“The title to a property is the elemental foundation of ownership;
essentially, it is the property owner’s right to possess and use the
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
- 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.
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
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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.
- 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
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
- 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;
- 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;
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
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
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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
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.
RUBIN MEYER DORU & TRANDAFIR
societate civila de avocati
Str. Putul cu Plopi, Nr.7, Sector 1
Tel: (40) (21) 311 14 60
Fax: (40) (21) 311 14 65
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