The Real Estate Law Review
A great deal has happened since the first edition of The Real Estate Law Review appeared in 2012, but nothing more significant than the Covid-19 pandemic, a truly global crisis. This tenth edition of the Real Estate Law Review will continue to prove its worth by providing readers with an invaluable overview of how key markets across the globe operate and how they react to major world events. Covid-19 has served as stark reminder that it is no longer possible to look at domestic markets in isolation.
Introduction to the legal framework
The property rights under Belgian law are:
b the right to build;
c long-term lease right;
d usufruct; and
The mortgage, lien and pledge are secondary or accessory rights in rem, which do not have an independent existence and are attached to a receivable.
The parties cannot agree contractually to create, alter or otherwise extend the scope of property rights beyond what is legally provided or permitted by law.
Ownership is the most complete right of enjoyment of property, and it is a perpetual right. Ownership of land includes the ownership of all that is on and below the ground. Ownership can also take the form of an indivision – several owners jointly exercise the full ownership right over a property (e.g., two brothers who are transferred the family house by inheritance), or of a co-ownership – several owners enjoy exclusive property right over private parts and shared rights over common parts (e.g., an apartment building where each apartment as such is subject to an exclusive ownership right while the ground, entrance, lifts
are subject to a shared ownership right).
A right to build is the right to own a building or a construction, existing or to be built, on, above or below the ground of another person. During the term of the right to build, the holder of the right shall be the owner of the building erected by it. The right to build is limited in time, with a maximum duration of 50 years. Upon termination, the owner of the land becomes the owner of the constructions erected. A right to build, as well as any constructions built pursuant to it, is a transferable asset that can be sold or mortgaged.
A long-term lease right grants its holder the right to use a building and collect the income as if it was the owner. A long-term lease right can be granted on ground or on existing building, or both; when granted on ground, the long-term lessee shall be the owner of the constructions erected by it until expiry of the long-term lease right. The long-term lease right is a temporary right, with a minimum duration of 27 years and a maximum duration of 99
years. The long-term lease right is a transferable asset that can be sold or mortgaged.
The usufruct is the right to enjoy a property, which is owned by another person. The usufruct is a temporary right, which terminates upon the beneficiary’s death (in case of an individual) or upon its dissolution (in case of a corporation); when granted to a corporation, the usufruct has a maximum duration of 30 years. A usufruct can also be transferred or mortgaged.
An easement is a right in rem vested on a property to the benefit of another property; it, therefore, presupposes the existence of two properties with two different owners. An easement is in principle a perpetual right but might terminate through prescription (i.e., if not used for 30 years) or uselessness. It is an indivisible and accessory right which cannot be sold, otherwise transferred, attached or mortgaged separately from the dominant property.The usufruct is the right to enjoy a property, which is owned by another person. The usufruct is a temporary right, which terminates upon the beneficiary’s death (in case of an
individual) or upon its dissolution (in case of a corporation); when granted to a corporation, the usufruct has a maximum duration of 30 years. A usufruct can also be transferred or mortgaged.
An easement is a right in rem vested on a property to the benefit of another property; it, therefore, presupposes the existence of two properties with two different owners. An easement is in principle a perpetual right but might terminate through prescription (i.e., if not used for 30 years) or uselessness. It is an indivisible and accessory right which cannot be sold, otherwise transferred, attached or mortgaged separately from the dominant property.
To make the transfer of a property right enforceable against third parties, and more particularly against the creditors of the transferor, the title must be transcribed in the mortgage register of the judicial district where the asset is located. This transcription requires a Belgian notary since only authenticated deeds or acts can be transcribed. Before the transcription, the authenticated deed must be registered, which shall trigger the payment of transfer taxes.
Consequently, there are two systems or source of information in Belgium: the land register, which provides a status of current ownership (including the registration numbers of the parcels) and is based on the registration, and the mortgage register, which keeps track of transfer of property rights over the past 30 years.
There is no state guarantee on the title, and the registers cannot be held liable for registering inaccurate information. Because of this absence of state guarantee, we are seeing the development of ‘title insurance’ in the framework of real estate transactions.
Real estate transactions are in principle governed by the law of the location of the asset, here Belgian law. Note that share transactions and real estate finance transactions are sometimes governed by another law than Belgian law, such choice of law being valid.
Real Estate activity
The appetite for real estate in Belgium remains high, due to the presence and demands of the European Union (that also attract corporates in Belgium) and thanks to the stable (indexed) rents. Competition, however, remains high, on price but also especially on the logistics sector (competition between local and international players). In terms of trends, major real estate developments are ongoing or have been announced; most of the time that includes residential; in the past months, appetite for residential has been noticed and this might become a new market.
The impact of covid-19 must be mentioned. This year 2020 has seen many transactions being paused or cancelled, with the expectation of a recovery of the real estate capital market in the course of 2021. In terms of asset classes, the retail, hotel and leisure sectors are currently suffering, both from an investment perspective (due mainly to the scarcity of funding) and from an asset management perspective. For those sectors, many tenants were faced with compulsory closure that has led to dispute around the rent payments. It should be noted that no legal measure has been taken in this respect and, therefore, that general principles apply. To date, there are clearly two main (pro and contra) arguments, and the case law remains divided:
- a the payment of rent should be suspended since, because of the closure, the landlord is not able anymore to guarantee the peaceful enjoyment of the premises versus the landlord cannot be held liable for troubles caused by third parties and the lockdown decided impacts the operation and not the real estate. Most of the case law rules, on this subject, in favour of the landlord; and
- b rent reductions should be granted based on the principle of execution in good faith of contracts, a landlord requesting the full payment of the rent committing an abuse of right versus legal measures (e.g., financial support), have been promulgated in favour of the tenants (i.e. entrepreneurs), which should allow them to still fulfil their contractual obligations. Most of the case law rules, on this subject, in favour of the tenant by granting a 50 per cent rent reduction for the lockdown period.
Note that force majeure does not apply to payment obligations and that hardship is currently not recognised under Belgian law.
Under Belgian law, there are no restrictions on foreign investment in real estate. No specific incentive for foreign investment applies either.
One should, however, pay attention to EU rules on money laundering and on sanctions since economic operator and services providers (e.g., lawyers, notaries) might be prevented from doing business with certain parties that are subject to restrictive measures or for which the KYC and client due diligence is not conclusive. This is, however, not typical for real estate and applies to any type of business.
Structuring the investment
Belgian law does not know the concept of ‘real estate company’, being a company, whose main assets consist in real estate and which would be treated, mainly for tax purposes, differently from an ordinary company. Consequently, the tax regime applicable to share transactions is not subject to deviating rules. Share transactions are not subject to transfer tax or VAT (unless the tax administration demonstrates a tax abuse), and capital gain realised on shares should benefit from participation exemption in the hands of the seller.
Transactions are structured via the acquisition of shares, the acquisition of ownership or the acquisition of a 99-year long-term lease right.
In a share transaction, the purchaser shall acquire the shares of an SPV and at the same time inherit all assets and (hidden) liabilities of the company. Extensive due diligence is, therefore, required upon acquisition. A share transaction might, however, be detrimental to the purchaser: the leverage shall be limited to the existing debt at the level of the SPV, and the asset value shall correspond to historical value (i.e., construction or acquisition cost less the depreciation already taken) without step-up. This type of transaction sometimes proves to be difficult to finance, as the bank shall require a mortgage on the asset and the up-stream
security interest to guarantee a financing of shares is prohibited by financial assistance rules. Solutions can be found in the conversion of the SPV into an ordinary partnership or a specialised real estate investment fund. From a pricing and negotiation standpoint and since the seller should realise a tax-exempt capital gain, it is market practice to negotiate a discount for tax latency.
The sale of ownership shall allow, in the hands of the purchaser, to record a step-up on the asset value (i.e., the asset shall be recorded, and depreciated,2 for its acquisition value by the purchaser) and to easily set up a full collateral package, without restrictions. It is, however, subject to 10 per cent (in Flanders) or 12.5 per cent (in Brussels and Wallonia) transfer tax.
The granting, by the owner, of a 99-year long-term lease right over a property is common practice. In the hands of the purchaser, the advantages of this structuring are the same as for the acquisition of ownership,3 and the tax cost is reduced since this transaction shall be subject to 2 per cent transfer tax. Parties usually agree that a substantial first instalment is paid upon granting of the right, followed by a limited yearly fee throughout the duration of the right. In order to guarantee the liquidity of the investment, parties can also agree that the transferee of the long-term lease right shall benefit from an option to acquire the residual property rights.
Foreign investors can acquire directly the ownership or the long-term lease right. In such a case, the revenues and capital gain shall be subject to tax in Belgium, at the ordinary rate of 25 per cent. No profit branch tax applies. Such a structure allows a direct appropriation of all revenues and the absence of ‘cash trapped’ (i.e., the revenues corresponding to the depreciation taken on the asset) in Belgium.
The investor can also choose to structure its acquisition via a Belgian acquisition vehicle: a corporation (SPV), an ordinary partnership or a specialised real estate investment fund.
The SPV shall be subject to regular Belgian accounting and tax rules. The revenues and capital gain shall be subject to tax in Belgium at the ordinary rate of 25 per cent. The disadvantage of an SPV lies with accounting treatment and capital protection rules. The building shall be automatically depreciated, and this depreciation shall reduce the accounting (and tax) result and, therefore, the profits available for distribution. It is common practice, but requires enough leverage capacity, to have an intragroup loan granted to the SPV to allow the upstream of this ‘cash trapped’. Specific attention must be paid to transfer pricing rule
when fixing the conditions of this intragroup loan.
To tackle this issue as well as to put a full collateral package in place, the SPV might be converted into an ordinary partnership. This type of company has legal personality under Belgian law and shall be subject to the same tax regime as the SPV. It is, however, not subject to capital protection rules, including the prohibition of financial assistance.
Investors might opt for a specialised real estate investment fund or FIIS, by either setting-up a FIIS as acquisition vehicle (of the shares or the asset) or by converting a SPV into a FIIS. The main advantages of a FIIS reside is its accounting regime and its tax regime. The FIIS must draw up its financial statements in accordance with IFRS and the investment income (e.g., rental income, capital gain) is not subject to corporate income tax. For certain investors, the FIIS also allows the qualification of the investment as ‘real estate’ in accordance with Solvency II regulation. However a tax cost is associated to this structure: (1) the entering into this FIIS regime triggers the ‘exit tax’ being the taxation of the latent gain on the asset at a rate of 15 per cent; and (2) the FIIS is subject to a yearly dividend distribution obligation which will trigger withholding tax based on applicable tax treaty. In this respect, note that dividends distributed to foreign pension funds that are exempt from income tax should benefit from a withholding tax exemption based on Belgian tax law. From a regulatory standpoint, the FIIS is an alternative investment fund, either by option in case it only has one investor or is a joint-venture, or by law in case of multiple investors. Regulatory burden for a FIIS by option is limited to a yearly compliance questionnaire.
Real Estate ownership
Each region is competent regarding the general legal framework within its territory. Deriving from this general legal framework, zoning plans are the main source of planning rules and regulations and contains binding conditions on the nature of buildings and activities that can be authorised in the concerned area; these plans exist at the level of the municipality, the province and the region. In a nutshell it can be said that construction, modification, renovation and extension require a building permit, as well as the change of the use of a property (e.g., from office to residential). The first condition to be granted a permit is that the
contemplated development complies with the zoning plan. Other conditions apply as well depending of the facts (e.g., results of the public inquiry, environmental impact assessment, fire safety). The operation of certain installations, which may have an adverse impact on the environment or health, or both, also requires an environmental permit, or when possible and relevant, a combined permit that merges the building and environmental prescriptions and authorisations.
The (most relevant) trigger event of soil formalities and sanitation is the ‘transfer of a risk land’. Although the concept might differ depending on the region concerned, a transfer of property right and corporate restructuring shall most of the time qualify as a ‘transfer’. The activities effectively carried out (with or without environmental permit) in the premises will determine the qualification of ‘risk land’; if an environmental permit has been delivered for a risk activity, it shall lead to the qualification of ‘risk land’, but the environmental permit is not the sole or determining criteria (e.g., if a tenant is operating a risk activity without permit, the owner will nevertheless have to comply with soil formalities in the event of a transfer).
In terms of liability, two situations must be distinguished:
- a the compliance with soil formalities lies with the transferor and can be shifted to the transferee where certain conditions are met; and
- b the liability for soil pollution and sanitation measures lies with the operator. Note that in each of the regions a waterfall system is in place, with the operator as first in line in terms of liability but also with a possible recourse against the owner. This is especially true in the event of bankruptcy of the operator. It is, therefore, highly recommended, for example, when letting a property, to have a clear view on the soil status, a monitoring of the tenant’s activity and specific provisions with respect to soil in the lease agreement.
Share deals are not subject to transfer tax, stamp duty or VAT, unless the tax administration demonstrates an abuse.
Asset deals are either subject to transfer tax or VAT. When the real estate qualifies as ‘new building’ for VAT purposes, the transfer of a property right may (when the owner is not a professional developer and opts for VAT taxable transaction) or must (when the owner is a professional developer) be subject to 21 per cent VAT. A building is deemed new for VAT purposes until 31 December of the second year following its first use or occupancy. Heavy refurbishment allows the qualification as ‘new building’ either when (1) a drastic modification of essential elements, being the nature, structure or destination, whatever the costs of the works might be, is executed or (2) modifications for which the cost of the works (excluding VAT) equals at least 60 per cent of the market value of the building (excluding ground) at the end of the works are executed.
When VAT does not apply, the purchase of an asset or the granting of a usufruct is subject to 10 per cent (in Flanders) or 12.5 per cent (in Brussels and Wallonia) transfer tax computed on the higher of the agreed price or the market value. Long-term lease rights and rights to build are subject to 2 per cent transfer tax computed on the total of the fees paid to the owner over the full duration of the right increased by the charges contractually borne by the beneficiary.
The collateral package includes mortgage, pledge of receivables (e.g., rent receivable and insurance receivables) and pledge of bank accounts. The parent company shall usually pledge the shares in the SPV and subordinate any intragroup loans. A few points must be kept in mind:
- a a mortgage is subject to 1 per cent transfer tax and 0.3 per cent inscription duty computed on the amount for which it is inscribed. Considering this tax cost, the practice – mostly with Belgian banks but never with Pfandbrief banks – is to inscribe a mortgage for a limited amount and to grant a mortgage mandate for the remainder. A mortgage mandate is not a security but an irrevocable power of attorney to inscribe a mortgage;
- b general banking terms and conditions usually include a right of pledge and set-off provisions in favour of the account bank which could interfere with the pledge of bank accounts in favour of the lender. Therefore, it is common practice to require from the account bank a waiver of these rights and provisions. This should be disclosed and discussed with the account bank ahead of the closing; and
- c subordination of intragroup loans is most of the time only partial in the sense that the SPV can still use excess cash to reimburse the intragroup loan.
Leases of business premises
Depending on the type of business, commercial premises can be rented via a common lease or a retail lease.
Retail leases concern a specific group of professionals that are in direct contact with the public in the leased premises, the premises being primarily used for retail activities. These leases are governed by the Commercial Lease Act of 30 April 1951, which includes a wide raft of mandatory legal provisions, mostly for the benefit of the tenant.
- a term: Retail leases must be concluded for at least nine years, the tenant being entitled by law to request three renewals of nine years each. This right to request a renewal is, however, not absolute as it can be refused by the landlord, for cause or not. The justification of the refusal shall determine the indemnity to the paid to the tenant, as determined by law;
- b break option: The tenant is entitled by law to terminate the retail lease every three years. An anticipated waiver of this termination right is not valid;
c rent: The parties are free to negotiate the rent level and the type of rent. The most frequent form remains a fixed rent, but hotel businesses and shopping centres also frequently apply variable rent based on turnover subject to a minimum guaranteed rent; and
- d rent review: Under a retail lease each party can, during a period of three months prior to the end of each three-year period, file a request to review the rent provided that the rent value of the leased premises has changed by at least 15 per cent due to new circumstances.
Contrary to retail leases, the legal provisions applicable to common leases are not mandatory meaning that the parties can accommodate the different terms and conditions. Except for the prohibition of a perpetual lease (i.e., a lease exceeding 99 years), no restriction applies regarding the term of the lease.
Lease agreements may contain different types of price variation clauses, including the traditional indexation clause that provides for an adjustment of the rent to the costs of living on a yearly basis. The indexation formula is set out in Article 1728 bis of the Civil Code. Where the formula chosen by the parties differs, the indexation amount can be reduced if the result of the contractual formula is higher than the result of the legal formula.
Concerning maintenance and repairs, the default rule is Article 1754 of the Civil Code, a tenant-friendly provision where the tenant will only be liable for small maintenance and repair works, leaning all other maintenance works, including obsolescence, in charge of landlord. Parties however frequently derogate, providing that the rule of Articles 605–606 of the Civil Code will apply, landlord-friendly provision where the landlord shall only support the major repairs (e.g., structure, roof, weathertightness). In sale and lease back transactions, we have seen lease agreements where all maintenance and repairs, including major repairs,
are met by the tenant.
It is common practice that the taxes linked to the property (e.g., the annual property tax) are recharged to the tenant.
There is no specific provision dealing with rental guarantee. In practice, it is usual for a landlord to request a guarantee, in form of a deposit or a bank guarantee, equivalent to three or six months’ rent, or a higher amount depending on the duration of the lease and payment frequency.
Registration of the lease is a legal obligation, which usually lies with the tenant based on contractual provision. Registration gives the lease a ‘fixed date’, limiting the eviction possibilities by a third part claiming property right on the leased premises, such as the purchaser of the asset.
All leases exceeding nine years or including discharge of three-year rent must be recorded in the mortgage register and, therefore, executed before a notary. If these formalities are not satisfied, the lease will not be enforceable beyond the nine-year term against bona fide third parties claiming a property right on the leased premises.
Developments in practice
Since 1 January 2019 an optional regime to subject ‘commercial’ leases to VAT is available. Under a commercial lease, it must be understood the letting of premises that are exclusively used by the tenant for its economic activity grants the tenant the status of VAT taxable person (even if without right to deduct input VAT). This option is subject to the following conditions: (1) the letting must concern a ‘new building’ (or part thereof ) meaning buildings for which VAT on construction or refurbishment cost has become chargeable for the first time on 1 October 2018 at the earliest; (2) the option must be agreed upon by both landlord and tenant; and (3) the option must be valid for the entire duration of the lease. This option allows the landlord to deduct input VAT on the construction or refurbishment cost but shall at the same time extend the VAT clawback period to 25 years.
The Law of 4 April 2019 concerning the abuse of economic dependence, unfair clauses and unfair market practices in B2B relations (the B2B Law) introduces a prohibition on 'unfair clauses' in contracts between enterprises. This B2B Law prohibits each clause that, separately or together with other clauses, creates a significant imbalance between the rights and obligations of the parties. The B2B Law furthermore includes a blacklist (4 clauses that are irrefutably deemed to be unfair and therefore prohibited) and a grey list (8 clauses that are presumed to be unfair, but the presumption can be refuted). The B2B Law entered into
force on 1 December 2020 and applies to all contracts concluded, renewed or modified after that date, but remains highly disputed by legal doctrine.
Real estate contracts between businesses are also subject to the B2B Law. Consequently, all kinds of real estate agreements, such as purchase agreements, lease agreements and construction agreements regarding real estate assets, are all subject to the provisions of the B2B Law if they are entered into between enterprises. The protection offered by the B2B Law is not limited to small and medium-sized companies, nor is a relationship of 'dependency' required. Consequently, real estate companies that contract with other real estate professionals will have to comply with the new law, regardless of the companies’ size or
the value of the transaction.
The reform of the property rights, already adopted, should enter into force on 1 September 2021. From an investment perspective, two main modifications can be highlighted:
- a long-term lease right: The minimum duration is reduced to 15 years and the obligation to pay a yearly fee is abolished. Because of this reduction of the minimum duration, the long-term lease right might become (more) attractive for certain investors wishing to avoid the mandatory break option of a retail lease. From a VAT perspective, and provided it concerns a new building, it should be noted that the recourse to a long-term lease right might be advantageous for the investor: instead of entering into a VAT lease, for which the investor bears the risk of a VAT clawback during 25 years, it can grant a long-term lease right subject to VAT. In such a case, the VAT clawback risk is shifted to the beneficiary and lasts for a period of 15 years; and
- b right to build and property of volume: The maximum duration is extended to 99 years. The reform also provides for a possibility to have a perpetual right to build to allow the division of an asset into volumes, provided that these volumes are autonomous and do not have shared common parts. This offers more opportunities for complex development projects (e.g., a shopping centre with an underground parking) which today must deal with concepts of easements or co-ownership, or both, that are not (fully) suitable for a division in several volumes.
The Regulation 2020/852 of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation), which was adopted on 18 June 2020 and shall enter into force gradually by 1 January 2023, shall be used by the EU and its Member States, certain entities of public interest and those actors in the financial markets that propose financial products. This last category includes insurance companies, investment companies, credit institutions that offer portfolio management services, retirement schemes, and fund managers (e.g., AIFs, UCITS).
These providers and managers of funds will bear an increased information obligation – and increased due diligence inquiries. Thanks to the information provided by these managers, investors should be able to determine the share of their investments dedicated to sustainable economic activities. The sectors to which the Taxonomy Regulation applies includes real estate, which is identified through four economic activities:
- a the construction of new buildings;
- b building renovation;
- c individual measures and professional services aimed at increasing energy efficiency; and
- d acquisition and ownership.
Speaking about ‘individual measures aimed at increasing energy efficiency’, the energy performance of buildings is one of the main ways to achieve climate change transition. The construction and renovation of properties can make a decisive difference on the environment.
The Brussels Region adopted a new legal framework regarding the energy efficiency of buildings. The users and owners of large real estate portfolios (> 100,000 m²) are obliged to develop an energy management plan in order to reduce their energy consumption. By 30 December 2020, the relevant buildings must be identified by the owners or users and an environmental co-ordinator must be designated. Then, within 18 months, each building
must be subject to an energy audit and an actions programme.
The increased use of green leases is also expected. A green lease is a lease that contains clauses establishing binding obligations between tenants and owners in order to manage and improve the environmental (and energy) performance of a building. Green leases establish obligations towards both parties regarding cooperation and data sharing, cost sharing, the management of resources, the establishment of audits, the establishment of targets (e.g., energy consumption, water reduction, waste management and obtaining certificates) and maintenance. Buildings subject to green leases could be profitable not only for investors and owners, but also for tenants (e.g., due to property occupancy costs, the impact on their commercial reputation, and compliance with environmental legislation).
Outlook and conclusions
How 2021 will evolve for the real estate sector remains difficult to predict in the current circumstances. In terms of asset classes, the logistics market should remain a ‘hot’ market and the residential market should develop rapidly. How the retail and leisure sectors will recover remains uncertain, as is the position that could be taken by financing banks in case of breach of (financial covenants); we note that 2020 has been very quiet on the distressed market.
It is expected that covid-19 shall remain at the front of people’s minds and the source of many renegotiations and disputes in 2021 – all on the theme of whether the tenant has to pay the rent or not. Legislation on that subject is not anticipated.
Finally, anticipated legislation on contract law may further impact the real estate sector since a major reform is expected to be announced, which might, for instance, introduce hardship in Belgian law and might integrate, and hopefully reform, the B2B Law.
Ariane BrohezPartner Attorney at Law
Ariane Brohez, Partner, is a member of the Real Estate practice group in our Brussels office. She focuses on real estate structuring and taxation, real estate funds and real estate investments.T: +32 2 743 43 21 M: +32 495 21 26 59 E: firstname.lastname@example.org
Christophe LaurentPartner Attorney at Law
Christophe Laurent, Partner, heads the Real estate practice group in our Brussels office. He focuses on real estate transactions and taxation. He is also a member of the Investment Management/Funds team.T: +32 2 743 43 05 M: +32 476 39 06 90 E: email@example.com
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