 July 2005, serving it by hand to the landlord’s address, which turned out to be the wrong address. Further copies of the notice were subsequently sent by fax on 29 and 30 July 2005, which, under the terms of the lease, had to be acknowledged by the landlord or its agent to be effective. The faxes arrived at the landlord’s offices after the offices had closed for the weekend.

The tenant appealed on the basis that it was unjust to have found that modest repairs which it undertook following the termination date resulted in a failure to have given vacant possession since, during that time, it had no intention of excluding the landlord from access and occupation of the premises. The tenant also argued that its statement about the keys had effected a sufficient waiver of the vacant possession requirement.

The landlord subsequently refused to acknowledge receipt of the faxes until after the break date had passed and the tenant vacated the property ceasing to pay rent to the landlord. The landlord disputed the validity of the tenant’s break notice, but did admit later that the faxes had been received. The tenant claimed that the landlord had retrospectively acknowledged receipt of the faxed notices and was not entitled to frustrate the break notice provisions simply by refusing to acknowledge receipt of the notice.

The court of appeal held that if the tenant was to satisfy the vacant possession condition in the break option, it had to give such possession to the landlord

The Court of Appeal held that it was too late for the landlord to make an invalid informal notice effective by acknowledging it after the break date. 61

WESTERN EUROPE

This case was unusual in that few leases will require that receipt of a break notice is acknowledged before the notice can become effective. However, it is a useful example of how a court is likely to construe a break clause strictly and/or deem time to be of the essence in relation to service of a break notice, if not expressly stated. The case also emphasises the need to consider the effect of a break clause together with the general notice provisions, if the break clause does not deal separately with service of a break notice.

Practical Advice for Tenants

1.

Tenants should be mindful of the fact that even a very minor failure to satisfy a break condition will prevent the effective exercise of the break option

Tenants should be mindful of the fact that even a very minor failure to satisfy a break condition (in the case of Avocet Industrial Estates LLP v Merol Limited Tudor Rose International Limited for example, only about £130 of interest was due) will prevent the effective exercise of the break option. This extends not only to payments of all sums due, but also to any other conditions, such as compliance with lease obligations and giving up possession of the property.

3.

If payments have been routinely made by cheque and accepted by the landlord, payment of any outstanding sums by cheque normally will be acceptable. However, to avoid any dispute, the prudent approach is to ensure that the landlord is in receipt of cleared funds on the break date either by a direct credit to its bank account or delivery of a cheque well in advance.

4.

The best protection for tenants is to have an appropriately worded break clause in the lease in the first place. The tenant will have paid a price for the right to terminate its lease early, whether this is through a higher rent or, the requirement to pay a break fee; this right should, therefore, only be denied in very limited circumstances.

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Practical Advice for Landlords

1.

Landlords receiving cheques must return them immediately if they do not want to risk being found to have accepted payment by this method.

2.

Landlords may be able to rely on non-payment of interest due on past arrears to thwart the exercise of a break option, but they would be unwise to do so on this ground alone until a higher court (either the Court of Appeal or Supreme Court) has considered the point.

3.

Landlords should not simply refuse to engage with a tenant seeking to ensure that it will have satisfied all conditions attached to its break right if it takes certain steps, as a court might take a dim view of this and find a way to find in favour of the tenant as the Court of Appeal did in Fitzroy House Epworth Street (No.1) Ltd v The Financial Times Ltd [2006] EWCA Civ 329 where the landlord refused to visit the property to confirm whether the tenant had fully complied with its repairing obligation until after the break date.

2.

Where a break is conditional on all monies having been paid, tenants should establish whether any interest may be due on late payments in the past, right back to the start of the lease if necessary. If the landlord will not give a categorical answer to the question, the tenant should do its own calculations and err on the side of caution by paying a sum in excess of those calculations and seeking reimbursement subsequently; better to risk the loss of a small sum than remain liable under the lease.

5.

Do not leave preparation and service of the break notice until the last minute. Seek legal representation and/or advice well in advance of the break date.

Landlords should not simply refuse to engage with a tenant seeking to ensure that it will have satisfied all conditions attached to its break right if it takes certain steps, as a court might take a dim view of this and find a way to find in favour of the tenant

4.

Do not leave preparation and service of the break notice until the last minute. Seek legal representation and/or advice well in advice of the break date. Sarah Rochelle, Associate

UNITED KINGDOM

Changes to UK REIT Regime in the Finance Bill 2012 The UK REIT regime was launched in 2007, with the aim of creating a tax efficient vehicle in which to encourage investment into Real Estate, similar to REIT structures in other countries.

However, with only a limited number of companies making the conversion to REIT status, the Government has sought to improve the regime by reducing barriers to entry, encouraging investment into REITs, and reducing the costs of complying with the regime. The Finance Bill 2012, which received Royal Assent on 17 July 2012 has brought in a number of changes which are designed to meet these aims, the most pertinent of which are listed below:

The Government has sought to improve the regime by reducing barriers to entry, encouraging investment into REITs, and reducing the costs of complying with the regime

Existing Position

New position

Companies converting to REIT status must pay an entry charge of 2% of the gross market value of their property assets.

Entry charge abolished.

The company must be listed on a recognised stock exchange (such as the main market of the London Stock Exchange and some parts of PLUS) to qualify as a REIT.

Companies that are trading on AIM or PLUS markets and their foreign equivalents can convert to a REIT.

REITS cannot be close companies (controlled by 5 or fewer people, albeit there is no specific restriction on the size of any one shareholding).

There is to be a 3 year grace period for the REIT to comply with this provision, allowing a company to convert and then seek to widen its shareholder base.

Comment The barriers to entry have been significantly reduced with the abolishment of the entry charge and the relaxation of listing and ownership rules. With these barriers addressed, there are a variety of other companies who may now wish to convert to REIT status: AIM and foreign listed companies who do not wish to incur the cost of main market listing; family property companies considering succession planning; and property companies seeking equity investment. Furthermore, with the relaxation of the close company requirements, companies that do convert have time to seek investors, whilst also enjoying the tax benefits of their REIT status. Due to the change in the diverse shareholders requirement, once they do find investors, they do not need to be concerned if only a small pool of institutional investors become their shareholder base. These changes could also encourage fund managers to incorporate new fund ventures as a REIT rather than a traditional fund structure and certain types of institutional investors (such as authorised unit trusts, open-ended investment companies, pension schemes and other such collective investment schemes) could establish wholly-owned REITs. Richard Benson, Associate

As part of the restriction on being a close The restrictions will be relaxed so that company, a REIT is required to have a a REIT will not be considered a close diverse shareholder base. company simply because it has one or more qualifying institutional investors. At least 75% of a REIT’s total assets value must relate to its property rental business.

Cash and gilts held can be added to the value of assets for the purpose of this test.

A tax charge is levied on the REIT if the profit ratio to financing costs falls below 1.25:1.

The ratio will be based on loans only and will exclude the cost of arranging finance and other finance costs.

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ATTORNEY FEATURE

Henry Lazarski Henry Lazarski is a senior member of the Global Real Estate Team in Paris, having joined Salans in 2004 after a distinguished career at Clifford Chance. Rated as a “Senior Statesman” in the French real estate market by Chambers Europe, Henry continues to focus on transactional work for top real estate private equity clients, funds and developers. Eric Rosedale sat down with the “Dean” of the French Real Estate Bar for a rare interview.

ER: Henry, you started practicing law in France in 1971. How would you characterise the French real estate legal profession at that time? HL: Apart from notaries, who dealt with conveyance, there were no lawyers specialising in transactional real estate. Most of us were general practitioners. For a number of years, at least the first half of any meeting was devoted to establishing what each lawyer thought the law actually said. By the way, time sheets did not exist!

Q&A

ER: On a personal note, what drew you to the law in the first place, and have you ever contemplated going into the real estate business?

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HL: Between leaving school and going to Edinburgh University, I spent three years as an officer in the British army (reaching the elevated rank of lieutenant). On leaving the army at the age of 21, I thought I should study something which may come in useful, so I chose law. I had certainly no wish to become a lawyer. Having spent three years mainly outdoors, the thought of being ‘cooped up’ in an office all day did not really appeal to me. As I had a certain amount of free time at university, I decided to become a trainee solicitor. The firm I joined was, even by the prevailing standards at the time, an old fashioned one whose clients were mainly land owners. It is there that I became fascinated – and remain to this day fascinated – by the multiple facets of law and the quasi daily challenges which its practice offers. Clearly what I thought was my natural predisposition for the law was

not shared by all the people I worked for. At the end of my traineeship, my boss’s parting words to me were: “One thing is certain you are not made for the law!” Most of my friends are in the real estate business in one capacity or another. And I do know some lawyers who became leading names in the real estate business…but not in France. Many lawyers hold the mistaken belief that they can do their clients’ job as well as they can, not realising that they are privy to only one aspect of their work. Conversely when I say to someone outside the legal profession that he or she would make a good lawyer, it could be a back-handed compliment! More to the point, I do not believe I have the qualities required to be a successful entrepreneur in real estate. For example, and with hindsight, one of the qualities I lack is the ability to foresee the end of a cycle and the beginning of another one. ER: Along with remarkable changes in the legal profession, how has the French real estate market fundamentally changed and developed over the years? HL: We have become part of a global market. Whereas when I started, the French market was fairly simple and consisted mainly of developers who built the real estate and institutional investors (pension funds, insurance companies) who bought it once leased; the number of players has not only grown considerably but they have become much more sophisticated. Real estate is now a financial product like any other. Nevertheless, an in-depth knowledge

ATTORNEY FEATURE

Q&A of real estate is still essential to be a successful operator in this field. ER: Real estate owners and investors are facing a tightening debt environment, with fewer banks making fewer and smaller loans. How are our French clients responding to this difficult lending environment, and are you seeing new sources of debt in the French market? HL: At present ‘cash is king’, banks will rarely lend more than 50% of the value of the real estate. A number of funds now provide mezzanine finance or participating loans, so the lack of bank finance has not, yet at any rate, driven the prices down. However, many loans made in 2007/2008 will soon mature and will need to be refinanced or the property sold to repay them. This may lead to some ‘fire sales,’ of which cash-rich investors will no doubt take advantage. ER: Paris is considered the prime destination for “core” cross-border real estate investors. Do you see French real estate opportunities outside of Paris? HL: Difficult question, apart from logistics buildings and shopping centres, I believe the commercial real estate market is really centred on Paris and its region. France is still very centralised and in spite of what may be said from time to time, the French provincial market, with regard to offices for example, does not have the fluidity of, for instance, the English provincial towns. I have lived through quite

a few property cycles, and each time foreign investors began to invest massively in French provincial towns, it was the sign of an over-heating economy, and a downturn of the commercial property market was not far behind… ER: This year we are facing the real prospect of fundamental changes in the Euro and Eurozone in the midst of extremely challenging sovereign debt problems. In such uncertain economic and political times, do you think investors see French real estate as a safe harbour or a risky bet? HL: Real estate has always been considered to be a safe investment especially in the medium to long term. It is experiencing a considerable revival of interest in the present economic climate fraught with uncertainty. This is true for both commercial and residential property. With regard to the latter, prices in Paris are still reasonably cheap compared to those of other major world capitals, but they are catching up fast. ER: You are known as an avid cyclist. How does your love of cycling compare with your love of the law? HL: Cycling and the practice of law both offer constant challenges. Thanks to cycling I have built up stamina and endurance which has helped and still helps me to withstand the stress which, unfortunately in these times of economic uncertainty, forms part of our daily routine.

ER: If you had one piece of advice to give to a new university graduate deciding on whether to become a real estate investor or a real estate lawyer in today’s world, what route would you say holds a brighter future? HL: I am not the best person to advise on a choice of career as I have never regretted my choice but, as in every profession, many changes have taken place over the 30+ years I have been in practice. Law has now become a commodity, and the legal market is highly competitive with a constant downward push on fees. In order to “distinguish yourself from the pack,” you must be able to offer an added value to your clients and not merely follow instructions and/ or see your role as putting down in legal form what the parties have agreed. This necessitates both a good overall knowledge of all aspects of the law (including tax) and a deep knowledge of real estate law, all of which must be constantly updated as well as a good understanding of the industry in which your clients operate. So if you are prepared “to go that extra mile” you will have a long, interesting, and extremely rewarding career as a real estate lawyer. You will have understood what I believe… that the practice of law still holds a very bright future, provided you are willing to make the effort.

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CIS

Tell Me What I Need to Know About Russian Pledge and Mortgage Law Reforms: “Welcome Back to Court” On 7 March 2012, a new Russian law (No. 405-FZ – the “New Law”) entered into force. It radically changed the game for Russian pledges and mortgages. It affects real estate lenders and borrowers alike, principally impacting on how security may now be created and enforced. Though the New Law includes many different changes, its principle ramifications may be summarised as follows. Although the New Law is vaguely drafted and has yet to be tested in practice or interpreted by the Russian courts, practitioners are drawing some conclusions (often gloomy for the lender). It is a prevailing view that any out-of-court (i.e. self-help) enforcement of a pledge or mortgage will now be possible only if the lender, following a default, obtains a special endorsement from a Russian notary – known as an ispolnitelnaya nadpis (an “Endorsement”). Previously, a lender could foreclose by way of out-of-court enforcement by merely notifying the security-giver of the default and the lender’s decision to foreclose.

It is a prevailing view that any out-of-court enforcement of a pledge or mortgage will now be possible only if the lender, following a default, obtains a special endorsement from a Russian notary

The procedure for obtaining an Endorsement in and of itself is not straightforward. Under the New Law, the notary (not the lender) must notify the security-giver and give him fourteen days to respond before acting. The notary can then only issue the Endorsement if the security-giver does not challenge the default. In case of a disputed default, the notary will most likely refuse to issue the Endorsement or risk personal liability for violation of the security-giver’s rights. In that case, the lender may foreclose only through the courts. This means lenders can no longer count on a smooth out-of-court enforcement – in practice borrowers must always cooperate (or at least not interfere) in the foreclosure process. It is also expected that Russian notaries will issue Endorsements only if the relevant security itself was notarised from the outset. Given that notarisation of security was not previously required as a general rule (with the exception of pledges of shares in Russian limited liability companies and some other limited cases), most currently existing security has never been notarised. The question arises – can this security now be notarised after the fact? So far, the general position of notaries on the market is that they will likely refuse to notarise existing security as well as any amendments made after the New Law entered into effect (under Russian law, an amendment to an existing contract should, as a rule, be made in the same form as the original contract). As a result, lenders will in all likelihood be unable to enjoy outof-court enforcement on most security signed before 66

7 March 2012. If a lender insists on having a truly enforceable out-of-court foreclosure right for existing security (which will in any event be subject to the risk of interference as mentioned above), the lender will have to face the tough choice of terminating and re-executing such security (with notarisation thereof), hence risking its priority as well as re-triggering (insolvency) hardening periods. Because notaries are now in charge of the process of creating security (if the lender wants self-help), documents will now need to be discussed and agreed with the notaries in advance. Notaries’ comments will need to be taken into account and properly reflected in the agreements – otherwise they will simply refuse to notarise them. This may well impact on standard lender-protection provisions seen in Russian-law security commonly used in large commercial real estate deals, such as representations and warranties, negative covenants and the like (not native to Russian law but often included by international law firms in Russia, and particularly in the cross-border commercial real estate finance context). This will lengthen the overall timing for putting Russian security into place, as security must now be agreed not only between lenders and borrowers but also with Russian notaries. Notarial fees must also now be included in the budget. Interestingly, so far there is no unified approach among Russian notaries on pricing such fees. Accordingly, for now this is likely to be handled on a case-by-case negotiation with individual notaries.

Lenders will in all likelihood be unable to enjoy out-ofcourt enforcement on most security signed before 7 March 2012

RUSSIA

Conclusion It is yet to be seen how the New Law will be implemented in practice. Its aim was clearly to streamline and make the foreclosure process more transparent. The involvement of notaries can be seen as legislative intent to place an independent intermediary between lenders and borrowers in the enforcement of security. However, the practical effect of the New Law is that lenders can no longer rely on out-of-court enforcement, as this will depend on security-givers’ (i.e. borrowers’) cooperation (or at least non-interference). In the ‘rough-andtumble’ Russian business environment (and taking into account that notaries will be personally liable for violation of security-givers’ rights), we anticipate that at least for now lenders are likely to find themselves in court more often than not. Welcome Back to Court. Sergey Trakhtenberg, Associate

Because notaries are now in charge of the process of creating security (if the lender wants self-help), documents will now need to be discussed and agreed with the notaries in advance

ATTORNEY HIGHLIGHT Timothy Stubbs Partner, Russia

Tim Stubbs is a member of Salans’ Global Real Estate Group and heads its Banking & Finance Group in Russia. Tim concentrates on cross-border real estate financings, M&A deals and restructurings. Tim is listed as a leading practitioner (taking first place for real estate finance in CIS/Russia) by Who’s Who Legal CIS 2011. He is also highly ranked by Chambers 2012 for banking and finance (in particular, real estate finance) and private equity in Russia, and in project finance in Central and Eastern Europe. Tim is also recommended as a leading expert in banking and finance by The Legal 500 2012 and in project finance by PLC Which Lawyer? 2012. Tim’s history with Salans dates back to 1991, when he moved to Moscow having previously practiced in Chicago and New York for six years. In 1993 Tim then moved to St. Petersburg, to open and co-manage the firm’s office there. In 2001-2002 Tim took a two-year working sabbatical at the Office of General Counsel (OGC) of the European Bank for Reconstruction and Development (EBRD) and re-joined the firm in 2003, moving back to its Moscow office in 2004. Tim tries to approach each transaction thinking as the client would – “The client needs to know you know their business as well as they, and you have their interests firmly planted in your heart and mind.” Tim is as passionate about practicing law as he is about his music – in his spare time, when not leading client deals, Tim heads a piano jazz trio.

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CIS

Concessions in Russia: Further Legislative Developments The Russian Federal Law on Concession Agreements was adopted in Russia in the summer of 2005. Since then nine sets of amendments have been made, most of which were substantial and had considerable legal significance. Despite this, the concession structure remains unpopular and is not widely used in practice.

The 10th amendment package has made another attempt to change the situation and make it more flexible and attractive to investors. Federal Law No. 38-FZ on Amendments to the Federal Law on Concession Agreements and article 16 of the Federal Law on State Company Russian Highways, and Amendments to Certain Legal Acts of the Russian Federation (“Law No 38-FZ”) was adopted on 25 April 2012. The primary purpose of Law No. 38-FZ is to establish a special legal procedure governing concession agreements with respect to roads or sections thereof, protective and artificial road structures, industrial facilities used in capital repairs, repairs or maintenance of roads, facilities for collecting payment and road services (“Highway Infrastructure Facilities”). At the same time, Law No. 38-FZ makes amendments to certain general provisions of Federal Law No. 115-FZ on Concession Agreements (“Law on Concession Agreements”), applicable to other facilities. Below we provide a brief summary of the key changes in Law No. 38-FZ: If a concession agreement is concluded with respect to Highway Infrastructure Facilities, then at the time the agreement is concluded, the facilities may belong not only to the Russian Federation, members (constituent subjects) of the Russian Federation, municipalities, or State Company Russian Highways, which are expressly recognised as public partner entities in the Law on Concession Agreements, but also to state or municipal enterprises and/or state budget-funded enterprises holding the facilities under operational management or economic management. These enterprises are now able to act for the public partner in undertakings under a concession agreement, and to exercise certain powers of the public partner along with the public partner itself (i.e., the Russian Federation, Russian Federation members, municipalities, State Company Russian Highways). In this connection, additional rules are provided with respect to termination of the rights of state budgetfunded enterprises to Highway Infrastructure Facilities and transfer of Highway Infrastructure Facilities to the concessionaire.

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The primary purpose of Law No. 38-FZ is to establish a special legal procedure governing concession agreements with respect to roads or sections thereof, protective and artificial road structures, industrial facilities used in capital repairs, repairs or maintenance of roads, facilities for collecting payment and road services

The Law on Concession Agreements provides that the public partner may undertake to pay a part of the cost of building (constructing) and/or renovating and operating the concession properties, and may provide the concessionaire with state or municipal guarantees. In addition to these general provisions, it is provided that a concession agreement with respect to Highway Infrastructure Facilities may also provide for the public partner to make a certain payment to the concessionaire, provided that: (1) the public partner’s payment under the concession agreement must be determined in the criteria of the tender for the right to conclude the agreement, and (2) a concessionaire receiving such payment from the public partner shall not have the right to collect payments from other parties for the creation, renovation, or operation of the Highway Infrastructure Facilities. This means that it effectively provides for the conclusion of concession agreements in the form of “life-cycle contracts”. This form should be desirable for building and operating “free” (public) roads. The public partner’s failure to perform the obligation to pay under the concession agreement constitutes a material breach of agreement, which may result in termination of the agreement by court decision. It is established that if the concessionaire raises funds from creditors for the performance of its obligations under a concession agreement with respect to Highway Infrastructure Facilities, the rights of the concessionaire under the agreement may be used to secure the performance of the concessionaire’s obligations before creditors in the manner and on the terms stated in the concession agreement. Moreover, in this case it is possible to conclude a trilateral agreement: among the public partner, the concessionaire, and the pool of creditors, which, inter alia, can resolve issues relating to liability for non-performance or improper performance by the concessionaire of its obligations under the concession agreement. (However, at the same time, Law No. 38-FZ excludes the ability previously provided in the Law on Concession Agreements for concessionaires to use a similar mechanism in agreements with respect to public utilities systems and infrastructure.)

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For the first time it becomes possible to replace the concessionaire without holding a new tender, if (a) the concessionaire’s non-performance or improper performance of its obligations resulted in a material breach of the concession agreement and/or (b) caused death or harm to individuals, or threatens to do so; a resolution of the RF Government is required upon either condition for replacement without a tender arising, which shall be issued with consideration for the opinion of creditors. When replacing parties to a concession agreement it is not permitted to amend the conditions of the agreement determining the technical characteristics of the concession property. It is clarified that the term of the concession agreement is established with consideration for the performance of the public partner’s obligations, as well as the concessionaire’s. The list of dispositive conditions that may be included in the concession agreement now includes (a) the size, conditions, procedure, and terms of payment of penalties for breach of the concession agreement; and (b) the procedure for determining the amount of reimbursement of the parties’ expenses in the event of early termination of the concession agreement in the cases provided in the Law on Concession Agreements. A rather important amendment is that when concluding concession agreements for Highway Infrastructure Facilities in federal ownership, the model agreements provided in the Law on Concession Agreements do not have to be used. The Law on Concession Agreements now provides that the conditions of a concession agreement based on the resolution on conclusion of the agreement and the concessionaire’s bid in accordance with the tender criteria may be amended by agreement of the parties on the basis of a resolution of the public partner. A new ground for termination of a concession agreement has been introduced. The agreement may now provide for early termination by decision of the public partner, if the concessionaire’s nonperformance or improper performance has resulted in death or harm to individuals, or created a risk of such harm. Provisions have been added to the Law on Concession Agreements establishing criteria for tenders for the conclusion of a concession agreement. As criteria, the tender may establish obligations to be undertaken by the concessionaire if the expected income from use/operation of the concession property is not received; additional

As can be seen, these amendments are important, relevant, and intended to improve the concession structure – to make it more attractive to private partners and financing organisations

expenses arise during the creation and/or renovation of the concession property, or use/operation of the concession property. At the same time, if the concession agreement provides that the public partner must pay a part of the cost of creating and/ or renovating the concession property, use/operation of the concession property, or make payments under the concession agreement, the size of such expenses and payments of the public partner must be established in the tender criteria. New provisions have been added to the Law on Concession Agreements governing the procedure for concluding concession agreements after a tender. Law No. 38-FZ establishes that after the members of the tender commission have signed the report on the results of the tender, the authorised public partner shall, on the basis of a resolution on the conclusion of the concession agreement, conduct negotiations in the form of joint meetings with the winner, or another party with whom it was decided to conclude the concession agreement, to discuss the conditions of the concession agreement and potential amendments upon the results of negotiations. (These amendments effectively fix the existing practice.) Conditions that were tender criteria and/or were determined on the basis of the bid by the party chosen to conclude the concession agreement cannot be amended in negotiations. The term and procedures for the negotiations shall be set out in the tender documentation. The tender documentation must state which conditions of the concession agreement are not negotiable, and/or conditions which may be amended in accordance with the procedure provided in the tender documentation. Notice of the conclusion of the concession agreement shall be published. As can be seen, these amendments are important, relevant, and intended to improve the concession structure – to make it more attractive to private partners and financing organisations. Unfortunately the amendments are the result of lobbying and the most “progressive” amendments concern mainly a narrow range of subjects – Highway Infrastructure Facilities. Furthermore, a significant number of legal issues impeding the use of concessions in Russia (such as limited arbitration clauses, insufficient tariff regulation, short-term budget planning, etc.) remain unresolved. Therefore, regrettably, it is unlikely there will be any boom in concession PPPs following the adoption of these amendments.

Karina Chichkanova, Partner, Head of St. Petersburg Real Estate and Russian PPP Groups Olga Lovtsov, Of Counsel

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New Lease Termination Powers Plans by the Governments of Moscow and St. Petersburg for a review of planned and on-going construction projects became clear at the beginning of this year.

Federal Law No. 427-FZ of 12 December 2011 (“Law”) was enforced on 14 December 2011, significantly amending Federal Law No. 137-FZ of 25 October 2001 on the Enactment of the Land Code of the Russian Federation (“LC RF Enactment Law”) and Federal Law No. 39-FZ of 25 February 1999 on Investment Activities in the Russian Federation in the Form of Capital Investments (“RF Investment Law”). The amendments to the RF Investment Law took effect on 1 February 2012, while the amendments to the LC RF Enactment Law were enforced on 1 April 2012.

Plans by the Governments of Moscow and St. Petersburg for a review of planned and ongoing construction projects became clear at the beginning of this year

The Law provides new grounds for early, out-ofcourt, unilateral termination by a state or municipal authority of investment contracts and land lease agreements for state-and municipally-owned land plots in Moscow and St. Petersburg that were finalised before January 1 2011. The Law gives the city administration (Moscow, St. Petersburg) the right to unilaterally terminate an investment contract and/or land lease agreement on the new grounds provided two conditions are met: the land plot must be allocated for the purpose of construction or renovation of a property; and there must have been a material breach of the agreement, or a material change in the circumstances under which the parties entered into the agreement. The material breaches of an investment contract or land lease agreement that permit unilateral termination by a state or municipal authority are as follows: failure of the tenant to perform the obligation to build/renovate the property by the time specified in the land lease agreement or investment contract. If no date is specified, then within the term of the construction/renovation permit. To serve as grounds for early termination the construction readiness of the property on the last day of the stated term must be less than 40% of the scope provided for in the design documentation; and not having obtained a construction permit after 5 years have elapsed from the end of the land

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There were more than 700 land plot town planning plans issued between 2008-2010 which are up for review by the Moscow Town Planning and Land Commission

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lease agreement or investment contract, if the relevant agreement does not provide a deadline for completing construction or renovation of the property. According to the Law, for a land lease agreement the only case of a material change in the circumstances under which the agreement was finalised is when in addition to the land lease agreement the state or municipal authority, or other state- or municipallyowned entity, and the tenant also finalised an agreement on the construction or renovation of a property on the said land plot, and that agreement was then terminated for any reason. According to the Law, for an investment contract a material change in the circumstances under which the contract was finalised is the inability to perform the obligations to build or renovate the property because the land plot cannot be allocated in accordance with Russian Federation law, or due to encumbrances or third party property standing on the land plot that impede the construction or renovation. In these cases, the Moscow or St. Petersburg city administrations will notify the counterparty of the unilateral termination of the investment contract or land lease agreement. The parties to the investment contract or land lease agreement have a one-month period to submit written objections to the termination of the agreement. If the state or municipal authority does not receive such objections within the one-month period or does not agree to them, the relevant agreement is deemed terminated as of the date the state or municipal authorities sent the termination notice for the agreement. Furthermore, Moscow Government Resolution No. 139-PP of 17 April 2012 on Measures to Ensure Cooperation among Executive Authorities of the City of Moscow in the Implementation of Certain Resolutions of the Moscow Town Planning and Land Commission, adopted pursuant to amendments to the Moscow Town Planning Code (Moscow Law No. 12 of 11 April 2012), determines that the Moscow Town Planning and Land Commission has the authority to amend or revoke previously issued land plot town planning plans (“GPZU”).

The Law provides new grounds for early, out-ofcourt, unilateral termination by a state or municipal authority of investment contracts and land lease agreements for state-and municipally-owned land plots in Moscow and St. Petersburg that were finalised before 1 January 2011

There were more than 700 GPZUs issued between 2008-2010 which are up for review by the Moscow Town Planning and Land Commission. Under the applicable law, the permitted use of land plots and the limiting parameters of permitted construction or renovation of capital structures are determined by the town-planning regulations established with respect to a particular territorial zone. The town-planning regulations are contained in the Land Use and Development Rules, which have not been adopted yet in Moscow. In the absence of the approved Moscow Land Use and Development Rules, information on the permitted use of a land plot is contained in the GPZU of a land plot and is determined on the basis of the following documents: the Moscow General Plan; territorial and sector schemes; draft territorial and demarcation plans, town-planning regulations, and others. Where no town-planning regulations or draft territorial plans have been approved, the GPZU for such territories will be issued or revised in accordance with the existing territorial regulations. The information previously stated in land plot permitted use certificates, land development plans, or land lease agreements finalised before 1 January 2012 are not binding when elaborating GPZUs. The abovementioned legal acts therefore allow the Moscow and St. Petersburg authorities, subject to certain conditions, to unilaterally terminate investment contracts and/or land lease agreements. The Moscow Town Planning and Land Commission has also gained the right to amend or revoke previously issued GPZUs. Many experts see these legal acts as Sergei Sobyanin’s “political answer” to “Luzhkov favourites”, with the intention of transferring investment opportunities to developers more loyal to the “new regime”. It remains an open question whether market participants that have never had particularly close relations with the city authorities will also feel the effects of these decisions. We believe that there is potential for an increase in litigation relating to the early termination of investment contracts and land lease agreements, as well as the financial consequences of such terminations. Anna McDonald, Head of Real Estate Russia 71

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UKRAINE

The Procedure for State Registration of Land Lease Agreements in Ukraine Has Been Simplified A new and official clarification of the State Agency of Land Resources confirms that the practice of submitting exchange files (obminni fayly) for the State registration of land lease agreements is illegal. This appeared on the website of the State Agency of Land Resources (see link http://www.dazru.gov.ua/ terra/control/uk/publish/article?art_id=135734&cat_ id=97786) on 22 May 2012. Despite the existing practice of territorial bodies of land resources and structural subdivisions of the State Enterprise “Centre of State Land Cadastre”, which requires submitting exchange files (obminni fayly) in XML format for the State registration of land lease agreements for privately owned land plots, the new clarification rejects this practice based on the following:

A new and official clarification of the State Agency of Land Resources confirms that the practice of submitting exchange files for the State registration of land lease agreements is illegal

Pursuant to paragraph 2 clause 16-1 of the Procedure for keeping the Book of records pertaining to State registration of State acts for ownership rights to a land plot and for permanent rights to use a land plot, land lease agreements, approved by resolution of the Cabinet of Ministers of Ukraine dated 9 September 2011 No. 1021 “On approval of the procedures for maintaining the Land Record book (Pozemelna Knyha) and the Book of records pertaining to State registration of State acts for ownership rights to a land plot and for permanent rights to use a land plot, land lease agreements” (the “Procedure”), State registration of a land lease agreement for privately owned land plots is performed after State registration of a land plot.

It must be mentioned separately that clause 16-3 establishes that a territorial body of the State Agency of Land Resources shall refuse to perform State registration of a land lease agreement for privately owned land plots if: 1. not all documents have been submitted; 2. the submitted documents do not correspond to the requirements established by this procedure. Therefore, the requirements of territorial bodies of the State Agency of Land Resources or structural subdivisions of the State Enterprise “Centre of State Land Cadastre” with respect to submission of exchange files (obminni fayly) by the applicant (in case of changes to their content, structure, format (In-4, Xml)) for State registration of land lease agreements for privately owned land plots are contrary to regulatory legal acts currently in force, in cases where the State registration of the said land plots took place earlier.

Anzhelika Shtukaturova, Associate

Clause 16-2 of the Procedure stipulates the complete list of documents necessary for State registration of a land lease agreement for privately owned land plots, in case the State registration of a land plot took place at the stage when the title document to a land plot was issued and the data about the plot was entered into the computerised system. The said Procedure prohibits requiring the submission of documents and data not stipulated by this clause. Requirements with respect to submission of land organisation documents which include a land plot plan and have data about coordinates of turning points of the boundaries of the portion of a land plot and an exchange file (obminnyi fayl) correspond to the Procedure only in case of State registration of a sublease agreement for the portion of a land plot.

The said Procedure prohibits requiring the submission of documents and data not stipulated by this clause 73

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Close-Ended Mutual Funds: A New Era in Real Estate Development in Azerbaijan? Recent years have seen a dramatic increase in legislative activity in the field of real estate, perhaps in a bid to catch up with the construction boom that has swept the country during approximately the same period.

New laws were passed, inter alia, regulating mortgages, requiring that construction contractors buy third party liability insurance, reforming ground for acquisition titles for immovable property, etc. However, in our view, the most important legal update was passing the modern Law On Investment Funds (the “Investment Funds Law”).

In our view, the most important legal update was passing the modern Law On Investment Funds

Finally, one of the most distinctive features of Mutual Investment Funds in Azerbaijan is that they do not have the status of legal entity. This means that Mutual Investment Funds are not subject to the Azerbaijani corporate profit tax, which applies only to legal entities, including limited liability companies and partnerships.

In this article we will attempt to provide an introduction to the only type of investment funds that is allowed to invest in real estate – the close-ended mutual fund.

Introduction Except for activities conducted by the State Oil Fund of Azerbaijan (SOFAZ), investment fund activity has been almost non-existent in Azerbaijan, even though the pervious Law On Investment Funds (1999) has been in force for many years. In fact, according to information concerning the registered names of legal entities available on the official website of the Ministry of Taxes, only three investment funds have ever been registered as such in Azerbaijan. And even those were probably registered when the old law was in force. The rationale behind passing the new Investment Funds Law was painfully clear – the old law On Investment Funds was grossly outdated and, given the small number of investment funds registered, not working very well. Passing the new Investment Funds Law was an action indicative of the efforts of the Azerbaijani government to establish the legal basis for, and to encourage engagement in, this type of activity in Azerbaijan.

Key Features of Close-Ended Mutual Investment Funds The Investment Funds Law defines an investment fund as a financial institution established in the form of either a joint stock investment fund or a mutual investment fund, created for the purpose of generating profit by making investments using the capital it has raised in accordance with an investment declaration. Further, a Mutual Investment Fund is defined as a professionally managed pool of funds owned by the participants in such fund under a right of common property. 74

A Close-Ended Mutual Investment Fund is a fund that sells and redeems its shares upon the expiration of the term for which such fund was created. The assets of a Close-Ended Mutual Investment Fund may consist of money, securities and real estate. It is the only type of Mutual Investment Funds that is allowed to invest into real estate.

Despite Mutual Investment Funds not having the status of a legal entity, the participants in such funds are not liable for their obligations, and losses incurred by them as a result of a change in the market value of the funds’ assets are limited to their respective contributions to the fund. Likewise, Mutual Investment Funds are not liable for the obligations of their participants, the creditors of which may direct their claims only against the shares actually owned by such participants.

The rationale behind passing the new Investment Funds Law was painfully clear – the old law On Investment Funds was grossly outdated and, given the small number of investment funds registered, not working very well

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How Do They Operate? Establishing the Close-Ended Mutual Investment Fund Mutual Investment Funds are created by a decision of the investment fund manager, and are considered formed when they have succeeded in raising the minimum capital, currently set at AZN 500,000 (approximately US$ 635,000), or set forth in the funds management rules, whichever is higher. The fund must then be registered with the Registry maintained by the State Securities Committee (the “SSC”), also acting as the Regulator, made upon the registration of the Management Rules of the fund. The fund and the investment fund manager must also be licensed.

A Close-Ended Mutual Investment Fund is a fund that sells and redeems its shares upon the expiration of the term for which such fund was created

Finally, all advertising and sales materials must be submitted to the SSC, which, upon discovery of any illegal content, may order that the dissemination of such materials be ceased.

Conclusion

Liability of the Investment Fund Manager

Reporting, Disclosure and Marketing Mutual Investment Funds must prepare financial reports in accordance with international financial reporting standards and an independent auditor must approve such reports. Such independent auditor must comply with the standards set forth by the regulator of the auditor’s profession, as well as those of the SSC. Mutual Investment Funds must make available certain information to investors in the offices where such funds accept orders for the sale and redemption of

Additionally, the law goes so far as to require that the investment fund manager or professional participants in the securities market (i.e., underwriters) provide investors with a separate risk statement and have them countersign the statement. If the investment fund manager or the underwriter fails to do so, they may be liable to the investors for any losses from such investment. As a general rule that the advertising of the investment fund manager must not be inaccurate, misleading, or contrary to the investment declaration. Importantly, the law requires the disclosure of any material information, which is necessary for making a decision by an investor, along with the risks associated with the investment.

Shares in the fund must be denominated in Azerbaijani manats (AZN), paid for in cash, and have no nominal value (value is then calculated in accordance with the SSC rules). These shares may not serve as an asset base for the issuance of derivatives, nor can they be offered to potential participants before the Management Rules are registered and published. The number of shares in a Close-Ended Mutual Investment Funds is limited to that set forth in its Management Rules. The Investment Fund Manager is liable for losses incurred by the participants of the fund as a result of the manager’s violation of the relevant provisions of the law or the fund’s management rules. No liability on the part of the Investment Fund Manager is envisaged for fluctuations in the value of the fund’s shares due to the shift in the market price of the fund’s assets.

their shares, including information on composition, structure and value of the fund’s assets; its net assets; then current value of the funds’ shares; and its audited annual accounts.

One of the most distinctive features of Mutual Investment Funds in Azerbaijan is that they do not have the status of legal entity and thus are not subject to the Azerbaijani corporate profit tax

While passing the law and adopting rules implementing provisions of the law are just the first steps, they are important steps in the right direction. Laying out the legal framework is crucial to provide potential investors with more confidence and to encourage their investment. However, it remains to be seen how effective these measures will be ultimately.

Kamal Mammadzada, Partner Ulvia Zeynalova-Bockin, Associate

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Regulation of Trunk Pipelines in Kazakhstan: Current Issues and Trends Subsoil users need transportation, including for export purposes, for the oil recovered from oil fields. Without reliable transportation routes and means, a subsoil use right would lose its value. A basic way of transporting oil and gas is trunk pipelines.

Despite the fact that this method of transportation is highly used in Kazakhstan (compared to transportation via oil tankers or by railroad), there are serious concerns in the industry regarding Kazakhstan’s lack of comprehensive legislation pertaining to trunk pipelines. The ambiguities in relation to the status of trunk pipelines, whether they are movable or immovable properties, have deepened the concerns. The very practical problem of registering trunk pipelines is a result of such uncertainties. The current legislation states that immovable property has to be registered in the oblast (administrative-territorial unit in Kazakhstan) where such property is located. However, one of the peculiarities of trunk pipelines is that they can extend through the territory of several oblasts.

There are serious concerns in the industry regarding Kazakhstan’s lack of comprehensive legislation pertaining to trunk pipelines

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To address and clarify these and other practical problems, a draft Law on Trunk Pipelines (the “Draft”) has been elaborated and is currently under consideration in the Parliament. It is anticipated that the Law on Trunk Pipelines will further develop the exploration and exploitation of oil deposits and facilitate business activities in general.

Issues of Legal Status The Draft appears to address the issue of the legal status of a trunk pipeline by viewing it as a complex entity consisting of different elements each with different legal status. Thus, the Draft provides that a trunk pipeline is an integrated industrial-technological complex which consists of a lineal part and objects ensuring secure transportation of production (facilities, constructions, buildings). The lineal part of a trunk pipeline references underground, submerged, surface, and above-ground pipelines, which are used for production transportation. The Draft recognises the lineal part of a trunk pipeline as an “object equated to immovable property”.

If the view is taken that a trunk pipeline is an integral item of immovable property, legal rights to it should be registered in one procedure and in respect of the trunk pipeline as a whole. However, the existing immovable property registration system cannot accommodate the concept that immovable property can be located in more than one oblast. Accordingly, there is a practical problem to register one trunk pipeline in several oblasts since the registration agencies in some of the oblasts do not recognise a trunk pipeline as an immovable property and refuse to register it as such. At the same time, other oblasts’ registration agencies freely register pipelines as immovable properties. Another issue with the legal status of trunk pipelines is that Kazakhstan’s Civil Code provides that oil and gas trunk pipelines are strategic objects, the assignment or encumbrance of which needs to be approved by the Government of the Republic of Kazakhstan. Moreover the Republic has a priority right to acquire trunk pipelines which are up for sale. Therefore a practical problem has been to identify exactly what constitutes a trunk pipeline and whether the pipeline’s owner must receive the approval of the Government in order to sell or encumber the pipeline.

Proposed Amendments

Kazakhstan law already has other examples of “objects equated to immovable property”. The Civil Code (as amended by the Draft) would state that “Air and sea vessels, vessels of domestic water travel, vessels of river and sea sailing, and cosmic facilities, lineal part of trunk pipelines shall be equated to immovable objects which are subject to state registration” (Article 117.2).

It is anticipated that the Law on Trunk Pipelines will further develop the exploration and exploitation of oil deposits and facilitate business activities in general

As to ancillary “objects ensuring secure transportation of production”, the Draft does not specifically characterise them. Therefore, these objects can be treated either as immovable or movable property depending on their characteristics. Obviously, by recognising the lineal part as a standalone object, the legislator is trying to solve the problem of registering the entire trunk pipeline, which extends through the territory of several oblasts. However, the Draft fails to respond fully to the question of whether trunk pipelines are subject to registration and how such registration should be done. In the absence of any reference in the Draft

KAZAKHSTAN

to a special registration system for trunk pipeline, it might seem that there is no need to register the pipeline as a whole. However, from our sources we understand that such registration system is likely to be created after the adoption of the Draft. Therefore, it still remains to be seen whether and how such registration system will be implemented and, more importantly, whether it will resolve the uncertainties that exist.

Dispute Resolution Issues There is another implication of classifying the linear part of a trunk pipeline as “objects equated to immovable property”. Under Kazakhstan law, disputes associated with immovable property cannot be referred to arbitration; rather such disputes are subject to a mandatory jurisdiction of state courts. Accordingly, in any agreements concerning trunk pipelines, parties would be unable to refer the disputes to arbitration. In this sense, the Draft is in line with the policy of the State to extend the jurisdiction of state courts over strategic objects, especially those being part of the oil industry.

Ownership Issues

Currently, trunk pipelines may be owned by both the State and private entities. However, the Draft introduces that ownership of trunk pipelines by private persons and foreign legal entities is forbidden

land underlying the pipeline. Much attention is paid to the safety requirements of activities connected with the use, conservation, and liquidation of pipelines. The interests of the owners of trunk pipelines are secured by listing their rights and obligations. One of the main obligations of the owners is to provide shippers with equal access to the pipeline. This is in order to eliminate possible abuses by the owner of its rights. The Draft contains limited grounds for an owner to decline shipment of the production or to suspend the fulfilment of the shipment contract, and those mainly for safety reasons. Given that Kazakhstan has never had comprehensive legislation in relation to trunk pipelines, the subsequent application of the Law on Trunk Pipelines can undoubtedly reveal problems going forward. It is hoped that attempts to solve these problems will be made with more enthusiasm and creativity than has been proved so far.

Birzhan Zharasbayev, Senior Associate Askar Kaldybayev, Senior Associate

Currently, trunk pipelines may be owned by both the State and private entities. However, the Draft introduces that ownership of trunk pipelines by private persons and foreign legal entities is forbidden. From these provisions it is clear that national security concerns will hinder foreigners’ control of strategic objects. One more example of national security issues is evident in the provisions relating to the priority right of the State to acquire a 50% stake in all planned trunk pipelines. The State again tries to exercise further control in the oil and gas industry. The Draft also addresses issues relating to the competence of the government and relevant state bodies, allocation of land plots, projecting, and construction of pipelines. Though these can be seen as mere technical issues, they have significant repercussions in the course of practical implementation. For example, the Draft provides that allocation of land for the purpose of a trunk pipeline shall be made by way of creating servitude over the 77

UNITED STATES

Operating Expenses: Renting Commercial Office Space in New York City Leasing commercial space in New York City (NYC) is not for the faint of heart. No matter whether the market at the time in question is an up market or a down market, the market itself is based on a healthy competition between landlords who draft leases aggressively favoring the landlord, and tenants, who undertake, with the assistance of their lawyers, to negotiate the landlord’s form into an acceptable and reasonable lease document. In many cases, tenants are overwhelmed by the length of the standard lease document and overlook the economic impact of certain lease provisions. This is especially true in the case of operating expenses. While tenants would like to assume that their monthly rent consists of one negotiated sum, most leases call for rent increases based on the operating expenses of the building, which is one element of so-called “additional rent”, which can often be the most unpredictable cost element in a lease. While additional rent generally also comprises other items, such as taxes, overtime services or other specific charges, this article specifically discusses the nature of operating expenses and some of the ways in which they are calculated in typical leases for commercial space in the NYC office market.

What Are Operating Expenses? Simply put, operating expenses are the total cost of all goods and services needed to keep a building operational. For example, in a typical lease for office space in NYC, operating expenses can include insurance costs, management fees, janitorial services, employee salaries and benefits, certain utility charges, heating, ventilation and air conditioning, landscaping, and a laundry list of other maintenance charges. Operating expenses are sometimes referred to as CAM (i.e. common area maintenance) charges, triple net charges, or pass-throughs.

How Are Operating Expenses Calculated in Leases? In the real estate market, commercial office leases are usually referred to as “net” or “gross” leases. Under a net lease, there is no base year, and the tenant is generally responsible for most of the costs associated with maintaining the property. Under a gross lease, on the other hand, the landlord agrees to pay for all base year expenses normally associated with property ownership, such as taxes, insurance and maintenance. The tenant is only responsible for its share of the increases in costs above the base year. The base rent will be set depending upon whether the lease is a gross lease or a net lease. In the NYC office market, the majority of leases are “modified gross” leases, under which the tenant is responsible for paying base rent, electricity, and the 78

In many cases, tenants are overwhelmed by the length of the standard lease document and overlook the economic impact of certain lease provisions. This is especially true in the case of operating expenses

tenant’s proportionate share of any increases in operating expenses and taxes over a “base year,” which normally is the current or prior calendar year or tax year. Typically, these leases include mechanisms to increase the operating expenses during the term of the lease. The rationale behind operating expense escalations is to protect the landlord’s profit margin. Thus, by allowing the landlord to recover typical inflationary cost increases in building services, the tenants share, on a pro-rata basis, increases in the operating costs of the building. Operating expense escalations in leases for NYC office space are commonly calculated in accordance with one of the following mechanisms: (i) direct operating expenses, (ii) the Consumer Price Index, or (iii) the Porter’s Wage.

Direct Operating Expenses Sometimes also called the direct expense passthrough, this is the most straightforward method of calculating escalations. It is also usually the least expensive and the most favorable method from a tenant’s perspective. Under this approach, when a property’s operating expenses increase, the tenant is charged for its proportionate share of the increase based on the ratio of the tenant’s leased square footage to the total square footage of the building. For example, if the tenant leases 25,000 square feet in an office space with a total square footage of 100,000 square feet, its proportionate share would be 25%. Thus, if the operating expenses of a building rise by US$ 100,000 over the base year, the tenant would be responsible for paying US$ 25,000. When using this method, the landlord typically will invoice the tenant monthly for its proportionate share based on the prior year’s actual operating expenses or on the landlord’s estimate of the building operating expenses for the current year. At year’s end, the landlord will provide the tenant with a reconciliation of the actual operating costs versus what the tenant was billed. The tenant will be asked to pay any shortage within a certain amount of time or will receive a reimbursement or rent offset for any overpayments. In negotiating a lease, the tenant’s attorney should attempt to exclude from the definition of operating

NEW YORK

expenses various landlord costs that are not typically included in the pass-through. For instance, a tenant should not be required to pay a proportionate share of the landlord’s costs for leasing commissions paid, managing agent fees in excess of the then customary charges, executive salaries above the grade of building manager, reimbursed or reimbursable costs and hazardous waste removal, to name a few. One should also be aware of the most customary method for limiting costs associated with capital expenditures. If capital expenditures were not so limited, a landlord could renovate the entire building and pass along the costs to the tenants, including a tenant who has less than a year left on the term of its lease. Therefore, as a general matter, capital expenditures are not included in operating expenses unless they are required by law, in which event, the costs should be amortized over the useful life of the expenditure. Thus, if a landlord has expenditures of US$ 1,000,000.00 for capital improvements that are permitted to be included as operating expenses, the expense would be amortized over 10 years and the tenant would be required to pay its proportionate share for each year remaining on the term of its lease.

In the New York City office market, the majority of leases are “modified gross” leases, under which the tenant is responsible for paying base rent, electricity, and the tenant’s proportionate share of any increases in operating expenses and taxes over a “base year”

Porter’s Wage A third common approach for calculating operating expense escalations in NYC is the Porter’s Wage, which is a method unique to NYC’s real estate market. Porter’s Wage escalations adjust rent by reference to the increase in hourly wage for union porters and cleaners as negotiated every three years under their collective bargaining agreement. Usually, a Porter’s Wage escalation clause will require an increase of one cent per square foot for each onecent increase in the porter’s wage (i.e. a “penny-forpenny” increase), with the base year typically being the Porter’s Wage index in effect during the first year of a lease. Thus, if the Porter’s Wage increases by US$ 2 per hour over the base year wage, the rent will go up by US$ 2 per square foot. However, it is sometimes possible to negotiate for a lesser Porter’s Wage increase, for example, 3/4 of a cent for each cent increase. Salans was recently able to achieve such a reduction in a substantial lease the firm negotiated for a large international financial institution. Calculating rent increases using the Porter’s Wage is not necessarily detrimental to tenants, particularly in times of low wage inflation, but can have the opposite effect if wages are increasing at a rate in excess of actual building operating costs. This is particularly true if the Porter’s Wage formula includes fringe benefits (i.e. pensions, medical benefits, seniority bonuses, overtime, scheduled hours versus worked hours, etc.). Accordingly, tenants’ attorneys should seek to eliminate fringe benefits when negotiating leases utilizing the Porter’s Wage for rent increases.

A tenant should also realize that, in preparing its escalation statements, the landlord may seek to pass through operating expenses that conflict with the provisions of the lease. Therefore, a tenant should always reserve the right to audit escalation statements in the lease and should utilize such right to confirm that the operating expense escalation amounts billed by the landlord are consistent with the terms of the lease. In a smaller lease, the landlord may seek to avoid negotiations regarding building operating expenses and disputes over escalation statements by using an index formula, such as the Consumer Price Index, or by pegging rent escalation to increases in the Porter’s Wage. As an added benefit to the landlord, these alternative approaches have generally yielded greater rental increases than the building operating expense method.

Which Method to Use?

Consumer Price Index Under the second approach, instead of calculating increases in operating expenses over a base year, the landlord will require percentage increases in the base rent, usually on a compounding basis, over the term of the lease. Although sometimes the percentage is fixed (i.e. 2-3% per year), often it is pegged to a variable rate, the most popular being the Consumer Price Index (CPI). The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI is calculated using the costs of services as well as the cost of products. In this regard, as the price of services tends to rise faster than prices overall, the CPI is more responsive to swings in inflation, and thus the CPI tends to increase faster than operating expenses in an inflationary environment. One method for tenants to protect themselves against excessive escalation of rent due to CPI increases is to negotiate for a cap on each year’s

CPI increase or to provide that only a percentage of the increase (i.e. 50% or 75%) is to be recognized when calculating rent increases under the lease.

Operating expense escalations in leases for New York City office space are commonly calculated in accordance with one of the following mechanisms: (i) direct operating expenses, (ii) the Consumer Price Index; or (iii) the Porter’s Wage

Typically the direct operating expenses approach to calculating escalations is the most beneficial and fair for tenants (provided the provisions have been properly negotiated), but this does not mean that, under the right circumstances, the CPI or the Porter’s Wage method may not be a good choice, particularly if limited as discussed above. Tenants and landlords need to consider a variety of factors, including market conditions, the size and length of the lease, and their own specific needs and objectives when determining which method of calculating escalations would ultimately be most advantageous. However, in the final analysis, the landlord will generally adopt one method and apply it uniformly to its building. Therefore, it is up to the tenant to negotiate appropriate protections in the context of the method proposed by the landlord in the lease.

Peter Figdor, Of Counsel Jody Saltzman, Counsel Vasiliki Yiannoulis, Associate 79

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Corporate Governance in China Organisations with proper corporate governance have accountability and transparency. The people in authority know that their actions will be noticed and judged by others and, therefore, they are more likely to act in ways that benefit the organisation’s stakeholders rather than themselves personally.

Unfortunately, companies in China have a reputation of foregoing transparency, with reports regularly circulating about misuse of shareholder funds and disputes between partners only serving to reinforce this image. This is not only true for domestic Chinese enterprises but also foreign invested enterprises.

The general shareholders’ meeting has final say over the key issues of the company

This has led to many Chinese companies finding themselves with business frameworks incompatible with international practices. Investments in China often increase foreign investors’ risk profile. Risk management is of increasing concern to boards and management alike of foreign companies conducting business in China. Good corporate governance, risk management and effective compliance programs help to mitigate risks in the Chinese business environment. At Salans, we can provide a tailor-made approach that best suits the individual characteristics of each company, all the while developing and improving our own approach as the legal infrastructure in China matures on a yearly basis. Effective corporate governance is one key element in this regard.

an Equity Joint Venture (EJV), a Cooperative Joint Venture (CJV), or in exceptional cases, a Foreign Invested Partnership Enterprise (FIPE). 80

The legal framework for corporate governance in China has taken shape at a rapid pace over the past two decades. The key legal framework for corporate governance in China consists of the Company Law originally promulgated in December 1993 and the Code of Corporate Governance for Listed Companies (CCGLC) issued by the China Securities Regulatory Commission and State Economic and Trade Commission in January 2001. This overview focuses on the corporate governance of an LLC which is the most commonly used legal vehicle by foreign investors. According to the Company Law, there are four tiers of control over a company’s operations: the shareholders’ general meeting, the board of directors, the board of supervisors and the management team. a) The Shareholders

a) Legal Formats

a Wholly Foreign Owned Enterprise (WFOE),

b) Legal Framework

Corporate Governance Structure

Different Legal Formats & Current Legal Framework There exist a number of possible different legal formats when setting up a company in China. The most common of these would be the Limited Liability Company (LLC), which forms a separate and distinct legal entity. Most LLCs with some sort of foreign influence consist of Foreign Invested Enterprises (FIE); this refers to Chinese entities with at least 25% foreign investment. FIEs are permitted to conduct business activities in accordance with the scope of their business as approved by the government authorities. Most FIEs take one of the following forms:

The other two main legal formats are the Stock Corporation and the Partnership Enterprise. Herein we will focus on corporate governance for LLCs.

Supervisors hold a watchdog position whose primary function is to detect and prevent directors and managers from violating the law

The general shareholders’ meeting has final say over the key issues of the company, such as approval of the management strategy, the financial budget and key investment plans, and the nomination of the boards of directors and supervisors. In the general meeting, the shareholders decide on the business direction and investment plans for the company, in addition to amending the articles of association of the company when deemed necessary. In general, their role is to review and approve the decisions made by the board of directors. b) The Board of Directors The board of directors represents the decisionmaking authority, with the chairman usually in control. In order for a board of directors to play their role in the running of a company effectively, especially with regard to keeping the corporate governance structure intact, they should hold the following duties and powers:

CHINA

Power to convene the shareholders’ meetings and report to the board of shareholders; Power to execute the resolutions passed by the board of shareholders; Final decision-maker with regard to business plans and investment schemes of the company;

The board of directors represents the decision-making authority, with the chairman usually in control

Ability to formulate the annual financial budget and accounting plan; Ability to formulate the profit distribution and loss recovery plans; Ability to formulate the plan for increase or reduction of registered capital and issuance of corporate bonds;

Fiduciary Duties and Liability The Code on Corporate Governance and the Company Law both explicitly underline the duty of loyalty and diligence that directors owe to the shareholders. If a director violates the law, a regulation or the company’s by-laws, as such jeopardising the shareholders’ interest, shareholders can sue the director in court and ask for compensation (Article 153 of the Company Law). With the amended Company Law in 2005, the concept of “duty of care” and “fiduciary duties” came into legal form, aimed at directors, supervisors and senior management. Article 148 of the Company Law provides that both directors and supervisors must comply with all laws, administrative regulations and the company’s articles of association, as well as uphold the “obligations of fidelity and diligence” to the company. Basically, this means that they cannot obtain unlawful earnings by taking advantage of their position or by infringing company property. These fiduciary principles are alternatives to more specific regulatory monitoring. They also shift from criminal and administrative penalties to the private enforcement model that can be found in countries such as the United States, the United Kingdom or Germany (Section 93 Para 1 AktG).

Power to formulate the plan for a merger, division, dissolution or change of company structure; Decision-maker on the set-up of internal management organisation; Decision-maker on the appointment or dismissal of company managers and deputy managers, as well as their remuneration; Power to formulate the basic management system of the company. This list does not purport to be comprehensive, as other duties and powers may be stipulated in the Articles of Association of the company.

Methods for Reducing and Avoiding Liability As a director or manager in China, in order to enhance the internal risk management of a company, we would advise the following:

c) The Board of Supervisors The board of supervisors (in small companies it can be replaced by one or two supervisors) holds the roles, amongst others, of inspecting the company finances, supervising the performance of directors and senior management, and making proposals at shareholders’ meetings. Basically, supervisors hold a watchdog position whose primary function is to detect and prevent directors and managers from violating the law. Apart from the provisions of the Company Law there is not much guidance as to how a supervisor should execute his duties. Many supervisors and supervisory boards are not yet active organs. Some foreign invested companies use the supervisory function to install a compliance supervision function in the company.

that the risk profile be understood comprehensively at all levels; performing regular risk audits; establishing a risk management system; gaining directors & officers insurance that covers negligence (although not gross negligence or intentional acts); and making sure that indemnification is defined in the articles of association and in the employment contracts of each manager.

d) Senior Managers Under Company Law, senior managers in an LLC include the general manager, deputy manager, chief financial officer and any other persons listed as such in the articles of association. Registration of the general manager is mandatory. Unless otherwise provided for in the articles of association, senior managers are appointed by the board of directors. The main role of the general manager and the other senior managers is to implement the board of directors’ resolutions and to ensure the running of the company’s daily business operations. In order to prevent the general manager from gaining too much power, it is best to define the scope of his authority

clearly in the company’s articles of association and management rules which can be adjusted from time to time.

Dr. Bernd-Uwe Stucken, Managing Partner

It is best to clearly define the scope of general manager’s authority in the company’s articles of association and management rules 81

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Recent Legal Amendments for the Benefit of Purchasers of Uncompleted Residential Properties in Singapore The Housing Developers (Control & Licensing) Act (Chapter 130) of Singapore (“HDCLA”) and the Housing Developers Rules (“HDR”) promulgated thereunder regulate housing developers and the sale of uncompleted residential properties in Singapore. The HDCLA and HDR apply to developments with more than 4 units of housing accommodation and are administered by the Controller of Housing (“Controller”). Recent amendments were made to the HDR by virtue of the Housing Developers (Amendment) Rules 2012. These amendments came into effect on 18 May 2012 and introduced, inter alia, a requirement for developers to provide certain information to intending purchasers before accepting a booking fee as well as certain changes to advertising requirements that developers would have to comply with. The amendments and proposed amendments summarised in this article are applicable to the sale of uncompleted condominium units in Singapore. Foreigners are allowed to buy such units.

Information to be Provided to Purchasers Before Accepting Booking Fee Under the amended HDR, a developer is required to provide more detailed information on the property to an intending purchaser before the acceptance of the booking fee and issuance of the option to purchase to the intending purchaser. The information required to be provided includes: (i) address of the property; (ii) estimated total floor area of the property; (iii) the description of all floor spaces for different uses (like bedrooms, living and dining areas, kitchen, utility room, household shelter, etc.) and other spaces included as part of the property as well as their respective areas comprised in the estimated total floor area; (iv) specifications of the building (such as materials and finishes in relation to walls, floors, doors and windows); (v) location plan of the housing project, which must be drawn to scale, showing the location of housing project, names of streets nearby and prominent buildings, and facilities and other features in the vicinity within a radius of 500 m of the housing project;

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Under the amended HDR, a developer is required to provide more detailed information on the property to an intending purchaser before the acceptance of the booking fee and issuance of the option to purchase to the intending purchaser

GUEST CONTRIBUTION – SINGAPORE

(vi) site plan of the housing project, which must be drawn to scale, showing the approved buildings in the housing project and where applicable, communal facilities such as guard house, bin centre, electrical sub-station, car park, car parking lots, recreational facilities, and vehicular entrance and exit to the housing project or car park; (vii) floor plan of the property, which must be drawn to scale, showing individual rooms, spaces and features constituting the strata area of the property, such as bedroom, living/dining area/kitchen, bathroom/toilet, utility room or area, household shelter, balcony, bay window, private enclosed space, roof terrace, planter box, air-conditioner ledge and void area; (viii) a copy of all amendments, deletions and alterations to the prescribed sale and purchase agreement as approved by the Controller. (Under the provisions of the HDR, developers must use prescribed forms of option to purchase and sale and purchase agreement in the sale of uncompleted residential property to purchasers. Any amendments, deletions or alterations to the prescribed forms must be approved by the Controller.); (ix) conditions, restrictions and requirements, if any, imposed by the relevant competent authorities which may affect the liabilities of or which are intended to be complied with and observed by owners or residents of the property and other units of the housing project after its completion; (x) where the number of car parking spaces to be provided in the housing project is less than the number of units in the housing project – (a) the number of housing units in the housing project; (b) the number of car parking spaces in the housing project; and (xi) track record of the developer stating whether the developer or its related corporation has carried out and completed any housing or other development project in Singapore.

It is hoped that the amendments to the HDR and proposed amendments to HDCLA will enable purchasers/investors to make better informed decisions when buying non complete residential units

Advertisements Under the amended HDR, the definition of “advertisement” has been expanded to include advertisements on websites. The effect of this is that developers must ensure that advertisements in respect of housing projects on websites do not contain any false or misleading information and that any such advertisement must include the following particulars: (i) the name and licence number of developer; (ii) tenure of the land and encumbrances, if any, to which the land is subject; (iii) the expected date that purchasers can take vacant possession of the property; (iv) the expected date when legal title of the property will be conveyed to purchasers; and (v) the location of the housing project.

Proposed Amendments to the HDCLA The Controller has also announced that it is finalising certain amendments to the HDCLA which are expected to be implemented in the second half of 2012. The proposed amendments include requirements: (i) for show flats to depict the actual units accurately; and (ii) for developers to publish transacted prices on a weekly basis. It is hoped that the amendments to the HDR and proposed amendments to HDCLA will enable purchasers/investors to make better informed decisions when buying non complete residential units. Note: This article is for general information only and does not constitute legal advice. Please seek specific legal advice before acting on the contents set out herein. Tan Teck Howe, Partner Wong Partnership LLP, One George Street, #20-01 Singapore 049145, T dir: +65 6416 8013 T: +65 6416 8000, F: +65 6532 5711 83

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Recent Legal Developments in the Real Estate Sector The recession of the global markets has also affected the Indian economy. Thus, post 2011 the Indian economy has not grown at the pace at which it was expected in view of the slowdown of the global market, in particular the European market. Another cause for concern is the fall of the rupee to an all-time low of around INR 55.83 to the US $.

The current scenario, along with the policy paralysis in the Government, has affected India’s economic growth,which also includes the Real Estate Sector under the Infrastructure category. However, the present budget does provide some respite to the Real Estate Sector. One of the disappointments is the exclusion of the Real Estate Sector from the “Industry” category, due to which the real estate sector could not avail of the benefits extended to the industries. The Real Estate sector plays an important part in India’s economy. India’s GDP has been around 6.9% in 2011-12 after having grown at the rate of 8.4% in each of the two preceding years. For the year 201213 the GDP is expected to be approximately 7.6%. Despite the lack of adequate infrastructure and the lack of political will to bring in economic reforms, real estate in India is the second largest sector after the agriculture sector and is expected to grow at a rate of 30% p.a. involving an investment opportunity of over USD 75 billion over the next 5 years (as per the Associated Chambers of Commerce and Industry of India).

The recession of the global markets has also affected the Indian economy and thus, post 2011, the Indian economy has not grown at the pace at which it was expected in view of the slowdown of the global market, in particular the European market

Foreign Direct Investment in Real Estate The Reserve Bank of India (RBI) has attracted foreign investors in real estate in India by adopting a relaxed and investor friendly policy allowing foreigners to own property in India. RBI has permitted Foreign Direct Investment (FDI) up to 100% under the automatic route for townships, housing, built-up infrastructure and construction development projects (which include, but are not be restricted to, housing, commercial hotels, resort hospitals, educational institutions, recreational facilities, city and regional level infrastructure) subject to certain conditions.

The Effect of the 2012-13 Budget in the Real Estate Sector The union budget for 2012-13 has been a balanced budget with respect to business sectors in general. The fiscal deficit of 5.9% GDP in the year 2011-12, instead of the estimated 4.6%, is one of the major factors for such a budget. Certain changes have been proposed in the real estate market to boost one of the key pillars of the Indian economy providing 6.5% of the GDP. Exemptions have been provided

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Developers today are facing a cash crunch in the domestic market as the prices of real estate are soaring

from service tax on affordable cost mass housing and from import duties which were levied on certain equipment, required for various construction purposes. External Commercial Borrowing (ECB) and extension of interest subvention has been granted with regard to low cost housing. Moreover, the increased scope of private sector participation in infrastructure demonstrates the clear intent to enhance urbanisation.

Path Cleared for External Commercial Borrowing The budget has also taken steps to allow ECB for affordable housing, which would help the real estate sector to tap long term funds and help increase the liquidity in the sector. Developers today face a cash crunch in the domestic market as prices of real estate are soaring. Thus, the initiative of ECB would help developers to look for investments from outside the domestic market at substantially lower interest rates. However, allowing ECB for affordable housing would have only a cosmetic effect as the definition of affordable housing given by the Government does not consider space starved cities like Mumbai, Bangalore, etc. The Government’s initiative to withhold tax on ECB’s for affordable housing from 20% to 5% for 3 years in order to ease the liquidity is also a welcome move. Further, investment linked deductions available for low cost affordable housing projects have been increased from 100% to 150%. This amendment may provide a much needed incentive to the affordable housing segment through a higher rate of deduction on capital expenditure though the cost of land will be excluded. The 201213 budget also extends the 1% interest subvention scheme for affordable housing which shows the Government’s intention to achieve its goal of affordable housing.

Investment Through Venture Capital Funds In order to streamline the investments through Venture Capital Funds (VCF), the Securities and Exchange Board of India (SEBI) has formulated market regulatory norms for Alternate Investment Funds (AIF) thereby repealing the old VCF regulations of 1996. These norms are also likely to

GUEST CONTRIBUTION – INDIA

affect real estate fund managers forcing them to adopt new ways to attract investors. As per the new norms, a VCF should have a corpus of minimum Rs.20 crores, and the minimum investors should not be more than 1000. The minimum investment threshold has been increased from Rs.5 lacs to Rs.1 crore with tenure of 3 years. The VCF sponsors are required to have a minimum of 2.5% of the corpus or Rs.5 crores. VCF also cannot invest in a single firm over 25%.

Postponement of GAAR to Boost Investments The Government also plans to implement the proposed General Anti-Avoidance Rule (GAAR) which was initially introduced in the current Budget but was deferred by a year. GAAR vests great powers with the revenue authorities ostensibly to keep a check on domestic and foreign tax evaders.

It is estimated that around Rs.4,00,000 crore investment would be required over the next five years and another US$ 1 trillion would be required to be spent on infrastructure

State Legislation

In 2011, the National Manufacturing Policy proposed granting exemption to Small and Medium Enterprises (SMEs) from capital gains tax, which has now been approved by the Finance Ministry’s Revenue Department. It has been proposed to bring this principle into practice by exempting tax on capital gains on the sale of residential property where the sale proceeds are invested in equity of a manufacturing SME Company for the purchase of new plant and machinery. Further, the turnover limit for compulsory tax audit of accounts and presumptive taxation is proposed to be raised from Rs.60 lacs to Rs.1 crore.

The Real Estate Sector comes under the ambit of the State. The State has the power to legislate and also make Rules and Regulations with regard to the properties and construction of housing and new townships in their states. States such as Gujarat, Maharashtra and Delhi have seen more foreign investment with regard to the real estate sector. Cities like Bangalore in Karnataka and Pune in Maharashtra have been getting special attention from foreign investors with regard to investment in the Commercial Real Estate Sector. The Government of Maharashtra has recently taken various steps to boost the housing and commercial real estate sector in the state. The State Government has recently amended the Development Control Regulations (DCR) in order to speed up projects that had been lying in a state of paralysis. These changes would help to create more liquidity and make way for new investments with projects completed on time.

Real Estate Law in the Offering It is estimated that there is a shortfall of around 40 million residential units in India. This means that India would require huge investments and infrastructure development to face this deficit. It is estimated that around Rs.4 million crore investment will be required over the next five years and another US $1 trillion will need to be spent on infrastructure. To keep a check on corruption and ease the flow of investments in the Real Estate Sector, the Central and the State Governments propose various new bills which would further strengthen the flow of investment in the Real Estate Sector.

The Land Title Bill is another land mark move towards making the title clearance procedure simple and unambiguous. This bill seeks to do away with presumptive title, and it attempts to determine the title of a property in a more transparent manner.

The 2011 Coastal Regulation Zone (CRZ) notification is a positive move to open up new development potential for the Real Estate Sector across the country as the Floor Space Index (FSI) has been increased from 1.33 to 2.55 and it now allows development of slums. Projects under CRZ would come under the ambit of the RTI (i.e. the Right to Information Act, 2005). These CRZ slum projects can only be undertaken through companies which have a government stake of 51% or more. The Ministry of Environment and Forests will have the right to appoint statutory auditors. The projects related to the Slum Rehabilitation Scheme will only be audited by the Comptroller and Auditor General. Pursuant to the aforesaid incentives, Various State Governments have also commenced with planning for coastal road projects, which is likely to grab the attention of many foreign investors.

Tax Exemptions for SMEs

The new Real Estate Regulatory Bill, which is scheduled to be tabled soon in the Parliament, aims to command certain public disclosure norms; establish a level playing field; and require compulsory registration by the developers before launching housing projects. This bill also aims to bring in more accountability and transparency in land and home transactions. This proposed bill also recommends that developers would have to set up a separate escrow account wherein 70% of the funds received from buyers would be deposited.

Coastal Regulation Zone

Another bold initiative taken by the State Government is to introduce the Maharashtra Housing Regulatory Development Bill. It aims to create a Regulatory Authority which will include an Appellate Tribunal and bring in more transparency in the process of housing construction in the State. The bill directs developers to make full disclosure of their housing projects, register themselves with the authority, and display details on the website of the Housing Regulatory Authority.

Conclusion

The Real Estate Sector in India is presently on the brink of change – it is transforming itself into an organised, investorfriendly sector from its earlier avatar

The Real Estate Sector in India is presently on the brink of change. It is transforming itself into an organised, investor-friendly sector from its earlier avatar. Consequently, there is a re-rating of the sector components. Aziza Khatri, Partner Mohit Advani, Paralegal Hariani & Co., Advocates & Solicitors 1st Floor, 10, Bruce Street, Homi Mody Street, Fort, Mumbai 400 001, India T: +91 22 2278 0600 F: +91 22 2204 6823 85

Salans Global Real Estate Group

“Dazzling...”

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GUEST CONTRIBUTION – VIETNAM

Vietnam’s Young Real Estate Sector Takes Off In 2007, Vietnam’s relatively young real estate sector experienced an economic boom as a result of new government policies supporting foreign investments, an increase in domestic demand and spending power, and an increase in foreign demand and foreign investments.

Vietnam’s membership in the World Trade Organisation (WTO) in 2007 required the country to increase its efforts to open its markets to foreign investors. Within the same year, foreign direct investment (FDI) doubled to US$ 20.5 billion. By 2008, that number increased to US$ 57.2 billion. Vietnam during this time also enjoyed an economic growth and a stock market boom. A property craze ensued, with prices on residential condos tripling within a matter of a year. In Ho Chi Minh City and Hanoi, office rental prices reached an all record high. The country’s hotel market was also increasing, with room occupancy remaining at almost 100%. In addition, Vietnam was ranked third in the world for retail development.

Vietnam’s Young Real Estate Sector Experiences Growing Pains Less than a year later, Vietnam’s real estate sector plummeted. The country suffered an economic downturn, a dreary stock market and high inflation (19% in 2008 compared to 12% in 2007). Vietnam’s real estate sector has limited means of raising capital and relies on bank loans. When the global financial crisis struck at the end of 2008, banks tightened credits causing a shortage of funds, and the high interest rates prevented potential buyers from obtaining property. As of 2012, experts and insiders believe that the real estate sector is on the road to recovery based on the banks’ and the Vietnamese government’s response. There have been tighter legislations on gold trading and a decrease in bank deposit rates; thus, redirecting the capital flows to the stock and property markets. Banks, such as Bank for Investment and Development of Vietnam (BIDV), have also lent a helping hand through credit support packages. BIDV’s credit support packages allowed potential buyers (up to VND4,000 billion) to obtain houses in projects financed by BIDV, at a lower interest rate (16%), and loan limit up to 85% of the house’s value. The Vietnamese government also made significant steps in response to the real estate crisis. In February, the State Bank of Vietnam issued a directive with the goal of loosening mortgage loans, granting loans to projects completed after 2012, and withdrawing mortgage loans from discouraged one. More importantly, the government allowed a reduction of

As of 2012, experts and insiders believe that the real estate sector in Vietnam is on the road to recovery based on the banks’ and the Vietnamese government’s response

VAT, corporate income tax, land rent tax and land use tax, and exemption of overdue loan fees.

The Silver Lining for Foreign Investors Can Be Found Through M&A in Real Estate Many are calling for foreign investment to inject much needed capital into the country’s real estate sector. Foreign developers and investors that have remained idle over the past year are tentatively re-entering the real estate via M&As. Dr. Nguyen Ba An, Deputy Director of Institute for Development Strategy (under Ministry of Planning and Investment) also observed and noted that “This moment is the best one for those who have money to invest because the real estate market is coming back to real value, virtual values are being eroded away.” Quiet market and declined prices are the very opportunity if investors manage to catch them. Especially for investors with long term capital, they can take the chance of abundant supply and buy houses at cheap prices, and then wait for opportunities to sell later. Now is the time for foreign investors to obtain land projects at bargain prices. Domestic companies and investors from Asia, such as Singapore and South Korea, are already ahead of the game. Recently, Hanoi Electronics Corporation (Hanel) acquired a 70% stake in a company owned by South Korea’s Daewoo Group that manages a 5-star hotel, office and apartment complex in Hanoi City. CT Group acquired a 200-hectar golf course project in Ho Chi Minh City from South Korea’s GS Engineering & Construction Company for US $24 million which originally cost US $42.6 million to develop. In 2011, Singapore’s CapitaLand took over three real estate projects and the Ascott, a subsidiary of CapitaLand, also bought a 90% stake in Somerset Central TD Haiphong.

Challenges for Foreign Investors in M&A Transactions and Investment in Real Estate Business Vietnam’s legal system is still evolving and in the process of development. Since Vietnam acceded to the WTO in 2007, foreign investors have had more opportunities than ever to engage in merger & acquisition activities (“M&A”) in Vietnam. On the other hand, the laws, procedures and policies for M&A have become more confusing, complex and 87

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dynamic, as the Government is struggling to balance its interests in complying with the WTO Schedule and in effectively managing foreign investment. It is expected that there will be more M&A transactions among property projects this year in order to boost available capital for the projects. Real estate industry experts such as Savills and CBRE observed that the Government’s solutions in the legal and financial systems should be synchronized. The regulatory framework for investment, planning, project approval and land-related procedures on real estate investment projects still need further improvement. There are often delays associated with licensing of projects because too many ministries are involved and the licensing may take years, in extreme cases. Land in Vietnam is considered public property. Thus, no person has the right to ‘own land’ in the sense of a freehold but the right to ‘use’ land may be obtained in several ways:

Now is the time for foreign investors to obtain land projects at bargain prices. Domestic companies and investors from Asia, such as Singapore and South Korea, are already ahead of the game

There have been some suggestions with respect to current land regulations to attract more foreign investment. One important proposal is that foreign investors are permitted to acquire land use rights both by way of land allocation and/or land lease with the same land use term as domestic investors. Currently, domestic investors are entitled to receive stable and long term land use whereas foreigninvested enterprises are generally only granted a land use right with a definite term. Vietnam’s foreign business community also suggests that clearer guidelines are put in place to permit foreign-invested enterprises to acquire alreadydeveloped property for their own use. Currently a foreign investor may only lease out properties if he invests in construction and development of a property project. Under Vietnam’s Law on Real Estate Business (“LREB”), foreign investors are only permitted to engage in the following real estate business activities:

1. by allocation from the government, for a definite or indefinite period;

(a) To invest in the development of houses and buildings for sale, lease and lease-purchase;

2. by lease from the government;

(b) To invest in land improvement and infrastructure works on leased land in order to lease out land with completed infrastructures; and

3. by sub-lease from the developer of an industrial zone or urban zone; 4. by transfer from an existing land user; or 5. by way of capital contribution from an existing land user. The law makes a distinction between types of land user (Vietnamese, overseas Vietnamese or foreigner), which determines the availability of each of the above options and the land use rights. As a result, because foreign investors have not been given the right to buy/sell land use rights (a right given to Vietnamese enterprises), they have two options to land use: 1) direct land rental from the government or 2) capital contribution in land use right from Vietnamese joint venture companies.

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(c) To provide real estate services which include property brokerage, property transaction center, property evaluation, property consultancy, property auction, property advertisement and property management. This means that foreign investors may not acquire a completed building for selling or leasing out or lease a completed building for subleasing. The laws of Vietnam do not provide further guidance in relation to the requirement of “investing in the development” of property. The issue is still evolving and remains uncertain whether a foreign investor could lease an almost completed building for further improvement and then subsequently sublease such building or part of such building to others.

GUEST CONTRIBUTION – VIETNAM

In practice, the licensing authority in Hanoi (in 2009) issued a license to a foreign investor for leasing a nearly completed building for the subleasing business. The objective of this 100% foreign owned company (“FOC”) was to lease incomplete construction floor spaces, complete the complex and subsequently lease out the retail shops, office and apartments. In this case, the 100% FOC was able to register the business activities of (i) real estate business; (ii) operating the business center, office for lease and serviced apartments. In 2010 the Ministry of Construction also issued two opinions where it generally stated that foreign investors must “invest in property development” in order to sublease. Another important suggestion to attract foreign investment and more capital is that foreign investors are permitted to purchase and lease all types of properties such as residential, office space, industrial and commercial. Currently, only foreign organisations and individuals permitted to enter into Vietnam for at least three months may lease residential property in Vietnam. In addition, foreign investors also need to meet certain criteria to be able to purchase and own residential property. For example, a foreign individual with direct investment in Vietnam or hired by an enterprise currently operating in Vietnam and holding a managerial position in that enterprise.

Future of Real Estate Business in Vietnam Notwithstanding the challenges and underdeveloped legal framework, there are still plenty of reasons why Vietnam remains an attractive investment destination. Vietnam’s good demographics including young population, relatively low labour costs, good location in the region, and a stable political market has continued to attract many foreign investors. The growth potential of Vietnam also remains attractive with an average 7% annual GDP growth rate. There is still hope that the market within the next few years will likely see a rising number of deals taking place.

Vietnam’s good demographics including young population, relatively low labour costs, good location in the region, and a stable political market has continued to attract many foreign investors

In order for Vietnam to not lose its market competitiveness and gain further foreign investment, experts have called for more professionalism, transparency, less restrictions on foreign investments, and a more effective legal framework. The Government now realises the need for a stronger legal framework for land and real estate business, and Vietnam’s Land Law is in the process of amendment. The draft of the Law on amendment to Land Law shall be submitted to the National Assembly of Vietnam for deliberation for its next session in October 2012. A stable economic environment, cohesive legal framework and good investment policies are among others key factors to strengthen real estate investment in Vietnam. Hopefully, the regulators will take these factors into account when they deliberate on the amendments to Vietnam’s Land Law.

Tung Ngo, Founding Partner VILAF Kumho Asiana Plaza Saigon, Suite 4.4 39 Le Duan Street Ho Chi Minh City Vietnam T: +84 8 3827 7300 F: +84 8 3827 7303

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FOCUS ON SPAIN

Global Office Contacts

Almaty

135 Abylai Khan Ave. 050000 Almaty Kazakhstan T: +7 727 258 2380 F: +7 727 258 2381 [email protected]

Baku

Eric Rosedale Co-Chairman Global Real Estate [email protected] T: +44 207 429 6000 F: +44 207 429 6001

Hyatt International Centre Hyatt Tower 2 1033 Izmir Street AZ 1065 Baku Azerbaijan T: +994 12 4 90 75 65 F: +994 12 4 97 10 57 [email protected]

Barcelona

Avenida Diagonal, 456 7th Floor 08006 Barcelona Spain T: +34 93 24 13 840 F: +34 93 20 99 193 [email protected]

Berlin

Markgrafenstraße 33 D-10117 Berlin Germany T: +49 30 2 64 73 0 F: +49 30 2 64 73 133 [email protected]

Evan Z. Lazar Co-Chairman Global Real Estate [email protected] T: +420 236 082 250 F: +420 236 082 999

Bratislava

Námestie SNP 15 81106 Bratislava Slovak Republic T: +421 220 660 111 F: +421 220 660 999 [email protected]

Brussels

Rue de la Régence 58 1000 Brussels Belgium T: +32 2 552 29 00 F: +32 2 552 29 10 [email protected]

Bucharest

General C Budisteanu 28-C 010775 Bucharest Romania T: +40 21 312 4950 F: +40 21 312 4951 [email protected]

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Budapest

Westend ‘A’ Tower 5th Floor Váci út 1-3 1062 Budapest Hungary T: +36 1 880 6100 F: +36 1 880 6199 [email protected]

Frankfurt

Platz der Einheit 2 Gebäude Pollux 60327 Frankfurt am Main Germany T: +49 69 45 00 12 0 F: +49 69 45 00 12 133 [email protected]

Istanbul

Bilim Sok. No: 5 Sun Plaza 12th Floor 34398 Maslak, S¸is¸li Istanbul Turkey T: +90 212 329 30 30 F: +90 212 329 30 31 [email protected]

Kyiv

49-A, Volodymyrska Street 01001 Kyiv Ukraine T: +380 44 494 4774 F: +380 44 494 1991 [email protected]

London

Millennium Bridge House 2 Lambeth Hill London EC4V 4AJ United Kingdom T: +44 20 7429 6000 F: +44 20 7429 6001 [email protected]

New York

Rockefeller Centre 620 Fifth Avenue New York, NY 10020-2457 US T: +1 212 632 5500 F: +1 212 632 5555 [email protected]

Madrid

José Ortega y Gasset 29 28006 Madrid Spain T: +34 91 43 63 325 F: +34 91 43 63 329 [email protected]

Moscow

Balchug Plaza Ul. Balchug, 7 115035 Moscow Russian Federation T: +7 495 644 0500 F: +7 495 644 0599 [email protected]

Paris

5, boulevard Malesherbes 75008 Paris France T: +33 1 42 68 48 00 F: +33 1 42 68 15 45 [email protected]

Prague

Platnérˇská 4 110 00 Prague I Czech Republic T:+420 2 3608 2111 F:+420 2 3608 2999 [email protected]

Shanghai

Park Place Office Tower 22nd Floor 1601 Nanjing West Road Shanghai 200040 China T: +86 21 6103 6000 F: +86 21 6103 6011 [email protected]

St. Petersburg

Northern Capital House Moika Embankment, 36 191186 St. Petersburg Russian Federation T: +7 812 325 8444 F: +7 812 325 8454 [email protected]

Warsaw

Rondo ONZ 1 00-124 Warsaw Poland T: +48 22 242 52 52 T: +48 22 242 52 42 [email protected]

Salans Global Network

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www.salans.com 91

Fluent in Real Estate

Representative Transactions in 2011/2012

Almaty

The Blackstone Group EUR 203,000,000

Peakside Capital EUR 600,000,000

Barcelona

Acquisition from Gecina and financing of a portfolio of 26 logistics centres located throughout France, 1 located in Spain and 1 located in Belgium

Acquisition of Allied Irish Bank`s Polish property fund management subsidiary and its interest in two Polonia Property Funds

Berlin

France, Spain, Belgium

Poland, Hungary

Bratislava

AFI Europe

Baku

Brussels Bucharest Budapest

Value Confidential Sale of the Tulipa Vokovice residential project located in Prague to Daramis Group

Natixis Zweigniederlassung Deutschland and ING Bank EUR 190,000,000 Refinancing of the Nova Eventis shopping centre near Leipzig

Czech Republic

Germany

Corpus Sireo Real Estate Value Confidential

Deutsche Pfandbriefbank AG Value Confidential

Sale of approx. 4,700 unit residential portfolio to Degewo AG and Gesobau AG consortium

London

Structure financing for Rockspring/National Pension Service of Korea for the acquisition of the La Abadía retail and leisure scheme located in Toledo

Germany

Spain

Madrid

ORCO Property Group

Globe Trade Centre

Moscow

USD 94,000,000

EUR 173,000,000

Sale of the Radio Free Europe building located in Prague to a subsidiary of the L88 Companies

Sale of the Platinium Business Park located in Warsaw to Allianz Real Estate

Paris

Czech Republic

Poland

Prague

UFG Real Estate

Capital & Continental

Shanghai

USD 47,000,000

Value Confidential

Sale of the Bakhrushina House office building located in Moscow to Sponda

Sale of the Praetorium, a 10,000 sq.m. office building located in Paris to Caisse d’Assurance Vieillesse des Pharmaciens

Russia

France

Frankfurt Istanbul Kyiv

New York

St Petersburg Warsaw

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