Continued Risk Seen in Property Acquisitions
Property acquisitions in Central and Eastern Europe (CEE) were always viewed as a risky strategy when compared to Western Europe. The risk however, was worth it and investors were rewarded with higher than projected yields.
Yields have already decreased in much of the CEE region, with the greater risk-taking money heading to alternative countries such as Romania, Bulgaria, and more recently Serbia. With property investment yields approaching, or at Western European levels, one would think the risk has decreased in parallel to similar levels. First Title has come across several instances recently which demonstrate this is not the case. In particular, we have encountered cases involving errors in the property transfer process, which include local, State and federal governments.
In some cases, properties that were being sold in the private sector were originally transferred from State ownership up to ten years ago leaving many people with the prospect of having to deal with added layers of bureaucracy and increased administrative processes. Dealing with government on any level often poses several risks, and public tenders often have complex and detailed requirements - some of which can be or were overlooked in the haste to secure a deal.
The flaw is typically something minor, such as the failure to adhere to the publicity requirements, or the lack of the appropriate resolution authorising the sale or pre-sale valuation. If a government official, or interested party, wanted to challenge the title, they are fully within their rights and justified to do so. However, this may invariably tie up the owner in litigation for years or force them to seek an early resolution and pay a settlement.
Some further examples include:
Slovakia
- The land planned for a logistics facility had been assembled by the local municipality, several months prior to the current seller's purchase of the land. Around half of the land assembled for the facility has been declared by the city as being 'land acquired through adverse possession'; in short, it had held the land openly and conspicuously for at least 10 years in good faith, believing that it was the rightful owner. In the course of due diligence, it became clear that there were some real doubts as to whether the city had met the "good faith" requirement, which consequently cast serious doubt over the legal title.
Bulgaria
- An international property developer was in the process of purchasing a large area of land with the intention of building a shopping centre. A detailed analysis of the title revealed that there were doubts over whether the State body that sold the land to the current seller followed the detailed legal requirements, in order to ensure that the purchase was valid. If the sale-purchase contract was ruled invalid, then the title to the land should never have been transferred from the State body to the current owner.
Bulgaria
- An international developer planned to purchase property with the intention of developing it into mixed-use facilities, including office buildings and a residential development. In 2004, the current owners purchased the property through a public tender from a Bulgarian government body. However, there were two issues with this public tender; the Council of Ministers issued a writ rather than a resolution and the public tender committee did not have the correct composition of members, as it included a committee representative who was not duly authorised by a power of attorney. These two relatively minor mistakes could allow an interested party to challenge the sale of the land, and if the appeal was successful it would invalidate the transfer of the property to the current owner as well any future owners.
Romania
- A large company intended to acquire property from another company which had in turn acquired the property from a State-owned enterprise. During the due diligence process, it was revealed that the transfer of the property from the State enterprise to the current owner could be perceived as invalid since the sale-purchase agreement was not concluded in the authenticated form required by Romanian law.
In all of these cases, the risks to the new purchaser were real and could have resulted in substantial financial losses. With the purchase of a First Title insurance policy, these risks are removed and owners are protected from the risk of challenges to ownership.