Vol. XI No.11
November 2006


Securing Property in Romania

Securing Property in Romania...

“The title to a property is the elemental foundation of ownership; essentially, it is the property owner’s right to possess and use the property.”

With EU accession for Romania scheduled for January 2007, the flow of foreign direct investment into the country will undoubtedly increase. A significant portion of this FDI will involve the purchase of property. The ability to properly and effectively register and formalize these property rights is one of the key requirements of any purchaser of any property. Unfortunately, Romania still has several outstanding issues with regard to registering property rights. The two main issues are that the process of restitution is not over and that the method of registering ownership rights is complicated, time-consuming and operates under two different systems.

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The Romanian Digest Issue No.7, July 2005, details the issues surrounding restitution claims including both reforms made in the laws by the July 2005 adoption of Article 114 of the Romanian Constitution and continuing problems with the resolution of existing restitution claims. To summarize the current situation in Romania:
  • At the national level, there is an understanding that restitution issues must be resolved.
  • The problem is that local governments, which control the land registry systems, have in the past been and continue to be the chief source of delay and obfuscation. There is indication that the national government intends to rectify this – fining mayors for instance - but this is not yet completely resolved.
  • One very positive aspect is that all claims for potential restitution should now have been filed (by Nov. 30, 2005). The bad news is that there are a lot of them -- 750,000 unresolved at the end of 2005 (according to the national authority for property restitution (ANRP) as quoted in the 2005 Country Report on Human Rights Practices in Romania).

Much has improved in the last year since revised laws were implemented in July 2005. Nonetheless, the story of restitution in Romania has been one of confusion and complication, missing records and extra funds to “grease” the way. These times are not completely over. Essentially these issues make it incumbent upon a buyer to spend significant effort to understand the complete status of a property. It is not enough to have confidence in who owns the property now, it is important to trace back the ownership history of the property. The current government understands that this must be resolved to encourage much needed development of the economy.

Restitution claims and related litigation is one major issue with the purchase of property; another is how property is transferred. Romania confusingly has two different systems and both involve multiple offices in different locations. These two simple facts without any other description give an indication that there could be issues with purchasing property besides restitution claims.

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Land Registry in Romania
Due to historical differences, there are two registration systems in Romania. In Transylvania, that is north-western Romania, registration traces its routes to the Austro-Hungarian Empire. It registers interests of parties including mortgages and easements by an address "land registry" system. The system is virtually the same as in today’s Hungary, with the crucial difference that unlike Hungary - which has an electronic land registry - individuals have to go to the land registry in person and request a manual extract.

The southern and eastern parts of Romania operate under the so-called "inscription-transcription" system that traces its routes to the Ottoman Empire. The 1996 law On Cadastre and Real Estate Publicity, the primary legal act dealing with land registration, contemplates use of the land registry system throughout Romania, and outlines the procedure for switching over from the inscription-transcription system. Rights under the inscription-transcription system, however, are protected under this law until each particular jurisdiction is ready to make the change. (Ultimately, there will be 170 land registry offices, under each of the 170 local court offices.) These offices and systems should be aiming to work by 2007 with EU accession and integration with EU laws, but is unclear whether all offices will be able to achieve this.

A potential problem is that the land registry offices have little capacity to gather information. They rely on the local units of the National Office of Cadastre, Geodesy, and Cartography for all information upon which registration decisions are made. Unless these cadastre units are exceptionally responsive to requests from the land registry offices, the registry offices may not be able to carry out registration activities in a timely manner. Unfortunately, these local cadastre units are required to accomplish a myriad of activities, and thus it is entirely possible that their most important task, that is supplying information to protect legal rights, does not receive the required attention and resources.

The steps required to register the new owner of a commercial property number 7 with a minimum timeframe of 35 days and a maximum of 70. This includes visits to the local Land Registry office, the local or authorized representative of the National Cadastre office, the local fiscal authority, the local tax office, and notary publics.

Between the different types of land registry systems, the number of steps required, the number of offices required, the bureaucracy of one local office relying on another, eventual implementation of new systems (n the parts of Romania operating under the system slated for replacement), the potential for problems in registering property are not difficult to anticipate.

How can a property buyer mitigate these risks? One important way is the due diligence conducted by an experienced lawyer. At the least this identifies potential issues surrounding restitution; at the best it shows a clear line of property ownership with no issues in the chain of ownership. Another way to limit any risk is to insure against it. Title insurance is a method of covering the risk of the transfer and ownership of property.

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Mitigate the Risk
For any bank lending money to a new venture or for an investor acquiring or building a factory the most important need for the investor is to protect his capital investment. The investor needs to know that he is buying what he thinks he is buying. Naturally any new investor will retain competent and experienced lawyers to research the ownership chain, but how can they protect themselves against problems identified in a due diligence report such as a pending restitution claim or a defective tender process in an earlier conveyance?

Lawyers often seek representations and warranties from vendors of real estate but often in Central and Eastern Europe the entities selling the real estate do not have any real substance to back the warranty or representation. Another solution could be a hold back from the purchase price, but this method is not common with CEE vendors as they often want the monies immediately and there tends to be some other company waiting in the wings who might have a stronger appetite for the identified risk.

Another answer could be title insurance. Title insurance not only insures that the correct parties have title to the real estate, but also covers against loss from defective titles, liens, encumbrances and even fraud. Should a problem arise with the title, the insurer will defend the insured’s interest. If a title defect voids the insured’s interest in the title, the insurer is liable to pay damages or loss caused by the title defect or take steps to correct the problem.

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Title Insurance Explained
Investing in real estate can be a profitable venture. However, certain risks exist that can frustrate any planned transactions. Title insurance is a common solution to mitigate this risk and close real estate transactions that would otherwise be impossible.

Quick Facts:
  • Title insurance has been available since the mid-1800’s and has grown into a standard product for over 90% of the real estate transactions closed in US.
  • The use of title insurance is growing in Europe with the UK leading the way.
  • Many lenders, investors, and developers demand title insurance for all their projects.
  • Title insurance policies have been sold be several different companies in all countries of CEE since 2004.

What is Title Insurance?
Title insurance not only insures that the correct parties have title to the real estate, but also covers against loss from defective titles, liens, and encumbrances. Title insurance differs from other types of insurance (such as property and casualty insurance) in one major way. While both types of insurance policies protect the value of the property (by insuring different risks), title insurance protects against defects and risks that originated in the past, while property and casualty insurance protects against future events. Typically, title insurance companies issue two types of insurance policies: (1) Owner’s Policy – one that insures the owner or borrower and (2) Lender’s Policy – one that insures the party holding a security over the real estate. These policies can be issued separately or jointly depending on the transaction.

What are Title Risks?
A title insurance policy typically covers the following risks that may cause loss of title or create an encumbrance on the title:

  • Restitution Claims (not uncommon in Central and Eastern Europe. It is estimated that there were 750,000 unresolved claims in Romania at the end of 2005);
  • Defective compliance with Government conveyance laws;
  • Gap periods to register interests within the Land and Mortgage Registers;
  • Perpetual Usufruct issues;
  • Adverse Possession matter (the most popular cause of action filed in Polish courts in 2005);
  • Defective Construction Permits;
  • False impersonation of the true owner of the property;
  • Lack of access;
  • Forged deeds, releases or wills;
  • Undisclosed or missing heirs;
  • Instruments executed under invalid or expired power of attorney;
  • Mistakes in recording legal documents;
  • Misinterpretations of wills;
  • Deeds by persons of unsound mind;
  • Deeds by minors;
  • Deeds by persons supposedly single, but in fact married;
  • Liens for unpaid estate, inheritance, income or gift taxes;
  • Fraud;
  • Incorrect tender process

What are the Benefits of Title Insurance?
The benefits of title insurance are varied and wide in scope, but mainly provide increased protection, transparency, efficiency and liquidity to the real-estate market and to the insured. Typically, polices can protect the following parties;

The Lender (or Investor): The overwhelming majority of mortgage loans made in the globalised financial world are made by persons who are acting in a fiduciary capacity - by savings and loan associations, savings banks, and commercial banks on behalf of their depositors, and by life insurance companies on behalf of their policyholders. Because they are lending other people's money (other people's savings or policyholder's funds) these lenders must be concerned with the safety of their mortgage investments.
Lenders and investors generally will not enter into any real estate transaction if a title problem is suspected. Title insurance provides the insured (lender or investor) with a very high degree of protection against the loss of security as a result of a title problem. For a one-time premium, this protection remains in effect for as long as the mortgage or security remains unsatisfied. If a title defect voids the title, and the matter cannot be resolved, the policy will pay the full mortgage amount. Especially to the lender, title insurance allows for the more efficient issuance of mortgages increasing lending capability.

The Attorney: Title insurance enables the attorney to provide the client with substantially greater protection than would be afforded by the attorney's opinion alone. The attorney's due diligence opinion is only limited to recorded matters and other items as may be negotiated in the Representations and Warranties of sales contracts. Title insurance effectively removes contentious negotiations concerning the condition of title, and increases the speed of final closings.

The Investor and Developer: By providing various title services and information to the investor or developer, a quality title insurance company can assist in identifying and evaluating building/land use, restrictions, easements, etc., in removing title problems that may arise, and in facilitating prompt and needed disbursement of construction funds from the construction lender. All these services ultimately work for the benefit of the buyers of new developments.

A title insurance policy will also prove valuable in developing an Investment Exit Strategy, as the portfolio rating is inevitably increased with title insurance.

To Everyone Involved: From historical experience, quality title insurance reduces costs for all parties involved, and an experienced insurance company will have the experience and economies of scale that substantially reduces the costs of title due diligence, as well as being able to standardize and simplify the mortgage process for all involved parties.

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Romania is entering into a period of rapid growth in many if not all of its market sectors as a result of joining the EU in 2007. Much of this growth will be the result of FDI – virtually all of which will require property transactions. While Romania has taken significant steps to normalize both normal property transactions and more difficult ones involving restitution, areas of significant risk will remain for some time. One way to minimize the risk of a property transaction is to seek title insurance for the property. With the assistance of experienced property attorneys who have the ability to research any potential problems, potential risks can be identified and insured against. The standard policy covers against all other potential problems; assisting property transactions to take place in a timely and efficiently.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2006 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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E-Mail: office@hr.ro

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