ISSUE 27 | www.dlapiperrealworld.com
REAL ESTATE
GAZETTE
BELGIUM
POP-UP LEASES IN
BELGIUM
KENYA
THE RISE OF THE
SHOPPING CENTER IN
KENYA
MIDDLE EAST
THE CHALLENGES OF
COMPLEX RETAIL LEASING
ARRANGEMENTS IN DUBAI
ROMANIA
DIFFERENT OWNERS
WITHIN A RETAIL PARK:
PRACTICAL ASPECTS
USA
THE RESCUE OF
AÉROPOSTALE: A NEW
FASHION FAD FOR RETAIL
LANDLORDS
MAURITIUS
ACQUISITION OF
PROPERTY BY FOREIGNERS
IN MAURITIUS
FOCUS ON:
SHOPPING CENTERS
CONSIDERING THE MYRIAD LEGAL ISSUES
FLOWING FROM THE CONSTRUCTION
AND OPERATION OF SHOPPING CENTERS
2 | REAL ESTATE GAZETTE
A NOTE FROM
THE EDITOR
The twenty-seventh
issue of the DLA
Piper Real Estate
Gazette highlights
issues relating to the
construction and
operation of shopping
centers.
“
Retail centers
have become
commercial and
entertainment hubs.
”
A
very warm welcome to all our readers to the first issue of
DLA Piper’s Real Estate Gazette of 2017.
In this issue, we focus on shopping centers and the myriad
legal issues flowing from their construction and operation.
Several articles highlight the surge in huge retail centers which offer more
than a shopping experience, and have instead become commercial and
entertainment hubs. Whilst this may be good news for consumers, various
legal issues have arisen. In Zambia, which has experienced significant
growth in its commercial real estate sector in the last two decades, issues
are identified in relation to land ownership, impact on the environment,
and leasing requirements, amongst others (page 54). Kenya too has seen
a surge in the number of shopping centers being built recently, with a
concomitant rise in foreign investment in the country’s real estate market.
Our Kenyan article (page 26) identifies the tendency towards mixed-use
centers but notes that whilst this “live-work-play” concept is attractive to
many, nevertheless, issues relating to poor roads and infrastructure that
have not kept pace with developments, the high cost of land, complex
zoning regulations, and security concerns, remain challenging.
Other aspects of our focus topic include the regulations on Sunday trading
and working in France (page 18) and Poland (page 34, which also looks at the
termination of lease agreements and recent changes on VAT refunds for real
estate transactions); the practical problems that can arise when a retail park
has more than one owner (Romania, page 42); and a fascinating case study
from the US describing a unique rescue from near-certain bankruptcy by
retail landlords of their tenant, the iconic teen retailer,Aéropostale (page 50).
This 27th issue of the Real Estate Gazette also covers topics outside of
retail. Read about opportunities for developers in Australia afforded
by strata law reform (page 62); the acquisition of foreign property in
Mauritius (page 76); and self-regulation in the Russian construction
industry (page 84).
The breadth of topics discussed reflects the dynamic landscape of global
real estate law. We continue to monitor and respond to these changes
and look forward to keeping you abreast of developments in these pages.
Olaf Schmidt, Co-Chair of the Global Cross-Practice Real Estate sector
ISSUE 27 • 2017 | 3
CONTENTS
SHOPPING CENTERS
ASIA
06
CITY LIMITS: THE RADIUS CLAUSE IN THE HONG
KONG COMPETITION ORDINANCE
BELGIUM
10
POP-UP LEASES IN BELGIUM
CZECH REPUBLIC
14
06
NEW RULES FOR HOLIDAY SHOPPING HOURS
FRANCE
18
SUNDAY WORKING IN SHOPPING CENTERS AND
DEPARTMENT STORES IN FRANCE
ITALY
22
GOODWILL AND INDEMNITIES IN ITALIAN SHOPPING
CENTERS
KENYA
26
THE RISE OF THE SHOPPING CENTER IN KENYA
MIDDLE EAST
30
THE CHALLENGES OF COMPLEX RETAIL LEASING
ARRANGEMENTS IN DUBAI
POLAND
22
34
CURRENT LEGAL ISSUES FOR SHOPPING CENTER
OPERATORS
PORTUGAL
38
ISSUES TO CONSIDER WHEN NEGOTIATING
SHOPPING CENTERS’ LEASE AGREEMENTS
ROMANIA
42
DIFFERENT OWNERS WITHIN A RETAIL PARK:
PRACTICAL ASPECTS
THE NETHERLANDS
46
RENOVATION OF SHOPPING CENTERS IN THE
NETHERLANDS
USA
4 | REAL ESTATE GAZETTE
46
50
THE RESCUE OF AÉROPOSTALE: A NEW FASHION FAD
FOR RETAIL LANDLORDS
ZAMBIA
54
THE SHOPPING CENTER BOOM IN ZAMBIA
ISSUE 27, 2017
GENERAL REAL ESTATE
ASIA
58
RETAIL THERAPY: HOW TENANTS SURVIVE THE
FREEZING RETAIL MARKET IN HONG KONG
AUSTRALIA
62
STRATA LAW REFORM PROVIDES OPPORTUNITIES FOR
DEVELOPERS
BELGIUM
68
PUBLIC REITS IN THE BELGIAN REAL ESTATE MARKET
ETHIOPIA
72
REGULATION OF PRIVATE REAL ESTATE DEVELOPMENT
58
IN ETHIOPIA
HUNGARY
74
VAT AND REAL ESTATE TRANSACTIONS
MAURITIUS
76
ACQUISITION OF PROPERTY BY FOREIGNERS IN
MAURITIUS
NORWAY
80
REVENUE-BASED RENT AND COMPETITION FROM
E-COMMERCE
RUSSIA
84
76
SELF-REGULATION IN THE RUSSIAN CONSTRUCTION
INDUSTRY
88
GRANTING A PERMIT AFTER CONSTRUCTION HAS
STARTED
SPAIN
90
RECENT JUDICIAL CHALLENGES TO THE SPANISH
MORTGAGE ENFORCEMENT SYSTEM
SWEDEN
94
TAXATION OF SWEDISH REAL ESTATE TRANSACTIONS:
RECENT DEVELOPMENTS
84
ISSUE 27 • 2017 | 5
SHOPPING CENTERS | ASIA
CITY LIMITS: THE RADIUS
CLAUSE IN THE HONG KONG
COMPETITION ORDINANCE
JANICE YAU GARTON AND KENNETH LEE, HONG KONG
I
ntroduction
Travel 50km in most
European countries and
there is a good chance
you will encounter no more
than one major city. Apply
that same radius to Tsim Sha
Tsui, the densely populated
commercial hub at the heart of
the Kowloon peninsula, and you
would cover all of Hong Kong’s
major islands, the entire New
Territories and a good corner
of mainland China.
The radius clause, a noncompete provision by which the
landlord restricts a tenant from
opening another similar business
6 | REAL ESTATE GAZETTE
within a prescribed radius, is a
common feature in shopping
center leases in Hong Kong,
as it is elsewhere. But while a
50km exclusion zone may be
commonplace for shopping
center tenants in other parts of
the world, Hong Kong’s cramped
geography and high population
density means a standard radius
clause could fall foul of the city’s
new anti-trust regime.
In Hong Kong, as in other
common law jurisdictions,
landlords often insist on a
radius clause before granting
retailers a space in their
shopping center. By ensuring
there will be no other
competing locations offering
the same merchandise within
the prescribed radius, the
landlord aims to protect its
income from the widely used
turnover rent arrangement,
under which it earns a share
of the tenant’s gross sales. A
radius clause also helps to
prevent the loss of a shopping
center’s customer base.
Radius restrictions typically
cover one or more of Hong
Kong’s four regions or 18
administrative districts, and
can—in some cases—cover
the entire territory. In the
SHOPPING CENTERS | ASIA
crowded, landlord-friendly
Hong Kong market, tenants are
generally powerless to resist.
The city’s new anti-trust regime
may, however, boost retailers’
bargaining power.
Competition
Commission
The Competition Ordinance
(Cap 619) came into full effect
on 14 December 2015, setting
out a cross-sector anti-trust
regime in Hong Kong. Drawing
heavily from the European
model, the ordinance prohibits
restrictions on competition
in Hong Kong through three
competition rules.
The First Conduct Rule,
which originates from and is
similar to Article 101 of the
Treaty on the Functioning of
the European Union (TFEU),
limits trade restriction clauses
and prohibits anti-competitive
agreements. Best known for
targeting coordination between
competitors including pricefixing, bid-rigging, market
allocation and restrictions on
output availability, the First
Conduct Rule provides that:
“An undertaking must not
(a) make or give effect to an
agreement; (b) engage in a
concerted practice; or (c) as
a member of an association
of undertakings, make or
give effect to a decision of
the association, if the object
or effect of the agreement,
concerted practice or decision
is to prevent, restrict or distort
competition in Hong Kong.”
The Second Conduct Rule
(which is similar to Article
102 TFEU) targets powerful
companies and prohibits abuse
of market power.
Finally, the Merger Rule prohibits
anti-competitive mergers and
acquisitions, but currently
applies only to mergers in the
ISSUE 27 • 2017 | 7
SHOPPING CENTERS | ASIA
“
European precedents may be
indicative.
telecommunications industry.
The Competition Commission
issued a guidance note on the
First Conduct Rule in July 2015,
clarifying that it applies not
only to agreements between
competitive businesses, but also
to agreements between parties
who are not competitors if the
agreement has (i) the object of
harming competition or (ii) the
effect of harming competition
in Hong Kong. The Competition
Commission alone will
determine whether the effect is
anti-competitive.
A landlord, by requiring its
tenant to agree to a radius
clause, falls within the scope
of the First Conduct Rule and
therefore the question arises
as to whether a radius clause
is anti-competitive. Neither the
Commission nor the courts in
Hong Kong have handed down
a decision on such restrictive
8 | REAL ESTATE GAZETTE
”
clauses regarding shopping
centers. Given that the
legislation is modelled on that
of the European Union (EU),
however, decisions in Europe
may be indicative.
European precedents
The radius clause has been
challenged once in Germany,
when the operator of an outlet
center tried to restrict its
tenants from opening up shops in
other outlets within a radius of
150km for a period of 10 years.
The German Federal Cartel
Office found the clause to be
anti-competitive and ruled that
the maximum acceptable scope
of a radius clause was a 50km
radius for a period of five years.
The line drawn in the German
case would not be appropriate
in a Hong Kong context, given
the significant differences
between the two legal
jurisdictions and the ways that
shopping centers operate in the
two markets. However, with no
applicable local precedent, it is
likely that the Commission and
the Hong Kong courts will take
similar factors into account, viz.:
•the scope of the relevant
market in terms of product
and services and the
geographical size of the market
(different types of businesses
will result in different
geographical determinations);
•the market share of both the
outlet center operator and
the tenant;
•the extent to which there
is a real possibility for
competitors of the outlet
center to establish themselves
in the relevant geographical
area and the ease of getting
new tenants;
•the number and size of
SHOPPING CENTERS | ASIA
businesses similar to that
operated by the outlet center
in the relevant market;
•the restrictive distance of the
relevant clause;
•the duration of the restriction
clause on the tenants;
•whether all tenants of the
outlet center have agreed to
similar restrictions; and
•other factors which might affect
competition such as customer
loyalty to existing brands or
particular consumer habits.
The key consideration here
is reasonableness. If a radius
clause has features that are so
unreasonable that the landlord’s
clear purpose is to restrain
trade, as opposed to protecting
its rental income, the object
of the clause is likely to be
declared anti-competitive under
the First Conduct Rule.
Another relevant precedent is
the ruling by the European Court
of Justice (ECJ) in December
2015 that a clause giving a
supermarket “anchor” tenant
the right to approve leases to
competing stores in the same
shopping center was not anticompetitive by object – that is, it
is not automatically illegal.
Closing the loop
The ECJ sets out principles
for consideration once it is
found that such a clause makes
it difficult for competitors to
enter a market. Factors similar
to those listed above can
be found in the ECJ’s ruling,
including the market strength of
the companies and duration of
the agreements, for example.
for companies to assess if a
While the ECJ case dealt with
restrictions imposed on shopping
center operators, rather than
tenants, the same reasoning may
be applicable if the radius clause
is challenged in Hong Kong.
The Competition Commission
has already stated that its
guidelines are aimed at providing
greater predictability in its
enforcement approach and
clarity in its procedures—not
to provide legal certainty
particular type of conduct or
specific clause contravenes the
competition rules. Whilst a
radius clause, with the aim of
protecting legitimate business
interests, is widely accepted as
enforceable under common
law if drafted well, Hong Kong’s
new anti-trust regime raises
questions for both landlords and
tenants looking to protect their
own interests. Germany’s 50km
limit is unlikely to cut it with the
Competition Commission.
ISSUE 27 • 2017 | 9
SHOPPING CENTERS | BELGIUM
POP-UP LEASES IN BELGIUM
MICHAEL BOLLEN AND JORIS BECKERS, BRUSSELS
I
ntroduction
In an effort to fill inner
city retail vacancies,
the Flemish Region in
Belgium enacted the Decree
of 17 June 2016 on the shortterm lease of premises for
commercial and artisanal
purposes (known as “pop-up
leases”), which came into force
on 1 September 2016.
Legal framework
Since 1951, commercial leases
in Belgium have been governed
by the Commercial Lease Act.
One of the main principles
of this Act is that commercial
10 | REAL ESTATE GAZETTE
leases must have a term of at
least nine years. Although there
is provision for a tenant to
terminate the agreement at the
end of each three-year term, it
has been argued that such a longterm commitment discourages
entrepreneurs from starting
retail businesses, which has led
to an increasing number of retail
vacancies in shopping areas.
Following the Sixth State
Reform in Belgium that was
approved in 2013, the three
Regions in Belgium (namely, the
Flemish Region, the Walloon
Region and Brussels) have
each been empowered to
enact new rules governing
lease agreements relating to
a tenant’s principal residence,
commercial lease agreements
and lease agreements relating
to agricultural real estate.
It was against this background
that the Flemish (Dutchspeaking) Region enacted the
Decree of 17 June 2016, which
has become known as the
Flemish Pop-up Decree. Popup leases have been expressly
excluded from the scope of the
Commercial Lease Act.
Under this Decree,
SHOPPING CENTERS | BELGIUM
commercial lease agreements
for premises that are located in
the Flemish Region can now be
entered into for a period of less
than one year (“pop-up leases”),
irrespective of whether or not
the tenant is the owner of the
commercial business.
The aim of the Flemish Popup Decree is to encourage
entrepreneurs to start up
a new retail business with
minimal risk but also to provide
comfort to landlords that such
a temporary lease agreement
will not unexpectedly be
reclassified as a standard nineyear commercial lease, subject
to the protective provisions of
the Commercial Lease Act.
All the provisions of the
Flemish Pop-up Decree are
mandatory unless expressly
stated otherwise.
Principal terms of
Flemish Pop-up Decree
Duration and termination
(Articles 2–6)
Article 2 of the Flemish Pop-up
Decree states that it applies
to agreements with a term
equal or shorter than one year.
Unfortunately, however, Article
3 states that the duration of a
pop-up lease must be shorter
than one year.
A pop-up lease will
automatically terminate on the
agreed end-date without any
required notice and it cannot
be tacitly renewed.
Contracting parties can agree
in writing to renew their pop-up
lease one or more times under
the same conditions, provided
that the total term does not
exceed one year. If, as a result
of successive renewals, the total
term becomes longer than
one year, the agreement will
automatically be classified as a
standard commercial lease (and
thus subject to the Commercial
Lease Act) with a term of nine
years commencing on the
starting date of the pop-up lease.
The tenant can terminate a
pop-up lease at any time with
one month’s written notice, given
to the landlord by registered
letter or by a notice served
by a bailiff.The landlord does
not have this early termination
right and such a right cannot
be contractually agreed.The
parties can terminate the pop-up
lease early by mutual consent
provided that this is confirmed
in writing. Unlike termination
by mutual consent of a standard
commercial lease agreement
subject to the Commercial Lease
Act, early termination of a popup lease does not require to be
notarized.
In case of early termination
of a pop-up lease, whether
by mutual consent or at
the tenant’s instigation, the
tenant will not be entitled
to compensation, unless
“
The aim of
the Decree is
to encourage
entrepreneurs to
start up a new
retail business with
minimal risk
”
agreed otherwise. Since
the Flemish Pop-up Decree
does not expressly mention
compensation in case of a
normal termination of a pop-up
lease at the end of the agreed
term, it can be assumed that no
such compensation is available.
Rent
The Flemish Pop-up Decree
does not contain any express
provisions on rent. As a result,
parties are free to agree on
the applicable rent and the
payment method.
Since the term of the pop-up
lease must be equal to or less
than one year, the standard rules
concerning annual indexation and
revision of rent do not apply.
Expenses and taxes
(Article 8)
Unless otherwise agreed, all
taxes that apply to the leased
premises (such as property tax,
communal taxes, registration
ISSUE 27 • 2017 | 11
SHOPPING CENTERS | BELGIUM
duties, etc) are considered to
be included in the rent.
The utility costs (heating,
electricity, water, etc) related to
the leased premises are always
to be paid by the tenant.
Renovation works
(Articles 9–12)
Article 9 the Flemish Pop-up
Decree provides that, unless
otherwise agreed, the tenant
is permitted to perform
renovation works which:
•are useful to the tenant’s
business;
•do not affect the health and
safety, or the aesthetical value
of the rented premises; and
•do not cost more than one
year’s rent.
A tenant who wishes to carry
out renovation works simply
has to notify the landlord in
writing before the start of the
renovationns. The landlord
has a right of access to the
site to inspect the works
being undertaken and may
require the tenant to take out
additional insurance.
Article 10 of the Flemish
Pop-up Decree provides that
12 | REAL ESTATE GAZETTE
if works have been carried out
without the landlord’s consent
or without complying with
consent given, the landlord
has a right to demand that the
renovation works are stopped.
However, given that Article 9 of
the Flemish Pop-up Decree only
obliges the tenant to notify the
landlord and does not require
his consent, in practice, Article
10 will be unenforceable.
If the renovation works were
financed by the tenant, the
landlord can request their
removal at the end of the pop-up
lease, unless otherwise agreed. If
the landlord decides to keep the
property as is, however, he is not
required to pay any compensation.
Assignment and
subletting (Article 13)
The Flemish Pop-up Decree
provides that assignment of a
pop-up lease and sub-letting of
premises leased under a popup lease are strictly forbidden.
However, as this is a clause that
benefits the landlord and the
Flemish Pop-up Decree was
principally drafted to protect
tenants, it is assumed that the
contracting parties will be
allowed to contract out of this
restriction, despite the fact that
this is not expressly stated.
Registration
In exactly the same way as
standard commercial lease
agreements must be registered,
so too must pop-up leases.
Unless otherwise agreed, it is
the landlord that is responsible
for doing so.
Sale of the leased
premises (Article 14)
A new owner of commercial
premises cannot evict a pop-up
tenant,“except for the application
of Article 4”.The reference to
Article 4 of the Flemish Pop-up
Decree is unclear, however.With
regard to termination,Article 4
simply provides that pop-up leases
will automatically terminate on
their end-date.Thus the reference
to Article 4 in Article 14 dealing
with eviction does not seem
relevant. It may be questioned
whether the Flemish legislator
intended in fact to refer to
Article 6, which provides that the
landlord and the tenant can at any
time mutually agree to an early
termination of a pop-up lease.
SHOPPING CENTERS | BELGIUM
“
The Flemish Pop-up Decree is a
commendable attempt to resolve the
growing problem of inner city retail
vacancies in Flanders
Disputes (Article 15)
Disputes concerning pop-up
leases fall exclusively under the
jurisdiction of the Justice of the
Peace of the location of the
leased premises, in the same way
as standard commercial leases.
”
Conclusion
The Flemish Pop-up Decree
is a commendable attempt to
resolve the growing problem
of inner city retail vacancies in
Flanders, and to re-stimulate
retail activity by enacting a
separate set of rules for shortterm commercial leases of up
to one year.
However, although the Flemish
Pop-up Decree seems clear
and straightforward at first
sight, it does contain a number
of inconsistencies and will
therefore require clarification
and amendment in the near
future either by the legislator or
by case law.
It remains to be seen whether
and to what extent the Walloon
Region and Brussels will follow
the example of Flanders in
enacting separate legislation for
short-term commercial leases.
ISSUE 27 • 2017 | 13
SHOPPING CENTERS | CZECH REPUBLIC
NEW RULES FOR HOLIDAY
SHOPPING HOURS
JAKUB ADAM AND MARTIN ŠERÁK, PRAGUE
A
ct No. 223/2016
Coll., on retail
and wholesale
shopping hours
has recently come into force
in the Czech Republic. This
Act requires certain retailers
and wholesalers to close their
doors to customers for the
whole day on the following
Czech holidays: 1 January, Easter
Monday, 8 May, 28 September,
28 October, 25 December
and 26 December. The only
exception is 24 December
on which retail and wholesale
shopping is banned “only” from
12:00 a.m. till midnight.
Scope of regulation
Subject to limited exceptions,
the shopping hours constraint
applies to stores with a
shopping area of more than
200 sq.m. Pawnshops and
secondhand stores, amongst
others, are included within
the scope of the regulation
regardless of their square
footage. Exempt from the ban
are retail and wholesale stores
whose shopping area does
not exceed 200 sq.m., petrol
stations, pharmacies, stores
located in areas with increased
concentration of passengers at
airports, railway stations and
bus terminals, stores located
in medical facilities, and any
retail or wholesale stores at
times of officially declared state
14 | REAL ESTATE GAZETTE
of danger, state of emergency,
state of threat or state of war.
Legal background
The Act operates alongside the
framework provisions of the
Labour Code which regulates
working working hours and
other employee protections, in
an attempt to balance work and
family life, referred to as one of
key aims of the European Union
(EU) in the field of employment
law.The Act’s protective nature
can be seen from its stated
aim to allow employees to be
with their families during public
holidays. Despite such (probably
slightly overblown) statements
on the protective nature of
the Act, the situation is not
completely black and white. For
SHOPPING CENTERS | CZECH REPUBLIC
commercial activities on 24
December, generally perceived by
Czech people as one of the most
important of all public holidays.
Therefore, the reasoning behind
the Act seems to be slightly
contradictory, which will be
further discussed below.
Interpretation issues
Given the brevity of the Act (it
consists of only four articles),
it is perhaps surprising that
discrepancies in its interpretation
have already emerged.
“Railway stations”
many employees the chance
to work on the days noted
above represented a welcomed
opportunity to earn considerably
higher wages for working on a
holiday. It could also be argued
that some of these days are
not, notably when compared
to Christmas or Easter, linked
to any particular celebration.
And yet the Act partly permits
On 28 October 2016, the
very first day the applicability
of the Act was tested, several
stores in the premises of the
Prague metro stations remained
opened, arguing that they fell
within the permitted category
of stores located at a railway
station. However, the Czech
Trade Inspection Authority
argued that metro stations do
not fall in the more generic
category of “railway stations”.
In its submission, the Inspection
Authority referred to the
Ministry of Transportation’s
Decree No. 177/1995 Coll.
that distinguishes the term
“railway stations” from any
other “stations”, with metro
stations coming under the
latter.Thus, the terms cannot
be used interchangeably. It is
submitted that this argument
should be rejected since the
Act and the Decree follow
completely unrelated regulatory
goals.The primary aim of
the Decree is regulation of
technological, construction
and safety aspects of railway
transportation. In this context,
the differences in terminology
are perfectly reasonable, as
requirements for various station
premises differ based on the
mode of transportation in
question.The Act, on the other
hand, is concerned with the
regulation of working hours
and it is very difficult to see
any reasonable link between
such distinct agendas. However,
the store owners appear to
have accepted the Inspection
Authority’s position (at least for
now), as there were no further
violations of the prohibition
on opening within the metro
station premises over Christmas,
according to the Inspection
Authority.
What is meant by
“sale”?
Another issue relates to the
definition of “sales activities”.The
Inspection Authority understands
the term as encompassing only
activities directly linked to the
sale of goods.Thus, store owners
are allowed to conduct any other
activities stricto sensu unrelated to
sales, including cleaning, inventory
checks or shelf-stacking.This
ISSUE 27 • 2017 | 15
SHOPPING CENTERS | CZECH REPUBLIC
approach is perhaps surprising
and one might have expected the
Inspection Authority to take a
more stringent view, interpreting
the term broadly to cover as
many activities as possible.
From the perspective of Act’s
declared protective nature, it is
very difficult to understand why
certain groups of employees,
namely shop assistants, should
enjoy increased protection
during public holidays whilst
other employees within the store
(for instance warehouseman)
should be permitted to work.
Such an interpretation appears
to be discriminatory, yet it
seems that this is precisely the
Inspection Authority’s position.
Furthermore, it is conceivable
that activities that fall within the
16 | REAL ESTATE GAZETTE
permitted category could be
in fact carried out by the same
employees who would otherwise
attend to customers, depending
on the wording of their
employment contracts. In such
a case, even those employees
would lose the Act’s protection
completely which would clearly
defeat the Act’s goals.
The position is less clear
regarding goods ordered online.
According to Inspection Authority
figures, from 349 inspections
made over the Christmas
period, there was only a single
case of alleged violation. One
of the largest e-stores in the
Czech Republic remained open
at Christmas time, arguing that
distributing goods ordered
online does not fall within the
scope of the Act. However, the
Inspection Authority stated that
such activities are prohibited as
distribution of goods falls within
the definition of sales activities
noted above, and immediately
commenced administrative
proceedings against the store
in question. Should the result
of these proceedings be the
imposition of a penalty, it is
extremely likely that the e-store
will file for review with the
administrative courts.As the Act
includes many loopholes and the
stance adopted by the Inspection
Authority has not always followed
logical reasoning, it will be
interesting to follow the outcome
of this case and learn the position
of administrative courts.
SHOPPING CENTERS | CZECH REPUBLIC
Shopping area—bring
a tape measure with
you
Finally, the meaning of the
term “shopping area” of the
store—this being the major
criterion for whether or not
sales activities fall within the
scope of regulation—should
be considered. As noted above,
the Act applies primarily to
stores whose shopping area
exceeds 200 sq.m., subject to
certain exceptions. According
to the Inspection Authority,
the shopping area should
be calculated in terms of
the Commission Regulation
(EC) No. 250/2009 of 11
March 2009, since Czech law
itself contains no such term.
In practice, the shopping
area encompasses the area
accessible to customers
including fitting rooms, areas
taken up by counters, as well as
the area behind the counters
used by shop assistants. Offices,
warehouses or preparation
places, workshops, stairs
and other social areas are
excluded. Even though this way
of measuring premises seems
reasonable, the problem is
not the way of measurement
but the surface area itself.
Considering the declared
intent of the Act, there is no
reasonable explanation why
employees working in the
same sector and perhaps even
under the same or very similar
conditions should be treated
differently just because of the
surface area of the shop. Quite
ironically, the explanatory
memorandum to the Act notes
some uncertain positive impact
on small and middle-sized
businesses because large stores
must remain closed. Regardless
of the discriminatory nature
of such a statement, it
appears ambiguous since
the primary objective of the
Act is employee protection.
It is perhaps only a slight
exaggeration to say that
despite (or maybe because of)
the concise wording of the Act,
it contains more contradictions
than other legislation consisting
of hundreds of sections.
ISSUE 27 • 2017 | 17
SHOPPING CENTERS | FRANCE
SUNDAY WORKING IN
SHOPPING CENTERS AND
DEPARTMENT STORES IN
FRANCE
JÉRÔME HALPHEN AND VANESSA LI, PARIS
T
rading and
Sunday working
has traditionally
been influenced
by cultural, religious and social
considerations. Standard
working days in the European
Union (EU) are usually Monday
to Saturday and Sunday
working has been considered
exceptional in most countries.
There are no specific EU
regulations regarding Sunday
working. Article 2 of the
European Social Charter
indicates only that Member
States should agree to ensure
a weekly rest period which
shall, as far as possible, coincide
with the day acknowledged
by tradition or custom in that
country or region as a day of
rest. Therefore, the weekly rest
day depends on every country’s
own traditions and rules.
In France, there are two main
principles:
•The principle of a weekly rest
time corresponding to 35
consecutive hours (24 hours
18 | REAL ESTATE GAZETTE
corresponding to a full day,
plus 11 hours of daily rest
time), as employers are not
legally allowed to have their
employees working more
than six days a week, and
•The principle of a weekly rest
day given on a Sunday, unless
otherwise provided by any
legal or collective bargaining
agreement provision.
Any infringement of these
legal principles may result in
significant criminal fines and
civil indemnities.
Until recently, several
derogations from this rigid
legal framework were possible.
For example, establishments
that cannot close because of
constraints on production,
activity, or public need could
give the weekly rest on a day
other than Sunday by rotation.
Other derogations applied in
different sectors, for example,
the food industry and tourism
or hot spring areas. However,
most derogation rules were set
by different decrees decided by
the French Government with
limited flexibility for companies.
Official reports outlined the
necessity to deregulate some
laws for the sake of economic
growth and to balance the
social and economic needs
of modern society along with
the reality of our increasingly
consumer-led lifestyles. Thus
the French Government
recently reviewed the general
principle that bans working on
Sundays.
As a result, the Macron Law,
adopted on 9 June 2015, has
introduced more clarity and
flexible arrangements for
Sunday working by easing the
conditions under which it may
be introduced.
The changes are aimed at
(1) providing more flexibility
for (non-food) retailers to
open on a permanent basis on
Sundays; and (2) extending the
opportunities for small traders
and businesses to participate
in the development of the
economy and growth of their
cities by allowing them to open
from time to time on Sundays.
The main rules
governing permanent
Sunday working
As a general principle, Sunday
working should be implemented
on a voluntary basis.
Before the Macron Law,
permanent Sunday working
was only permissible in several
specific areas that were not
legally defined but set by the
Prefect of each region. This was
a system that smacked of lack
of transparency.
The Macron Law has now
defined the geographical areas
where employers operating in the
retail industry may remain open
on a permanent basis on Sundays.
The French Employment Code
has set four new categories
of zones where working
on Sundays is possible for
retail businesses and service
industries:
•Those zones designated by
the Prefect of the regions as
international tourist areas,
based on factors such as their
commercial reputation, their
cultural standing and heritage,
and what they offer in terms of
leisure facilities.There are 12
such zones in Paris, for example.
•The tourist zones, typically
those where tourists spend
significant amounts of money
in the area.
•The commercial zones which
feature particularly important
commercial offerings.
•Railway stations which are
not included in one of the
other zones where working
on Sundays may be allowed.
In France, even if shopping
centers are rarely located in
those geographical zones, the
department stores generally
operate in most tourist
zones where businesses are
now allowed to open on a
permanent basis every Sunday.
Retailers operating within these
areas may derogate from the
ISSUE 27 • 2017 | 19
SHOPPING CENTERS | FRANCE
principle of a weekly rest day
on Sundays by giving rest on a
rotational basis for all or some of
the workforce, subject, however,
to the existence of a collective
bargaining agreement under
which the employees concerned
will be adequately compensated.
The compensating provisions
include salary increases, as well
as policies to benefit certain
categories of employees, such
as disabled persons, to ensure
a good work/life balance, and
to ensure the costs of any
additional childcare are met.
Consequently, most
department stores in Paris
have entered into collective
bargaining agreements with
their trade union on how
Sunday working may be
implemented. For example,
the Galeries Lafayette signed a
collective bargaining agreement
in June 2016 providing double
time for the first eight Sundays
worked by employees along
with a compensatory rest
day. The BHV meanwhile has
negotiated for its employees
double time for the first 15
Sundays worked and 50 per
cent additional pay for all other
Sundays worked beyond that.
Additionally, childcare benefits
have been negotiated.
However, the collective
agreements negotiated within the
department stores themselves
are not applicable to employees
20 | REAL ESTATE GAZETTE
of business partners or suppliers
who are operating within the
department stores but are not
employed by them. As most
department stores work together
with brands and retailers who
employ their own personnel,
those brands and retailers
should negotiate their own
collective bargaining agreements
taking into consideration the
relevant legal provisions and
the benefits granted by the
department stores to their
employees. For instance, in the
collective bargaining agreement
negotiated within Printemps
signed on 30 December 2016,
it is clearly specified that the
agreement does not apply to
individuals who are employed
by partners of Printemps who
are free to determine their own
regulations on Sunday working.
Printemps will ensure that the
business partners and suppliers
whose employees work for
them on Sundays comply with
their obligations by providing a
specific statement to that effect,
and informing their employees
about the benefits granted to
Printemps’ own employees.
Companies employing less
than 11 employees could
also benefit from the new
system without entering into a
collective bargaining agreement
provided that the employer
has obtained the majority of its
employees’ approval.
SHOPPING CENTERS | FRANCE
Working during
Mayor’s Sundays
centers or department stores
who can suggest specific dates.
In other words, the owners of
In addition to the permanent
derogations based on geographic shopping centers can play an
active role in the determination
zones, the Macron Law has also
amended regulations governing
of the most appropriate dates
Mayor’s Sundays.
to boost their activities and
take advantage of the times
According to the Mayor’s
Sundays system, companies
increased crowds are expected
operating in certain industries are in shops during the year.
allow to open on Sundays subject
French regulations on Sunday
to the terms and conditions set
working may not be considered
by the Mayor relating to salary
a top priority in the area of
and rest days. If the company has
commercial leases with French
a health and safety committee,
department stores or shopping
consultation with that employees’ centers. However, the assumption
representative body is required.
that the lessee can necessarily
The initial number of Sundays
open on Sundays simply by
decided by each Mayor was
being authorized to do so by
increased from five to 12. By a
the shopping center is, at least,
specific decision of the Mayor
misleading. In practice then,
of each city, a limited number of
the issues surrounding Sunday
industries are allowed to operate
working in France should not be
on 12 Sundays per year. In other
ignored by retailers when they
words, on an exceptional basis
are negotiating their commercial
and only on the dates decided by
lease with shopping centers
the Mayor, a company operating
or departments store. It is not
in an industry covered by a
municipal deliberation is allowed unreasonable in such negotiations
to consider as essential
to open on Sundays, subject to
any other specific conditions laid conditions of the lease (i) that
down by a national industry-wide the lease allows the lessee/
retailer to open on Sundays, and
collective bargaining agreement.
(ii) that the lessee/retailer will
In practice, the dates set by
not be in breach of its obligations
the Mayor generally match the
main holidays and sales seasons where there is a provision in the
lease that the lessee/ retailer will
(Christmas, winter sales
open the store every Sunday and
(January) and summer sales
(June–July)). The decision of the the lessee/retailer is not able to
Mayors might also be influenced do so under the conditions set
by the owners of shopping
out above.
ISSUE 27 • 2017 | 21
SHOPPING CENTERS | ITALY
GOODWILL AND
INDEMNITIES IN ITALIAN
SHOPPING CENTERS
PAOLO FOPPIANI, ALESSIA BILOTTI AND EMANUELA NITTI, MILAN
S
hopping centers
occupy a strategic
position in the Italian
real estate market.
From a legal standpoint the
use of the real estate units that
make up a shopping center is
regulated by two different types
22 | REAL ESTATE GAZETTE
of contracts: the property lease
agreement and the business
branch lease agreement.
The business branch lease
agreement is the contractual
form most commonly used
in shopping centers. Under
the authorization scheme, the
lessee acquires not only the
right to use the physical space
but also the right to request
the necessary permits for the
commercial activity together
with the goodwill of the
shopping center. These aspects,
together with the real estate
SHOPPING CENTERS | ITALY
units, constitute the business
a) the lease agreement
concerns an urban building
branch to be leased to the user.
with non-residential use;
There are additional advantages
b) the property is used for one
to using a business branch
of the activities referred into
lease agreement. In terms of
section 27, paragraph 1 of the
Law 392/78, the Italian Tenancy
Italian Tenancy Law, namely
Law, the mandatory provisions
“industrial, commercial and
concerning, for example, the
tourist activities, sports centers
length of the lease, rent controls
and centers for recreational
and the right of the tenant to
withdraw from the lease in certain activities, hotels and other
organizations for the purposes
circumstances, are not applicable.
of promoting tourism” which
It should be noted too that,
must be exercised habitually
since the introduction of the
and professionally (section
Law Decree No. 133/2014
34, paragraph 1 of the Italian
(now Law No. 164/2014), the
Tenancy Law);
parties to a commercial lease
c) the property must be used
agreement with an annual rent
for the exercise of activities
higher than EUR 250,000, may
also depart from the mandatory used directly by the public
(section 35 of the Italian
provisions of the Italian
Tenancy Law).
Tenancy Law. However, those
On the other hand, an indemnity
commercial lease agreements
for loss of goodwill is not due:
for annual rents of less than
a) where the lease agreement is
EUR 250,000 remain subject to
terminated because the tenant
these mandatory provisions.
has not renewed it, because of
Among these provisions,
the tenant’s early withdrawal, or
sections 34 and 35—governing
default by the tenant;
indemnities for the loss of
b) where the lease agreement is
goodwill to be paid by the
terminated because procedures
landlord to the tenant—are of
have been initiated under Italian
particular relevance.
insolvency law;
These sections provide that,
c) in case of property used for
in case of termination of the
professional activities;
lease, the tenant is entitled to
d) in case of property used for
receive an indemnity for the
temporary activities;
loss of its commercial goodwill
equal to 18 months’ rent (or 21
e) in case of properties
months in the case of a hotel
additional or internal to train
lease agreement), provided the
stations, ports, airports, service
following conditions are satisfied: stations, hotels and resorts.
The aim of sections 34 and
35 is to compensate the
tenant for losses incurred as a
consequence of the termination
of the lease and to prevent the
landlord from benefitting unfairly
from any increase in the value of
the property as a result of the
tenant’s activity on the property.
With particular reference to
the exclusion of properties
located within or additional
to larger building complexes,
noted at e) above, the legislative
intent is that the tenant
should not suffer the loss of
the goodwill created by the
tenant himself by means of
the activity performed in the
leased property. Thus, the aim
of the exclusion is to avoid
the landlord paying the tenant
“
A recent Italian
Supreme Court case
ruled that, regarding
lease agreements
of property
located within a
shopping center,
compensation for
the loss of goodwill
may be due to the
tenant.
”
ISSUE 27 • 2017 | 23
SHOPPING CENTERS | ITALY
for goodwill which exists
where customers are not a
consequence of the activity
performed by the tenant,
but who are, in fact, simply
a reflection of the specific
location of the property within
a larger building complex,
whose users guarantee a
continuous flow of customers.
A recent Italian Supreme Court
case, concerning indemnity for
the loss of goodwill regarding
commercial leases of property
located within or additional to
a shopping center, highlights
the issues. The Court in this
case ruled that, regarding
lease agreements of property
located within or additional to a
shopping center, compensation
for the loss of goodwill may be
due to the tenant. The Court
maintained that, ultimately, any
decision on whether or not
the conditions for payment of
the goodwill indemnity exist
lies with the courts, and that
sections 34 and 35 of the Italian
Tenancy Law must form the
basis for that decision.
The case in question concerned
a property unit that was being
used as a launderette and
located within a shopping center.
On termination of the lease,
the tenant claimed a goodwill
indemnity from the landlord.
While the Court of First Instance
24 | REAL ESTATE GAZETTE
rejected the claim, the Court
of Appeal (whose decision was
subsequently confirmed by
the Supreme Court) ordered
the landlord to pay a sum
equivalent to 18 months’ rent,
noting that the launderette had
been operating since before the
shopping center was opened
and, consequently, the tenant
already had its own clients, to
be distinguished from the clients
of the entire shopping center,
and, therefore, it had “a proper
goodwill, independent from that
of the shopping center”.
The Supreme Court, in
confirming the decision,
deemed the following
circumstances to be significant:
i) Generally, it is not possible to
distinguish between goodwill
belonging to the shopping
center that does not also
belong to each activity that is
performed there, where such
activity implies direct contact
with customers and does not
have a professional nature or
transitional character.
ii) Contrary to the argument
of the landlord in this case,
the fact that rules on access
to the shopping center are
established by the shopping
center itself does not exclude
the goodwill of each single
activity performed within the
shopping center.
iii) In this particular case, it
was not possible to imply a
purely casual contact with the
customers of the shopping
center, since someone requiring
to have their laundry done “goes
specifically to the launderette,
bringing with him clothes or
anything else to be washed”.
It should be noted, however, that
SHOPPING CENTERS | ITALY
particular, the judge maintained
that a goodwill indemnity was
not due to the “tenant of an
outside area, located within the
parking area of an hypermarket,
separated from the public road
and intended for a truck for
the selling of sandwiches and
beverages”, as he considered
that such activity benefited from
“parasitical” goodwill.
Conclusion
there are also other cases which
have been decided differently. For
example, in a 1992 judgment of
the Constitutional Court, a more
restrictive position was adopted.
In fact, the Court in that case
maintained that the courts had no
discretion in this area and were
bound to apply the mandatory
list provided by section 35 of the
Italian Tenancy Law.
A subsequent ruling of the
Supreme Court in 1997 was less
strict. Indeed, in that judgment
it was stated that the list of
circumstances where a goodwill
indemnity need not be paid
(provided by section 35) was not
mandatory, and could be also
extended to similar situations. In
It is clear from the above then
that the current judicial position
is not unanimous. Indeed, it
is far from clear whether or
not a real estate unit within a
shopping center creates “proper”
goodwill or if it only benefits
from the “parasitical” goodwill
of the entire shopping center. In
particular, the Supreme Court in
2016 expressed a new principle,
by virtue of which, it is generally
not possible to distinguish
between goodwill belonging to
the shopping center that does
not also belong to each activity
performed within that shopping
center, provided that such activity
implies direct contact with users
and consumers, and does not
have a professional nature or
transitional character.
We await with interest new
cases and further developments
in this area.
ISSUE 27 • 2017 | 25
SHOPPING CENTERS | KENYA
THE RISE OF
THE SHOPPING
CENTER IN KENYA
JANE WANGARI, NAIROBI
B
ackground
Kenya has seen
a surge in the
number of
shopping centers being built
recently, with Nairobi—the
economic hub of the country—
hosting most of them. These
shopping centers are largely
catering for a growing Kenyan
middle class with disposable
income, and new standards are
being set in terms of their size,
use and quality. For new shopping
centers, there is a tendency
towards mixed-use centers as
opposed to the purely retail
centers that were previously
preferred. These now extend
to office, residential, retail and
leisure facilities.To illustrate this,
compare the Sarit Centre which
opened its doors in 1983 (and
was the first enclosed shopping
center), catered purely to retail
26 | REAL ESTATE GAZETTE
and occupied approximately
500,000 sq. ft., with the Two
Rivers Center which will be
a mixed-use development
occupying 1.7 million sq. ft. once
completed this year.
Nairobi has positioned itself
among the top cities in SubSaharan Africa, being the largest
shopping center development
location besides South Africa.
This has influenced other
satellite towns such as Mombasa,
Thika, Nakuru, Nanyuki, among
others which are catching up
with the wave.
There has been a concomitant
surge in foreign investment in
the country’s real estate market
due to the attractive returns
and the willingness of Kenyans
to embrace shopping centers.
This investment boom has
taken Nairobi by storm even
as concerns are raised about
the viability of the new center
projects around the country.
There are fears of oversupply
with shoppers abandoning
the older centers for new
and trendier ones. It is not
overstating the matter to say that
the shopping center landscape
is changing drastically with the
ongoing construction of several
centers and hotels within the
city—all scrambling for the
attention of the city’s growing
middle class.
Retail centers and
mixed-use trends
Traditionally, one high-rise
building would have a mix of
retail space on the lower floors,
office space on the upper
floors, and occasionally, some
penthouses on the top-most
floors. Currently there are
properly integrated mixeduse developments, which are
SHOPPING CENTERS | KENYA
delivering commercial, residential
and retail space on a far bigger
scale, with striking examples
being the above-mentioned Two
Rivers Center situated in the
affluent Runda area, the Hub in
the upmarket Karen area and
Garden City Center off the Thika
Super Highway.
There have also been
developments in satellite areas,
where projects like Konza City
and Tatu City, besides being
mixed-use for retail, residential
and commercial space, are also
incorporating industrial use.
The live–work–play lifestyle
concept is fast gaining popularity
in major cities worldwide, with
Nairobi being no exception,
bringing homes, offices, shops
and recreational spaces closer
to one another. This has partly
been attributed to the rising
middle class who are embracing
the one-stop-shop concept and
who have the disposable income
to generate consumer interest.
These mixed-use formats are
designed as city hubs where
people can live, work, shop and
play in the same location. When
all one needs is within easy
reach, there is greater efficiency
and more time available in
which to do all these things. For
companies, this will translate
into higher productivity at work
while for employees who live
within the developments it
means more time for recreation
and their families. There is also
the added advantage of less time
wasted in traffic commuting to
and from work.
The major centers in
Kenya
Kenya alone has over 53
shopping centers located in
various parts of the country,
with the majority being
concentrated in the capital city,
Nairobi. To highlight a few:
Two Rivers Center in
Runda
•Two Rivers Center is
expected to open in February
2017.
•The development is being
undertaken by Centum
Investment Company Limited.
•The center covers a total of
1.7 million sq. ft.
•The center has a mixed use
including a medium density
residential area, an office
block and a shopping center,
as well as a three and a five
star hotel.
•The center is expected to
cost Kenya Shillings (Kshs.)
15.5 billion (approximately
USD 153.5 million).
ISSUE 27 • 2017 | 27
SHOPPING CENTERS | KENYA
Garden City Center
•The Garden City Center
claims to be East Africa’s
second largest center after
the forthcoming Two Rivers
Center in Runda.
and accord the necessary
approvals.
5.The zoning regulations are
Benefits and
not always clear.
challenges
6. There are security concerns
Advocates of these large,
relating to terrorist threats,
mixed-use
shopping
centers
•It is financed by private equity
such as that experienced in
argue
that
they
provide
greater
fund,Actis.
the Westgate Center attack in
convenience by supplying
September 2013.These have
•It occupies a 32-acre mixedmultiple services in one
had a major effect on shoppers’
use development featuring
location; they enhance efficiency
retail, commercial and
willingness to visit the centers.
thus saving time; they create
residential space.
However, despite these threats,
employment opportunities;
retailers continue to show
The Hub in Karen
competition leads to supply of
confidence in the sector.
•This too is a mixed-use
quality products at competitive
7.There has been a lack of
complex which has been built
prices; and they help economic
government participation in
at a cost of Kshs. 4 billion
growth by boosting the real
such projects which, if provided,
(approximately USD 39.6
estate sector and opening up
would greatly aid their
million).
investment opportunities.
development.
•It is set on 20 acres in the
Despite these benefits, there
There are also some
green suburbs of upmarket
are some challenges facing
disadvantages associated with
Karen.
shopping centers in Kenya.
the growth in shopping centers,
•Its construction is in two phases, These include the following:
the major one being the death
integrating retail, office and
1.Poor roads and infrastructure
of smaller businesses since
residential use, as well as a hotel
have not kept pace with the
shoppers prefer centers where
and conference center.
growth in the number and size
they can purchase everything
of shopping centers.This can
The Village Market
under one roof. There is also
cause major traffic disruption,
•This is one of the older
arguably a detrimental effect
especially during the rush hours.
centers and is currently
on the environment as green
undergoing some renovation 2.The high cost of land,
spaces are being developed.
works.
especially in prime locations,
has deterred many who would The laws governing
•It is owned by Greenhills
be interested in investing in
shopping centers in
Investment Ltd, a local
shopping
centers.
Kenya
company.
3.The high cost of finance can
There are various laws governing
•It is currently undertaking a
also be a deterrent.
shopping centers in Kenya which
Kshs. 5 billion (approximately
include the National Construction
4.There are systemic delays. It
USD 49.5 million) expansion
Authority Act, No. 41 of 2011,
takes the land registries and
project which will involve
Environmental Management and
related planning authorities
the construction of 75 new
time to process and approve
Coordination Act, No. 8 of 1999,
retail outlets and 187 rooms
the change of use applications the Occupational Safety and
in a low cost hotel with a
28 | REAL ESTATE GAZETTE
conference center that will be
able to host 500 people.
SHOPPING CENTERS | KENYA
Health Act (Cap 514), the Physical
Planning Act (No. 6 of 1996),
amongst others.When purchasing
land the governing legislation
includes the Land Act (No. 6 of
2012) and the Land Registration
Act (No. 3 of 2012) which form
the substantive and procedural
laws respectively in the sale and
purchase of property
Management of
centers
Most of the shopping centers
are managed by letting and
managing agents.The owners
usually enter into a management
agreement with these agents for
provision of the services such
as rent collection, maintenance
of common parts, provision of
security, etc.
The agents are also responsible
for setting up the management
systems and recruiting the
management teams for the
shopping centers on behalf of
the owners. In some cases there
are in-house managing agents
appointed by the owners of the
shopping centers from their
subsidiary company.
Lawyers are involved in
providing a wide range of legal
services related to shopping
center projects. Legal advice
is crucial when purchasing the
land for such a project, ensuring
that due diligence is conducted,
coordinating any change of use
process, reviewing and negotiating
the agreement for sale and
assessing, stamping and registering
the transfer document. Lawyers
also provide support for property
management providers including
the review, negotiation and
preparation of leases, management
contracts, construction and
architectural contracts, supplier
and franchise agreements amongst
others.
Conclusion
Against a background of fastmoving change and turbulence
in the market, the owners
of shopping centers must
ensure they are in a position
to compete in the long term
by having strategies in place
that cannot be easily imitated
and bettered by other market
players in the industry.
IKM is a member of the DLA
Piper Africa Group, an alliance of
leading independent law firms
working together in association
with DLA Piper across Africa.
ISSUE 27 • 2017 | 29
SHOPPING CENTERS | MIDDLE EAST
THE CHALLENGES OF
COMPLEX RETAIL LEASING
ARRANGEMENTS IN DUBAI
TOM O’GRADY AND HELEN HANGARI, DUBAI
D
ubai is famous
for its world
class shopping
centers which,
in addition to retail offerings
featuring the world’s leading
brands and cutting edge local
brands, also offer a multitude
of leisure experiences including
indoor skiing and cage diving
with sharks. However, the legal
framework for leases does not
mirror this level of sophistication,
particularly as the existing
legislation does not differentiate
between residential and retail
premises, nor are there separate
30 | REAL ESTATE GAZETTE
courts to deal with disputes
arising from commercial leases.
The following details a number
of areas which currently pose
challenges when negotiating
complex retail leases in Dubai
and how these could be better
dealt with if the law is amended.
Early termination
of leases and lease
renewals
Dubai Law Number 26 of 2007
(as amended) (referred to here
as “L&T Law”) applies to all
leases relating to real estate in
Dubai, other than those for staff
accommodation.
The L&T Law offers protection
to tenants by limiting:
a ) the circumstances in which
a landlord may terminate a
lease prior to its expiry; and
b ) the circumstances where a
landlord may reject renewal of
a lease.
The limited grounds for early
termination of a lease by a
landlord include a failure to pay
rent within 30 days of notification
by the landlord, unauthorized
subletting, use of the premises
for illegal or immoral purposes
SHOPPING CENTERS | MIDDLE EAST
and the premises being left
unoccupied for 30 consecutive
days or 90 days in one year
(amongst others).Therefore
there is some debate regarding
whether a break right for
termination “without cause”
could be challenged by the party
not exercising it on the basis that
it does not fall within the grounds
for early termination permitted
within the grounds set out in
the L&T Law. However, clause 7
of the L&T Law allows for early
termination upon mutual consent
of the parties so, provided a break
right is well drafted, it ought to be
enforceable.
There are also narrow grounds
for a landlord to reject a lease
renewal.The grounds are that
the landlord wishes to carry
out renovations which are
not possible if the tenant is in
occupation, Dubai Municipality
require renovations to be made,
the landlord wishes to occupy
the premises itself or that it
wishes to sell the premises.
Therefore, it is not possible for
a landlord to refuse to renew
a lease upon its expiry, for
example, if it wishes to bring a
different brand into the shopping
center in order to change and
refresh the tenant mix.
There are no grounds set
out in the L&T Law allowing
a tenant to terminate a lease
prior to its expiry or allowing
a landlord to terminate, other
than in prescribed circumstances
and therefore tenants’ break
rights must be negotiated and
documented in the lease.
In order for the law to
better support common retail
arrangements, it would be useful
if an amendment to the law
removed the obligation on a
landlord to be obliged to renew a
lease upon its expiry other than
in the limited circumstances that
currently exist in the L&T Law and
expressly permitted break rights.
Rental increases on
renewal
Decree Number 43 of 2013
controls rent increases upon
renewal for leases in Dubai.The
law provides that the rent under
a lease may only be increased
upon renewal by reference to
how it compares to the rent
set out in the index compiled
by the Real Estate Regulatory
Agency (RERA). Although the
Decree applies to all leases in
Dubai, including free zones, in
practice a number of the free
zone authorities do not apply it
and this lack of implementation
should be clarified to bring more
certainty to tenants.
The Decree provides for the following increases in rent upon renewal:
Current rent compared to the rent set out
in the RERA rental index
Maximum permitted rental increase
upon lease renewal
Current rent less than 10% of the rent set out
in the rental index
No increase
Current rent between 11% and 20% less than
the rent set out in the rental index
5%
Current rent between 21% and 30% less than
the rent set out in the rental index
10%
Current rent between 31% and 40% less than
the rent set out in the rental index
15%
Current rent is more than 40% less than the
rent set out in the rental index
20%
ISSUE 27 • 2017 | 31
SHOPPING CENTERS | MIDDLE EAST
“
The total rental value can be very
hard to calculate.
This restriction on rent
increases upon renewal seems
to have been issued largely with
the aim of protecting tenants
of residential properties (which
tend to be for one-year terms).
It is not particularly suitable for
renewal of retail units within
a shopping center where, first,
the RERA rental index does
not cover specific shopping
centers and, second, the
revised rent can be negotiated
between the two commercial
parties. Therefore, it would be
beneficial for this control on
rental increases to specifically
apply to leases of residential
property only.
”
no effect vis-à-vis third parties;
it remains a personal contract
between the landlord and tenant.
Landlord and anchor tenants
alike, in Dubai’s shopping
centers, will frequently want a
lease of more than 10 years in
order to recover high levels of
capital expenditure for fitting
out and to provide continuity
and appeal in the shopping
center for customers and
other tenants. However, the
registration fees associated with
registration of a long lease at
the DLD are 4 per cent of the
total “rental value”. The total
rental value can be very hard to
calculate due to rent reviews
and turnover rents providing
Calculation of lease
variables and the law offers no
value for registration firm rules to deal with how this
of long leases
figure is calculated. Anecdotally,
Law Number 7 of 2006 in Dubai it is understood that turnover
requires leases for 10 years or
rent may be considered a
longer, but less than 99 years, to
commercial payment rather
be registered at the Dubai Land
than rent and can therefore
Department (DLD).The effect
be disregarded in these
circumstances, but this will very
of registration at the DLD is to
render the lease binding on third much depend on the particular
parties. Leases with terms of less scenario and the fee is still likely
than 10 years must be registered to be substantial in the case of
on the “ejari” system operated by a long term retail lease.
RERA and such registration has
Therefore, the L&T Law would
32 | REAL ESTATE GAZETTE
benefit from further clarity on
how to calculate this fee where
the rent throughout the term
of a long retail lease cannot
be known from the outset
and whether turnover rent is
excluded from such calculation.
Rent deposits
Article 20 of the L&T Law
provides that landlords may
obtain a deposit from a tenant
to guarantee the maintenance
of the premises upon the
expiry of the lease provided
that the landlord undertakes to
return the deposit or the part
remaining to the tenant upon
expiry of the lease.
A material issue which arises
from this is the reference to
guaranteeing the “maintenance”
of the premises which
therefore does not appear to
permit the landlord to use the
deposit in the event of nonpayment of rent. From the
tenant’s perspective, there is no
requirement for the landlord to
hold the deposit in a separate
account which is ring-fenced
in the event of insolvency or
an attachment order being
successfully placed on the
landlord’s bank accounts by an
order of the Dubai courts.
Certain provisions of the UAE
Civil Code also apply in relation
to security deposits as the
tenant depositing funds with
the landlord creates a contract
of bailment and a relationship
of bailor and bailee exists. The
provisions of the Civil Code
impose certain obligations
on the bailee (the landlord)
including that it:
•is liable for any wrongful act
in relation to the deposit or
any default in the safekeeping
thereof;
•must take the care of a
“reasonable man” in the
safekeeping of the property
bailed (ie the deposit);
•cannot use the property bailed
without the consent of the
bailor; and
•must return the property bailed
on the terms of the contract.
Whilst the Civil Code cannot
be amended by a Dubai law,
it would be helpful for any
revisions to or replacements of
the L&T Law to reflect these
existing obligations from the
Civil Code in order that more
landlords and tenants are aware
of these provisions. There is also
a risk that a tenant aggrieved by
a landlord using a rent deposit
could make a criminal complaint
to the police and prosecutors
for breach of trust under UAE
Penal Code, which can result in
imprisonment.
In order to keep pace with
growth in Dubai and the
growing sophistication of how
commercial property is operated
and managed, it would be highly
beneficial for the L&T Law to be
updated specifically to deal with
commercial leases differently
to residential leases in certain
respects.We are aware that
the Government is considering
a new landlord and tenant
law which will provide for a
distinction to be made between
commercial and residential
leases.This will allow for greater
certainty that complex retail
leases will be enforceable in full
and therefore move the retail
market towards the standards
expected by institutional
investors.This may in turn help
to trigger greater investment,
particularly from overseas
investment funds.
ISSUE 27 • 2017 | 33
SHOPPING CENTERS | POLAND
CURRENT LEGAL ISSUES
FOR SHOPPING CENTER
OPERATORS
PAWEŁ BIAŁOBOK, ALEKSANDRA KOZŁOWSKA
AND ANNA KRZANICKA, WARSAW
I
ntroduction
The most important legal
issues currently affecting
the shopping center
sector are the following:
1.proposed changes in the law
on Sunday trading;
2.practical problems connected
with the application of
the Restructuring Act to
the termination of lease
agreements; and
34 | REAL ESTATE GAZETTE
3. the change of the Polish
tax authorities’ position on
VAT refunds for real estate
transactions.
This article will examine each
of these in turn.
Proposed restrictions
on Sunday trading
In October 2016, a citizens’
bill proposing restrictions on
Sunday trading was submitted
to the Polish Parliament.The bill
proposes that Sunday trading
be limited to seven specific
Sundays during the year, namely,
the two Sundays immediately
before Christmas, the Sunday
immediately before Easter, the
last Sunday of January, the last
Sunday of June, the first Sunday of
July, and the last Sunday of August.
The bill also proposes to limit
trading activity on Christmas Eve
SHOPPING CENTERS | POLAND
Its opponents claim, on the other
hand, that they will result in a loss
of income generated by the retail
sector (including the income of
shopping center operators), which
will in turn mean job losses and a
rise in unemployment.
The bill is still at the initial
stage of the legislative process
and therefore it is difficult to
predict whether the proposed
changes will actually come into
force. However, shopping center
operators should be aware
that these changes may be
implemented and the effects they
may have on their businesses.
Act on Restructuring:
termination of lease
agreements
(shops would close at 2:00 pm)
and on Easter Saturday (again a
closing time of 2:00 pm would
be imposed). However, these
limitations would not apply to
shops run by entrepreneurs with
no employees, among others.
This citizens’ bill raises many
questions. On one hand, its
supporters claim that the changes
will improve the work/life balance
of employees in the retail sector.
On 1 January 2016, substantial
pro-business legal reforms
were implemented to address
creditor dissatisfaction with
costly and lengthy bankruptcy
proceedings.These reforms—
comprising significant changes to
the existing Act on Bankruptcy
and an entirely new Act on
Restructuring, containing a
raft of rescue and recovery
restructuring processes inspired
by English and US procedures—
are intended to introduce a real
“second chance” policy in Poland.
There are currently four types of
restructuring proceedings under
Polish law: (i) proceedings for
the approval of an arrangement;
(ii) arrangement proceedings;
(iii) accelerated arrangement
proceedings; and (iv) rehabilitation
proceedings.
These regulations may cause
significant problems for the
operators of shopping centers.
As a general rule, from the
initiation of restructuring
proceedings to their completion
or redemption, the lessor
cannot terminate a lease
agreement for premises in which
the debtor runs its business if
it does not have the permission
of the creditors’ committee.
This prohibition refers to
the termination of lease
agreements after the initiation
of restructuring proceedings.
However, there is some doubt
as to whether the prohibition
applies only to agreements
terminated after the initiation
of restructuring proceedings
or also to agreements
terminated before the initiation
of restructuring proceedings
for which the notice period
would end after the initiation of
such proceedings. In our view,
this prohibition refers only to
lease agreements that were
terminated after the initiation of
restructuring proceedings.
This situation may be
problematic for shopping center
operators because the initiation
of restructuring proceedings—
in most cases—is the result of
serious financial problems and
lack of liquidity. This means that
the debtors may not be able
ISSUE 27 • 2017 | 35
SHOPPING CENTERS | POLAND
to buy stock and their shops
will remain empty—which is
harmful to the reputation of the
shopping center.
However, these restrictions
do not apply to the termination
of lease agreements that occur:
(i) with the agreement of the
parties; (ii) as a result of the
debtor’s (or administrator’s)
failure to fulfil the obligations
under the lease agreement after
the initiation of the restructuring
proceedings; and (iii) due to the
expiry of the term for which the
lease agreement was concluded.
This means that if the debtor
36 | REAL ESTATE GAZETTE
(or the administrator) does not
pay the rent after the initiation
of restructuring proceedings,
the lease agreement may be
terminated without taking into
consideration the restrictions
stipulated in the Act on
Restructuring.
Tax issues
The change of approach of
the tax authorities in Poland
creates uncertainty for real
estate investors. In the past,
the tax authorities claimed that
the sale of a shopping center
or an office, which is the main
asset of the seller, constituted a
delivery of goods. However, they
now claim that it constitutes a
transfer of an organized part
of an enterprise. This poses a
significant challenge for shopping
center operators.
In the case of an asset deal,
the proper determination of
the subject of the transaction
(ie whether it is the sale of an
individual asset or of a going
concern or an organized part
thereof) is crucial, due to the
different tax consequences in
both cases. In the case of the
sale of an individual asset,VAT
is usually due.VAT is generally
SHOPPING CENTERS | POLAND
“
In recent months, the tax authorities
have started refusing to grant VAT
refunds.
”
neutral for the parties to the
transaction, that is, it is paid by
the seller and then refunded
to the purchaser. However, in
the case of the sale of a going
concern (or an organized part
thereof), non-refundable transfer
tax amounting to 2 per cent
of the value of the transaction
must be paid by the purchaser
(known as the tax on civil law
transactions).Therefore, if after
the transaction the subject of
the transaction is reclassified
from the sale of an asset to the
sale of an organized part of an
enterprise, the VAT refund will be
questioned by the tax authorities
and 2 per cent transfer tax will
be due.With this risk in mind,
before the transaction, both the
seller and the purchaser apply
for rulings in order to confirm
the way in which the planned
transaction will be taxed, that is,
whether it will be subject to VAT
or whether the purchaser should
pay transfer tax.
In recent months, the tax
authorities have started refusing
to grant VAT refunds and to
question previously issued tax
rulings that classified the sale of
commercial real estate (which is
the seller’s main asset) as being
the delivery of goods and thus
subject to VAT. The tax authorities
now argue that tax rulings do not
protect the purchaser because
the factual state differs from that
described in the application for a
ruling, for example, the taxpayer
did not mention some details of
the transaction. It is very likely
that as taxpayers defend their
position in court proceedings,
the courts will come down on
the side of the taxpayer. However,
the current uncertainty is causing
some investors to refrain from
entering into transactions.
ISSUE 27 • 2017 | 37
SHOPPING CENTERS | PORTUGAL
ISSUES TO CONSIDER WHEN
NEGOTIATING SHOPPING
CENTERS’ LEASE AGREEMENTS
LUÍS FILIPE CARVALHO AND TÂNIA GOMES, LISBON
A
ccording to
recent statistics,
shopping centers
are still the main
retail space format in Portugal
in terms of gross leasable area
(GLA). It was recently confirmed
that at least two new shopping
centers will be built in 2017 and
three existing centers will be
refurbished and/or expanded.
Discussions on the terms of
the agreements for the use of
stores in shopping centers are
becoming more frequent, in
particular, how the rents are
calculated and reviewed.
The contracts for the use of
stores in shopping centers and
in other commercial complexes
such as retail parks and outlets in
Portugal are considered atypical
contracts.This means they are
not subject to any specific legal
regime, including the law on
leases, being subject instead to
the parties’ agreement under
the principle of freedom of
contract, as laid down in the
Portuguese Civil Code. Although
38 | REAL ESTATE GAZETTE
the Portuguese New Urban
Lease Law (NRAU) is far more
permissive than its predecessor,
particularly in relation to
commercial contracts (leaving
parties significant autonomy
to negotiate the main terms of
lease agreements) the owners
and managers of shopping
centers tend to use the atypical
agreement, known as a “contract
for the use of stores in shopping
centers” as it still has some
important advantages when
compared to the NRAU regime.
In particular, it is not subject to
the law on leases, such as timeconsuming eviction procedures
and preemption rights, among
others). Also, contracts for the
use of stores in shopping centers
usually include, in addition to
the use of a specific store or
area, the rendering of services
such as telecommunication,
infrastructure, maintenance,
cleaning and safety, and IT
equipment, among others,
reflecting the inextricable link
between the use of the store and
services provided by the owner/
manager of the shopping center.
This is the reason why the courts
and academics alike accept that
such agreements cannot be
construed as lease agreements
and should be excluded from
Portuguese lease law.
SHOPPING CENTERS | PORTUGAL
“
In recent years consumer spending
habits have changed across the world,
and strong online sales are now
important to a retailer’s success.
”
Rent and other
economic terms
The freedom to negotiate
contracts for the use of stores in
shopping centers is also applicable
to the calculation of rent and to
the terms of rent review, both
of these being freely negotiable
between shopping center
owners or their management
companies and shopkeepers (for
ease of reference, in the rest of
this article, we will refer to the
parties as “landlord” and “tenant”,
respectively).
Typically, besides a monthly
base rent and service charges,
landlords and tenants will
agree to fix a “turnover rent”
(commonly referred to as
variable or percentage rent),
which is calculated by the
gross income earned from the
business carried on at the leased
premises. The ways in which
turnover rents are determined
may vary, and experience tells
us that much depends on
the landlord and also on the
negotiating power of the tenant.
The most common turnover
rent models used in Portugal are
the following:
•An amount calculated by a
fixed percentage of the gross
income generated at the
store, which is only payable
to the extent that it exceeds
the base rent. This fixed
percentage is commonly fixed
at 7 per cent in shopping
centers, but it may vary for
anchor units.
•During the store’s first
contractual year, a minimum
guaranteed rent is fixed. This
ISSUE 27 • 2017 | 39
SHOPPING CENTERS | PORTUGAL
will be replaced in subsequent
years by a rent based solely
on a certain percentage
(fixed at the start of the
contract) of the gross income
generated at the store during
the preceding year.
is agreed that a break clause may
be exercised by the landlord if
the tenant’s gross income falls
below a certain amount per year.
In contracts for the use of
stores in Portugal, the gross
income typically used to
The base rent review may also
calculate such turnover rents
be calculated by the turnover
includes all moneys resulting
generated at the store in
from (i) sale of articles, products
previous years.
or services, (ii) leasing of
equipment, articles or products,
Importance of
(iii) as well as revenues that may
determining an
accurate gross income be originated in the store by any
other means, including but not
More important than discussing
limited to sales through agents,
the structure or the method of
calculation of the turnover rents, traders or representatives
and external sales made via
it is crucial for both landlord
customer visits, excluding VAT.
and tenant to determine how
This is the model that has
the gross income earned will be
been used for some decades by
determined. The way in which
the majority of shopping center
this is calculated also has an
owners/managers. However, the
impact on other contractual
exponential growth in online
terms as well as the turnover
sales has given rise to new
rent and rent reviews. It is
particularly important where it
problems between tenants and
40 | REAL ESTATE GAZETTE
landlords, as described below.
Online sales impact
on gross income
Whilst the pivotal element
for the success of the tenant’s
brand was its store presence
in a shopping center, in recent
years consumer spending habits
have changed across the world,
and strong online sales are now
important to a retailer’s success.
Today, physical and online stores
are inextricably connected.
Statistics show that 23 per cent
of internet users in Portugal
made online purchases in the
first quarter of 2015, but more
recent statistics indicate that 35
per cent of Portuguese internet
users are now e-shoppers.
It is, therefore, important for
landlords to understand how
and which online sales should
be taken into account, how
financial records should be
audited and monitored, and
SHOPPING CENTERS | PORTUGAL
whether the tenant’s business
structure is compatible with
such provisions, in particular
multichannel retailers.
In fact, the huge growth in
online retail sales has forced
landlords to rethink the
turnover rent provisions in
order to ensure that they
capture all possible items,
especially given the trend
towards considering physical
stores as “showrooms” and the
fact that tenants’ businesses
are now operating in different
channels, making it possible
for a customer to order goods
from smart phone applications
even while they are inside a
store. For instance, to avoid
rent reductions, landlords often
try to include in the gross
turnover goods purchased
online and collected at the
store (commonly referred to
as click and collect), gift cards,
vouchers and goods ordered instore but delivered at home.
However, from a tenant’s
perspective, this may be
unreasonable, particularly if it
considers that it is its strong
online presence and other
channels that have an impact on
the success of the store located
in the shopping center and not
the other way round. As this
may be true for some tenants,
but not for others, it is easy to
see why this has led to some
debate within the sector.
Conclusion
Given what has been said
above, we consider that there
is no fair standard provision
that fits all tenant and landlord
interests, but it is important
when negotiating such
provisions to understand the
role of the physical store in
the tenant’s turnover and also
the tenant’s business structure
in order to determine how its
accounting information may be
accessed and accurately audited
to calculate its turnover rents.
Since parties in Portugal are
free to agree their own rent
terms and conditions, it is
advisable that the contracts
for the use of stores include
provisions on online/
multichannel sales, in order
to align both landlord and
tenant interests. It must be
remembered that the success
of a shopping center depends
on the performance of the
stores within it, and the tenants’
success depends not only on the
shopping center’s performance
but also, in some cases, on
the sales and the marketing
provided via other channels,
which may be inextricably
connected and co-dependent.
ABBC & Associados law firm is DLA
Piper’s relationship firm in Portugal.
ISSUE 27 • 2017 | 41
SHOPPING CENTERS | ROMANIA
DIFFERENT OWNERS WITHIN
A RETAIL PARK: PRACTICAL
ASPECTS
FLORINA TOMA AND CLAUDIU STAN, BUCHAREST
S
hopping centers,
including retail
parks, are viewed in
Romania today as
commercial and entertainment
hubs, where shops operate
together in an integrated
way to offer consumers an
enhanced shopping experience.
Whilst this integrated feel
may be fairly simple to achieve
when the retail park is owned
by a sole owner, who can
implement uniform treatment
across all tenants in terms of
business activity, opening and
closing times, configuration of
stores, etc, achieving the same
outcome when a retail park is
42 | REAL ESTATE GAZETTE
owned by two different owners
may prove more challenging.
Management of the
retail park
Retail parks are usually
designed to work as one block,
including the internal roads and
parking areas. The decision to
sell part of the retail park to
another party, such as an anchor
tenant, will mean that the
retail park is operated by two
different owners. Such a decision
should be taken only after
careful consideration of two
aspects which could impact on
the future operation of the retail
park, namely: (i) management of
the retail park and (ii) operation
of common areas.
In order to ensure the
integrated operation and
management of the retail park,
as well as regulating any other
aspects arising out of the
relationship between the two
owners (including the granting
of any other rights of use or
imposing restrictions/specific
covenants), the two owners
should consider entering into
a neighbouring agreement
establishing guidelines for
problem-free “cohabitation” in
the retail park.
Such an agreement will usually
regulate the overall activity in the
SHOPPING CENTERS | ROMANIA
“
The proper creation and implementation
of the various arrangements between the
owners of a retail park is a key element
for the operation of a retail park.
”
retail park (for example, shopping
hours, delivery conditions, etc); the
management and operation of the
common areas used within the
retail park (such as access roads
and car parks); and the payment
of service charges incurred in
relation to these common parts
or the conditions under which
construction or repair works may
be undertaken.
The neighbouring agreement
can also regulate the marketing
activities and the day-to-day
administration of the retail
park. One of the owners may
take responsibility for the
administration of the retail
park or both owners may
decide to appoint a professional
management company.
The neighbouring agreement
can also lay down certain
personal rights for the
owners such as the terms and
conditions applicable to the
right to access and use of the
car park owned by the other
owner. Restrictions should
be included with regards
to the usage right, such as
those preventing the blocking,
hindering, limiting or affecting in
any way the use of the car park.
The parties can also impose
conditions with regards
to maintenance, repair or
reconstruction works on
the car park (for example,
to perform such works only
outside the operating hours
of the other owner, to send
a prior written notice with
regards to such works or to
not affect or make unavailable
more than a certain percentage
of the car park through such
works).
The parties can also agree to
include taxes on the land on
which the new owner’s car park
is located in the service charges
payments.The observance of
this obligation to pay the service
charges or of other duties under
the neighbouring agreement can
be secured by a guarantee which
ISSUE 27 • 2017 | 43
SHOPPING CENTERS | ROMANIA
can be provided either as a cash
deposit or as a bank letter of
guarantee.
Nevertheless, the unitary
management of the retail park
can be limited in time.Thus, the
neighbours can agree that after
a certain time period lapses,
the management and operation
of the retail park can be split
between the owners. In this
case, the neighbours will have to
put in place practical measures
to ensure the effectiveness of
the separate management and
operation, such as installing
separate meters and connections
for the lights used in each of
the properties and/or on the
common parts, such as the
access roads.
In order to preserve the
commercial concept of the
retail park the parties to the
neighbouring agreement can
impose certain limitations
on the permitted use of the
neighbouring properties (for
example, to use the car park
only for purposes of parking
small vehicles or trucks used by
visitors or clients, to observe
the use of a specific building (for
example, DIY/hypermarket store,
etc). However, such restrictions
should usually be limited in time
due to potential breaches of
competition legislation.
Obligations generated for each
of the owners by their activity
in the retail park have to be
44 | REAL ESTATE GAZETTE
mirrored in the neighbouring
agreement for the other owner
as well.The neighbouring
agreement (or at least specific
rights provided therein) should be
recorded in the land register in
order to make them enforceable
against third parties (for example,
subsequent owners).
Operation of
common areas
Access and parking are essential
for conducting activity in a
retail park. Commercially, such
spaces become common areas
for the use of both owners,
their tenants and customers.
Legally, specific scenarios
must be put in place for the
operation of the common areas.
To identify the best approach,
the following scenarios are
worth exploring:
1.Each of the owners to hold
an abstract quota of the
ownership right over the
common areas and reciprocal
servitude rights over the
other’s quota.
In this scenario, each of
the owners will be entitled
to use the entire common
2.The new owner has exclusive
areas (whilst observing
ownership, whilst the initial
the permitted use) and to
owner has a servitude right
freely dispose of its own
over the common areas (both
quota. Although no disposal
for the use of the common
may be made without the
areas and for prohibition to
other owner’s consent, the
build on or alter the common
disadvantage is that either
areas).
owner can request the split
of the car park at any time.
The servitude is a right in
SHOPPING CENTERS | ROMANIA
rem, meaning that it will be
registered in the land registry,
it remains attached to the
common areas (irrespective
of the subsequent owners or
successors), it is enforceable
against third parties and is not
limited in time.
In this scenario, the initial
owner will be able to use and
access the common areas
directly and immediately
without any third party
cooperation and will also be
able to ground a potential claim
(or injunction) directly on the
servitude right. However, the
new owner could hinder the
use of the common areas by
the initial owner (for example,
by instituting barriers for access
in the car park).
3.The new owner has
exclusive ownership, whilst
the initial owner has a
usufruct right (non-exclusive
use) over the common areas
and servitude rights (both
for the use of the common
areas and for prohibition
to alter the common areas)
after the expiry/termination
of the usufruct.
Similar to the servitude,
the usufruct right is also a
right in rem. However, the
usufruct is limited in time to
a maximum of 30 years and
can be unilaterally terminated
by the new owner if the
initial owner abusively uses/
damages/deteriorates the
common areas.
In this scenario, the initial
owner will be able to use and
access the common areas
directly and immediately
without any third party
cooperation and will also be
able to ground a potential
claim (or injunction) directly
on the basis of the servitude
right. The initial owner will
also be entitled to conclude
various acts in relation to the
common areas.
Another important aspect to be
considered is the access of the
new owner’s shopping unit to
public roads. In order to ensure
such access, the new owner
will usually seek to obtain a
servitude of way right over the
internal access roads owned by
the initial owner for access and
passing, and a negative servitude
prohibiting building over the
inner access roads.
The servitude and/or usufruct
rights can be implemented
either through the neighbouring
agreement or through separate
specific deeds. Given that
these are rights in rem over
real estate assets, which are
registered in the land registry,
the neighbouring agreement
and/or the separate specific
deeds need to be concluded in
the form of a notarized deed.
The proper creation and
implementation of the various
arrangements between the
owners of a retail park is a key
element for the operation of a
retail park. That is why all such
aspects have to be thoroughly
considered. Here, as in so
many cases, “prevention is
better than cure”.
ISSUE 27 • 2017 | 45
SHOPPING CENTERS | THE NETHERLANDS
RENOVATION OF SHOPPING
CENTERS IN THE
NETHERLANDS
MARLIES VAN SCHOONHOVEN-SLOOT AND KIRSY CORTEN,
AMSTERDAM
I
ntroduction
The renovation of
shopping centers is
currently a topic of some
interest in Dutch lease law
and case law in this area is still
developing.The shopping center,
“Hoogh Catharijne” in Utrecht
train station is a striking example
of a shopping center that has
recently been renovated.This
article provides an overview
46 | REAL ESTATE GAZETTE
of legal considerations for a
landlord with regard to the
renovation of a shopping center.
A distinction will be made
between the situation in
which a lease agreement will
continue after the renovation,
and the situation in which the
lease agreement is terminated
because of the renovation.
Before that, however, it
is necessary to distinguish
between the two types of
commercial leases that are
used in the Netherlands.This is
the distinction between leases
agreed in terms of article 7:290
of the Dutch Civil Code (DCC)
(“retail space”) and leases agreed
in terms of article 7:230a DCC
(“office/other commercial/
industrial space”).The statutory
regimes for these leases diverge
slightly, but both regimes will be
covered in this article.
SHOPPING CENTERS | THE NETHERLANDS
Renovation with
continuation of the
lease
the leased space could fall within
the legal scope of renovations.
A renovation proposal must
be made in writing. According to
Urgent (renovation)
both the case law and academic
works
literature, the proposal has to
Urgent (renovation) works are
be fairly specific and realistic in
works that have to be carried
order to qualify as a renovation
out urgently by the landlord, and
proposal. It must clarify the need,
which cannot be postponed.
Therefore, article 7:220 paragraph scope and duration of the works,
the financial consequences (such
1 DCC provides that the tenant
as the rent after the renovation
is obliged to tolerate these
has been carried out), eventual
works, irrespective of whether
new lease terms and option
the lease governs retail or office/
periods, details of conditions
other commercial/industrial
on delivery and the term within
space.Works may be classified as
which the renovation of the
urgent if they have to be carried
leased space will be completed.
out before the end of the lease
agreement.These works can
It is only where the proposed
also include repairing damage
renovation qualifies as being
which has occurred or preventing reasonable that the tenant
possible future damage.
needs to cooperate. Whether
or not a renovation proposal
Renovation proposal
may be considered to be
Under article 7:220 DCC
reasonable, will depend on
paragraph 2, a landlord who is
the circumstances of the case.
planning to renovate the leased
space may present the tenant with Article 7:220 DCC is relatively
new, so the way in which it is
a “renovation proposal”.This is
interpreted is still developing
only available when the current
lease agreement will be continued. in the case law and literature.
However, the legislature has
A “continuation of the lease
agreement” is interpreted widely, provided certain factors which
have to be taken into account,
however it is provided that the
“place and function” of the leased namely: the nature of the works,
space are to remain the same.The the necessity of the tenant’s
scope of renovations is also to be cooperation, the financial
interpreted widely.They can relate consequences for the landlord,
any rent increase for the tenant,
to a partial renewal (because of
replacement or additions) but also the possibility of an alternative
to an entire renewal of the leased leased space by the tenant and
space.Therefore, demolition of
any other circumstances of
“
It is only where
the proposed
renovation
qualifies as being
reasonable that the
tenant needs to
cooperate.
”
ISSUE 27 • 2017 | 47
SHOPPING CENTERS | THE NETHERLANDS
the case. In practice, additional
circumstances have been
added as being important
in establishing whether or
not a renovation proposal is
reasonable. In this respect, there
is a specific rule for buildings
with more than 10 business
spaces laid down in article 7:220
paragraph 3 DCC, for example.
It should be noted that article
7:220 DCC is regulatory law,
meaning amendments can be
made (in writing).The most recent
standard terms of the Real Estate
Council (ROZ) model agreements
also deviate from these rules (see
further below).
Termination of lease
Urgent own use
If a “retail” lease is entered into
for a fixed period, neither the
tenant nor the landlord can
terminate the lease prematurely
(with the exception of
termination by mutual consent
or in cases where the contract
is breached). The lease can only
be terminated before the end
of the fixed period by written
notice of termination by the
landlord, who is obliged to cite
one of the mandatory grounds
for the termination.
One of the mandatory
termination grounds is urgent
own use. Under certain
circumstances, a renovation
may fall within the scope of this
termination ground.This could
48 | REAL ESTATE GAZETTE
SHOPPING CENTERS | THE NETHERLANDS
be the case if the size of the
leased space and/or its function
will change (substantially). For
example, the combining of
two small units (in a shopping
center) to one new (for example,
flagship) store, could fall within
the scope of urgent own use
because of renovation. Another
example is where the designated
use of the leased space will be
changed, for example from retail
space to housing.
The urgency of the renovation
also has to be assessed.
According to case law, the
renovation of a shopping center
is often considered to be urgent
if the layout or feel of the center
does not comply with current
standards. A restructuring of
(the rest of) the shopping center
can also constitute urgency, as a
(bad) business circumstance of
the landlord.
The tenant is not obliged to
accept a termination of the lease
by the landlord. In the event that
the tenant disagrees with the
termination, the landlord must ask
the court to terminate the lease.
Until such a decision is made by
the court, the tenant is entitled to
stay in the leased space. Because
such proceedings may take years,
the tenant can frustrate the
renovation fairly easily (since the
only cost to the tenant of staying
many more years in the leased
space will be legal fees).Therefore
it is advisable for the landlord to
seek legal advice at an early stage
of any planned renovation.
Balancing of interests
At the end of the tenth year of a
lease agreement, a lease on retail
space can also be terminated
by a judge after balancing the
interests of both tenant and
landlord. In case of renovation, the
termination grounds, urgent own
use and balancing of interests, can
be combined and argued together
by the landlord (in court).
Termination of 7:230a
lease
A landlord does not have to rely
on a notice ground to terminate
a lease agreement relating
to office/other commercial/
industrial space.This lease may
be terminated with due regard
to the remaining lease term and
notice period. However, there are
some protections provided to
the tenant, specifically an eviction
protection period of two months.
This can only be extended by
a judge three times in one year.
Each case will depend on its own
circumstances and much depends
also on market conditions.
Standard terms
It has to be taken into account
that the ROZ standard terms
are applicable to most Dutch
leases.According to the most
recent standard terms (2012
for retail space; 2015 for office/
other commercial/industrial
space), article 7:220 DCC is
not fully applicable.This means
that the standard terms are
more beneficial to the landlord
than the law. For example, the
opportunities to claim a rent
reduction or damages from a
landlord in case of defects (based
on articles 7:207 and 7:208 DCC),
are more limited based on ROZ
standard conditions. Furthermore,
regarding renovation, there is a
presumption that a renovation
proposal is reasonable if at least
51 per cent (instead of 70 per
cent based on article 7:220 DCC)
of the tenants leasing at least 70
per cent of the property agrees.
This 70 per cent includes vacant
units, with the landlord considered
to be the tenant of the vacant
units.Additionally, compared to
the statutory law,“renovation”
itself is defined more broadly in
the latest ROZ standard terms.
Conclusion
If a landlord wishes to carry out
renovation work to a shopping
center, there are several different
options.With regard to both
office/other commercial/industrial
space and retail space, the
landlord may present the tenant
with a renovation proposal during
the term of the lease agreement.
In that case, the lease agreement
will be continued.
Otherwise, the landlord may
try to terminate a retail lease on
the ground(s) of urgent own use
and/or balancing of interests at
the end of a lease period.
ISSUE 27 • 2017 | 49
SHOPPING CENTERS | USA
THE RESCUE OF
AÉROPOSTALE: A NEW
FASHION FAD FOR RETAIL
LANDLORDS
RICK CHESLEY, CHICAGO, ANN LAWRENCE AND
SHAUNEEN MILITELLO, LOS ANGELES
I
conic teen retailer
Aéropostale shockingly
escaped from what
appeared to be nearcertain bankruptcy liquidation,
thanks to a pair of unusual
suitors: real estate investment
trusts General Growth
Properties (GGP) and Simon
Property Group (SPG).
The companies, which act as
landlords for a combined total
of 237 Aéropostale locations,
teamed with liquidators and a
branding and licensing firm in an
unexpected eleventh-hour bid
to save 229 of the retailer’s 623
remaining stores with a winning
bid of $243.3 million—defeating
multiple competing bids that
planned to completely liquidate
and close all Aéropostale stores.
The transaction represents
the first time a retailer has
been restructured by vertically
50 | REAL ESTATE GAZETTE
integrating the chain through
its landlords and bifurcating
the business to have a
distinct operating arm and an
intellectual property arm.
Bidding to purchase a failing
retail tenant that has no real
property assets is a firstof-its-kind move for a real
estate investment trust. Many
industry observers were
uncertain whether the bailout
was a growth opportunity or
a desperate measure to avoid
failing at the mercy of the
bankruptcy process.
Due to the unique ownership
structure, however, the landlords
appear to have won twice—once
by retaining a key tenant that
would have otherwise shuttered
and stopped paying rent, and
again via the money that will
come back to them as part
owners of the joint venture.
SHOPPING CENTERS | USA
Had the retail chain gone
through a complete liquidation,
more than 14,500 employees
would have been jobless
and shopping center owners
across the country would have
been faced with hundreds
“
Bidding to
purchase a failing
retail tenant
that has no real
property assets is
a first-of-its-kind
move for a real
estate investment
trust.
”
ISSUE 27 • 2017 | 51
SHOPPING CENTERS | USA
of vacancies and lost rental
income. And since rental
leases are generally treated
as unsecured claims, the two
landlords would stand at the
back of the line with other
unsecured creditors in hopes
of getting paid sometime in the
future. Even then, the landlords
would receive pennies on the
dollar with their damages being
capped at an amount equal to
the greater of one year’s rent
or 15 per cent of the remaining
lease payments, not to exceed
three years’ worth of rent.
As part owners of the joint
venture, the landlords had
clout to renegotiate rents and
bring overheads under control.
With the incentive of profits,
the landlords have the upper
hand to secure considerable
rent concessions from other
landlords, saving 171 more
stores than originally planned.
While the plan was crafted
to ensure that at least 229
Aéropostale stores remain
open, it was vital for the
retailer’s future to bring
rents and operating costs
under control and let those
experienced in apparel retail
52 | REAL ESTATE GAZETTE
SHOPPING CENTERS | USA
brand management control the
intellectual property.
The landlords partnered with
Authentic Brands Group (ABG)
to benefit from their expertise
in branding and development
as well as an experienced team
that would be tasked with selling
inventory from closing stores.
The landlords created a joint
venture with ABG, which owns a
string of fashion brands, including
Judith Leiber, Marilyn Monroe,
Elvis Presley, Muhammad Ali, and
Juicy Couture; and liquidators
Hilco Merchant Resources
and Gordon Brothers Retail
Partners, whose expertise lies in
disposing of excess merchandise.
In addition to the expertise of
the retail landlords, the brand
has seemed to benefit from
ABG’s established expertise
in brand building and licensing.
To date, nearly 400 stores and
12,300 jobs have reportedly
been saved as part of the joint
venture’s efforts, with each
store expected to be profitable.
Only time will tell if this new
deal structure for landlords and
their distressed retail tenants is a
fashion fad or a fashion faux pas.
“
ABG owns a
string of fashion
brands, including
Judith Leiber,
Marilyn Monroe,
Elvis Presley,
Muhammad
Ali, and Juicy
Couture.
”
ISSUE 27 • 2017 | 53
SHOPPING CENTERS | ZAMBIA
THE SHOPPING
CENTER BOOM IN
ZAMBIA
CHANSA MULELA, LUSAKA
I
ntroduction
The commercial real
estate sector in Zambia
has experienced significant
growth over the last two
decades.This growth has been
accompanied by a large shift in
the way consumers shop, moving
from the traditional purchase
of goods at markets, standalone
shops and informal shopping
centers to much bigger, formal
shopping centers.The appeal of
shopping centers in Zambia, as
elsewhere, appears to be their
ability to offer consumers a
shopping experience as a leisure
54 | REAL ESTATE GAZETTE
and the rest of the country.
The business models of the
anchor tenants have proven
effective in a market that has
yearned for convenient access
to commodities within a 1 km
radius of homes or places of
It is easy to see then why
work.These anchor tenants
investors view this particular
sector as an attractive investment attract sufficient foot flow to
justify the tenancy of numerous
opportunity. Numerous anchor
retail offerings. The successful
tenants such as Shoprite, GAME
track record of shopping centers
Stores, Pick ‘n’ Pay, Spar, as well
such as Manda Hill and Arcades
as new entrants to the market
has validated the viability of the
such as Choppies, Food Lovers
sector and has also proven that
Market, Builders Warehouse,
Edgars and Woolworths are keen there is room for expansion due
to expand throughout Lusaka
to very high demand.
activity, more than simply the
opportunity to purchase goods.
In Zambia’s capital city, Lusaka, the
number of large shopping centers
has risen from two in 2001 to
twelve today, with more planned.
SHOPPING CENTERS | ZAMBIA
This shopping center boom is
even more interesting when one
compares the situation in Lusaka
to that of larger and significantly
faster growing economies such
as Lagos, Nigeria which, despite
having a significantly higher
population than that of the entire
country of Zambia, has less than
half the number of large shopping
centers than Lusaka.This begs
the question, “what is driving the
surge in the number of shopping
centers in Zambia?”
of consumers as a direct
consequence of growth in
the population, a beneficial
investment climate, stability of
investments in the real estate
sector in comparison to other
sectors, and availability of land
in prime locations as well as the
ability of developers to satisfy
financiers’ requirements, for
example by providing them with
adequate security and guarantee
of repayment through the high
rentals generated.
It can in fact be attributed
to a plethora of factors,
including growth in the number
From a legal perspective,
developers of shopping centers
and/or prospective investors in
this sector have had to become
familiar with the various legal
issues that affect their projects
including, but not limited to,
the relevant land laws which
govern key issues such as
land ownership requirements,
environmental laws, requisite
approvals by the relevant local
authorities, leasing requirements
and in certain instances, such as
where a developer is acquiring
an existing shopping center
for the purposes of expansion,
competition law requirements.
These points are covered in
more detail below.
ISSUE 27 • 2017 | 55
SHOPPING CENTERS | ZAMBIA
Land laws
It is important for developers
to ensure that they comply
with the provisions of, amongst
other statutes, the Lands Act
Chapter 184 of the Laws of
Zambia which governs the
acquisition and ownership
of land. One of the most
important points a developer/
investor in Zambia needs to
be aware of is that there are
restrictions around who can
own land. The law however
allows international investors
to own land upon obtaining an
investment permit pursuant
to the Zambia Development
Agency Act No. 11 of 2006.
In addition to enabling the
investor to own land, holding
an investment permit allows
56 | REAL ESTATE GAZETTE
investors access to various
protections as well as incentives
such as tax breaks provided
by the Zambia Development
Agency and Ministry of Finance.
It is also extremely important
for an investor to conduct due
diligence on the land earmarked
for development prior to the
acquisition to address any other
legal matters that may arise.
Approvals from local
authorities
A developer/investor also needs
to be aware of the relevant
local law requirements. The
two most important approvals
required from the local
authorities relate to zoning and
planning permission. The zoning
requirements in particular
should not be overlooked as this
has the potential to frustrate a
project, should it be discovered
that the land on which the
shopping center is intended
to be built is not zoned for
commercial use. A developer
also needs to ensure that the
requisite planning permissions
have been obtained from the
local authority.
Environmental
requirements
There has also been an
increasing awareness in Zambia
of the possible environmental
impact that large scale
developments may have on
the surrounding environment.
Accordingly, a developer needs
to ensure it complies with
environmental laws such as the
Environmental Management
SHOPPING CENTERS | ZAMBIA
Act No. 12 of 2011 and obtain
the necessary approvals such as
carrying out an environmental
impact assessment where
necessary. Developers need
to ensure that they take into
account and mitigate any social
impacts that the project may
have on the environment.
Recent experience has also
shown the importance of
engaging with and bringing on
board the affected communities
as their dissent could prove to
be an obstacle in the process of
obtaining the relevant approvals.
Leasing requirements
Last but not least, a developer
needs to ensure that it has
well-drafted leases in place,
particularly with its anchor
tenants, as this will have a huge
impact on, among other things,
its ability to bring other tenants
on board, secure financing
for the project and/or to sell
the shopping center to an
interested party should the
developer wish to exit. Under
Zambian law, failure to register
a lease in terms of the Landlord
and Tenant (Business Premises)
Act Chapter 193 of the Laws
of Zambia, for example, can
render a lease void. The
law also sets out specific
requirements in relation to
how leases can be terminated,
such as minimum notice
periods. A developer also needs
to be aware of the taxation
requirements applicable to
leases such as property transfer
tax, value added tax and
withholding taxes which would
need to be factored into the
lease agreements.
Conclusion
It is fair to say that the Zambian
retail sector, particularly the
development of formal shopping
centers, is investor-friendly and
the legal hurdles identified above
are surmountable.With the
exponential growth rate and
particularly a rise in the middle
income bracket of the population,
it is likely that consumer demand
for commodities will increase
and the number of shopping
centers will continue to increase
along with it.
Chibesakunda & Co is a member
of the DLA Piper Africa Group, an
alliance of leading independent law
firms working together in association
with DLA Piper across Africa.
ISSUE 27 • 2017 | 57
GENERAL REAL ESTATE | ASIA
RETAIL THERAPY: HOW
TENANTS SURVIVE THE
FREEZING RETAIL MARKET
IN HONG KONG
JANICE YAU GARTON, HONG KONG AND REBECCA WYLIE, LEEDS
H
ong Kong has
just emerged
from its warmest
January on
record, but the city’s retail market
is still facing a severe winter. Retail
sales declined for 22 months
straight to December 2016,
58 | REAL ESTATE GAZETTE
largely thanks to a decline in
mainland Chinese tourist arrivals
and the steady rise of the Hong
Kong dollar, making shopping in
Hong Kong increasingly expensive
for overseas visitors.
With retail sales suffering,
some tenants are looking to
reduce their rent or exit leases
early to keep down losses
from high rent and operational
costs. However, leases in Hong
Kong’s historically strong
retail market are notoriously
landlord-friendly, meaning there
is little potential for a tenant
GENERAL REAL ESTATE | ASIA
to negotiate provisions that
would grant them the right to
renegotiate terms in the event
of an economic downturn.
Consequently, retail tenants are
finding themselves tied to leases
with rents significantly higher
than the current market values,
given that retail rents have fallen
by up to 30 per cent from their
peak in 2012.
Tenants therefore have to look
beyond their contractual rights
to find a commercial solution.
This article considers the
various options that retailers
may consider in these difficult
circumstances.
the current market rent is,
whether the landlord owns
any additional properties with
similar tenants and whether
those tenants have also
attempted to restructure rent.
The tenant may try negotiating
a lower rent now, subject to
future increases, if the tenant
believes the long-term outlook of
the retail market is positive. For
example, the tenant could agree
that the rent will increase again in
three years when the market has
recovered.Another alternative is
to trade a lower rent for a longer
term by increasing the remaining
term of the lease.
Rent restructuring
Assignment or
subletting
Tenants may start an open
discussion with the landlord to
negotiate a reduction in rent.
Landlords are well aware of the
tough retail market conditions
facing their tenants in recent
years and may be sympathetic,
preferring to retain a reputable
tenant for a lesser rent for the
remainder of the term rather than
being left with an empty store.
Managing the negotiation
is key in rent restructuring.
Tenants must equip themselves
with a strong understanding of
their lease terms and their rent
restructure proposals before
beginning any discussions
with the landlord. Tenants can
strengthen their proposals
by corroborating them with
market data ascertaining what
The tenant may propose
assigning or subletting the lease
(either in whole or in part)
to a new tenant. Retail leases
generally do not allow the
tenant to assign, sublet, share
or transfer the whole or any
part of the premises, so such
proposals can only be accepted
through renegotiation. The
landlord will only consider this
solution if the effect means that,
at the very least, he is not out
of pocket and does not suffer
reputational damage from the
acceptance of a lesser tenant.
This option will therefore
require a good track record
from any proposed alternative
retail tenant in order to
persuade the landlord.
Relocation
Relocating is dependent upon
the willingness of the landlord
to cooperate and the availability
of alternative premises. The
landlord may be keen to retain
the tenant, even if this involves
relocation, thus providing the
tenant with the opportunity to
“right-size” in a proper (and
cheaper) location.
Buyout / Surrender
The tenant may offer the
landlord a buyout to terminate
the lease early. Factors such
as additional leases with the
same landlord can be used
as leverage, as well as the
likelihood of any future deals
with the landlord.
Going dark
Tenants are often obliged to
keep their premises open
during specified business hours
“
Burberry, Kering,
Gucci, Prada and
Chow Tai Fook
have all announced
they are attempting
to renegotiate
their rents
”
ISSUE 27 • 2017 | 59
GENERAL REAL ESTATE | ASIA
throughout the year. Any days
in which the shop is not open
for the specified hours would
constitute a breach of the lease.
Tenants can propose “going
dark”, that is, where the tenant
closes the store but continues
to pay rent. This would result in
substantial savings for the tenant
due to reduced operational
costs, whilst maintaining income
for the landlord. Tenants
must weigh up the financial
consequences of this route as
losses incurred in relation to
keeping the store operational
may be tax deductible.
Another strategy we have seen
involves partial surrenders, and
therefore reduced rent, including
the reduction of space by
boarding up the back half of the
shop so that only the front of
the shop remains operational.
Default and
bankruptcy
The tenant may default and let
the landlord claim damages.
At common law, the general
position is that damages are
calculated on the basis of the
injured party being reinstated
to the position he would have
enjoyed had the contract been
properly performed and to
compensate for any losses
suffered. Losses are only
recoverable if they are a direct
consequence of the breach and
were within the reasonable
contemplation of the parties at
60 | REAL ESTATE GAZETTE
the time the lease was entered
into. Any losses claimed must
have been mitigated so far as
possible and the court will take
mitigation into account when
assessing the level of damages.
Some retailers establish
multiple entities to separate
the tenant at each store from
all other assets and liabilities,
thereby having the option to
let any one particular tenant go
bankrupt if need be. Bankruptcy
would mean that the tenant
defaults on the lease and the
landlord would have no viable
means of securing rent. For this
option to be practical, prior
structuring on the part of the
retailer must have occurred;
otherwise, this would be a
high-risk strategy because
if the purpose of corporate
restructuring was to avoid
obligations under a lease (for
example, transferring the lease
from an operational company
with assets as the existing tenant
to a newly set up affiliate shell
company), the landlord may seek
to pursue the tenant’s parent
company in court to effectively
negate the restructuring and
claw back losses. This option is
also not practical if the lease is
guaranteed by either a parent
company or any other affiliate of
substance of the retailer. There
are of course also potential
reputational ramifications with
choosing this route.
Riding out the storm
In recent months, several
big-brand retailers have been
successful in renegotiating their
rents, while a few “no-name”
tenants are simply leaving
their rental spaces vacant
and defaulting on their leases
(for which they usually suffer
no further ramifications as
landlords are generally unwilling
to throw good money after
bad). Local media reported that
Burberry, Kering, Gucci, Prada
and Chow Tai Fook have all
announced they are attempting
to renegotiate their rents
and a large jewellery retailer
successfully negotiated the
closure of part of one of their
stores on the understanding
that they would open an
additional store at another
of that landlord’s properties.
These announcements follow
the closure of Coach’s Queens
Road Central flagship store
and TAG Heuer’s Causeway
Bay store in 2015, in addition
to the impending closure of
Abercrombie & Fitch’s Central
store expected in the first half
of 2017.
Whilst examples of successful
negotiations are encouraging,
tenants should also take note of
when their lease was executed.
If the lease was entered into
after the beginning of the
economic downturn, a landlord
may argue that the tenant
GENERAL REAL ESTATE | ASIA
cannot use economic downturn
as a reason to renegotiate
because the adverse economic
circumstances were within the
reasonable contemplation of
the tenant at the time the lease
was entered into.
The big thaw
The Hong Kong Trade and
Development Counsel
reported that a total of 56.7
million visitors (equivalent to
7.7 times of the size of Hong
Kong’s local population) came
to Hong Kong in 2016, with
76 per cent of these tourists
coming in from mainland China.
This is a 4.5 per cent drop
from 2015 figures and a 13.6
per cent decrease from total
tourism expenditure associated
to inbound tourism (amounting
to HK$144 billion) in the first
half of 2016 alone. Whether
the constant depreciation of
the CNY makes Hong Kong
a less attractive destination,
or whether China’s anticorruption drive has frozen
luxury sales, the past flurry of
frenzied shopping by mainland
Chinese tourists currently
looks unlikely to return.
The silver lining seems to be
lower rent from landlords. A
more balanced retail landscape
means luxury brands benefit
from the lowering of existing
rents, and local retailers, fast
fashion brands and lifestyle stores
have an opportunity to open in
prime shopping areas, leading to
a more diverse retail offering.
With 73 new international
brands entering into the Hong
Kong market in 2015 and plans
for underground shopping
streets underway, Hong Kong
may have a fighting chance
to keep its reputation as a
shopping mecca, second only to
London on a global scale in its
appeal to cross-border retailers.
ISSUE 27 • 2017 | 61
GENERAL REAL ESTATE | AUSTRALIA
STRATA LAW REFORM
PROVIDES OPPORTUNITIES
FOR DEVELOPERS
PETER FALUDI AND REBECCA TAN, SYDNEY
B
ackground
Multi storey
residential
buildings and
residential flats first became
popular in Australia after
the Second World War.
Their construction has been
increasing at a rapid rate over
the last three to five years
due to increased demand for
housing and planning laws which
encourage medium to high
density living. The ownership
and management rights relating
to such buildings is governed by
state legislation.
For the purposes of this article,
we will focus on the legislative
system in place in New South
Wales (NSW) as it has recently
introduced substantial reforms
62 | REAL ESTATE GAZETTE
in this area (which took effect
on 30 November 2016) which
are likely to be adopted in some
form or another in other states.
In NSW, it is estimated that there
are 75,000 registered strata
schemes, of which approximately
30 per cent were registered
more than 30 years ago.
Initially, there was no legal
mechanism by which separate
title and ownership to part of a
building could be created. The
most common mechanism used
was to have the ownership of
the building held by a company
with the owners of each of the
separate residential apartments
being allocated shares in the
ownership company. There
were a number of difficulties
with this, particularly in relation
to the ability of purchasers to
obtain finance in respect of the
acquisition of such properties,
as the ownership of the
relevant shares in the company
did not provide the purchasers
with freehold title to their
individual apartment.
This led to the passing of strata
title legislation in 1961 which
allowed for such properties to
be subdivided into separate lots
and common property with
individual legal title being created
for each lot.The legislation also
provided a management regime
for these properties.
Although there have been
a number of reforms in the
past, the reforms which took
place on 30 November 2016
are significant not only for the
GENERAL REAL ESTATE | AUSTRALIA
owners of such lots but also for
developers seeking to acquire
the whole of such buildings or
to substantially redevelop them.
Under previous legislation, if
a developer sought to acquire
all of the lots of a residential
strata building, this required
the approval of 100 per cent
of the owners of the lots. This
often led to difficulties for the
developer where one or more
owners did not wish to sell
their individual lots. The inability
of the majority of the owners
to approve a development
proposal often delayed or
prevented major repairs being
undertaken, and this was a
particular problem given the age
and state of disrepair of many of
these strata titled buildings.
ISSUE 27 • 2017 | 63
GENERAL REAL ESTATE | AUSTRALIA
New regime for
collective sale or
renewal
authorizations required under
existing planning laws.
Environment Court.
With vacant development land
being very scarce in Sydney
In summary, provided the
(particularly in the older
process is followed and the
The Strata Schemes
established suburbs), the strata
Development Act 2015, together requisite approvals have been
title reforms should facilitate
obtained, it is now more
with the Strata Schemes
the redevelopment of many
Management Act 2015, introduce, likely that developers will be
existing strata titled buildings in
successful in acquiring and/or
amongst other things, a new
redeveloping existing strata titled these suburbs.
process which aims to make
buildings.The majority required
matters easier for developers
Although it will still be
has been reduced to 75 per cent necessary for a developer to
in the circumstances described
above. A summary of the process of the owners of the lots and
demonstrate to the owners
there is increased transparency
is set out in the final section of
of the lots the benefits of the
this article but it should be noted to the process which requires
proposal, the reduced majority
that this process is in addition to approval from the Land and
required for approval should
64 | REAL ESTATE GAZETTE
GENERAL REAL ESTATE | AUSTRALIA
improve their success rate.
Developers are likely to have to
be more creative in structuring
their proposed development
and may find it useful to consult
with owners and the relevant
strata committee before putting
a proposal to the committee.
Development proposals will
not necessarily be limited to
acquisition of all the lots which
constitute the relevant strata
scheme and could include the
following activities:
1.The addition of new apartments
to the block with the existing
owners being provided with
a financial or other benefit in
consideration of their approving
the proposal.These benefits
could include the construction
of an elevator for the residents
in older properties where no
elevators were initially installed,
the construction of balconies
for apartments which do not
have balconies and/or the
refurbishment of the existing
apartments.
2.Amounts paid by the
developer to the existing
lot owners being used by
the lot owners to attend to
urgent repairs needed for
the existing building or such
repairs forming part of the
project to be undertaken by
the developer.
With many strata schemes
having inadequate funds
available to carry out major
repair work to older strata
buildings, it is clear that the new
regime may be highly beneficial
to the existing owners.
ISSUE 27 • 2017 | 65
GENERAL REAL ESTATE | AUSTRALIA
Impact on foreign
developers
The potential benefits provided
by the reforms are also
available to foreign developers.
Acquisitions of existing dwellings
for redevelopment by foreign
investors will require approval
from the Foreign Investment
Review Board but, according to
the Board’s Guidance Notes,
this will generally be provided
if the redevelopment “genuinely
increases the housing stock”.
The conditions for approval will
normally include the following:
1.The existing property cannot
be rented out prior to
demolition or redevelopment.
2.The existing property must be
demolished and construction
of the new properties
completed within four years
of the approval date.
3. Evidence of completion must
be submitted within 30 days of
the approval being received by
the applicant.
It seems then that the new reforms
will provide benefits not only to
developers but also to residents of
existing strata buildings (particularly
those in buildings which require
major and expensive repairs). It will
be interesting to watch the extent
to which domestic and foreign
developers take advantage of these
reforms as well as whether such
reforms will be adopted in any of
the other states of Australia.
66 | REAL ESTATE GAZETTE
“
It will be interesting to watch the
extent to which domestic and
foreign developers take advantage
of these reforms
”
GENERAL REAL ESTATE | AUSTRALIA
Collective Sale and Renewal Process
Under the new laws, the following steps may be taken for the collective sale and renewal of an
existing strata scheme:
1.
Initiation of process Any person (whether or not the person is an owner of a lot) may submit to the owners’
corporation a written proposal for the collective sale or redevelopment of a strata scheme (Strata Schemes
Development Act 2015, section 156).
2.
Consideration of proposal The strata committee of the owners’ corporation (formerly known as the executive
committee) must consider the proposal within 30 days of receiving it, specifically whether the proposal is worth
further consideration from the owners’ corporation. A copy of the strata committee minutes of the meeting must
be circulated to each owner of a lot on the scheme within 14 days of the meeting.
3.
Further consideration of proposal by owners If the strata committee decides that the proposal is worth further
consideration, it must convene a general meeting of the owners’ corporation within 30 days of making that decision.
The purpose of the general meeting is for the owners’ corporation to decide whether the strata renewal proposal
warrants investigation by a strata renewal committee.
Note: one or more owners of a lot in the strata scheme having a total unit entitlement of at least one-quarter of the
aggregate unit entitlements may also make a request for a general meeting to be convened for the purposes of step 4.
4.
Election of strata renewal committee If it is decided at the general meeting that the strata renewal proposal
warrants further investigation, a strata renewal committee, consisting of a chairperson and not more than eight
persons, must be established. The strata renewal committee is required to prepare a strata renewal plan relating
to the proposal, and may engage professionals (lawyers, tax experts, etc) to help prepare the plan if the owners’
corporation has delegated the committee the authority to do so. Part 10, Division 5 of the Strata Schemes
Development Act 2015 provides a list of information that must be provided in a strata renewal plan, including the
compensation that must be paid to each owner, etc. The strata renewal committee is to carry out its function for
one year, unless extended by special resolution.
5.
Consideration of strata renewal plan The strata renewal committee must present the strata renewal plan to
the owners’ corporation at a general meeting. An owner may, at least 60 days after receiving the strata renewal
plan but before the plan lapses, provide a ‘support notice’ which means that the owner agrees to participate
in the proposed collective sale or redevelopment under the strata renewal plan. A support notice can be
withdrawn after it is given, unless the required level of support (ie 75 per cent of the owners in a strata scheme)
has been obtained.
A strata renewal plan lapses if one of the following occurs:
(a) The owners’ corporation decides under Division 5 not to give the plan to the owners for their consideration; or
(b) Within three months from the day the owners’ corporation decided to give the plan to the owners for their
consideration, the required level of support for the plan has not been obtained; or
(c) The owners’ corporation decides not to apply to the court under Division 6 for an order to give effect to
the plan; or
(d) If an application is made under Division 6 to the court for an order to give effect to the plan, the court
refuses to make the order.
6.
Giving effect to strata renewal plan If the required level of support has been obtained for the strata renewal
plan, then another general meeting is to be held to determine if a court order should be obtained to give effect
to the strata renewal plan. If so, a special resolution may be passed. An application for a court order must satisfy
the requirements under section 179 of the Strata Schemes Development Act 2015.
7.
In deciding whether or not to give effect to the strata renewal plan, the court must consider a number of
factors listed in section 182 of the Strata Schemes Development Act 2015, including whether the correct
procedure has been followed and whether the terms of settlement are just and equitable in the circumstances.
ISSUE 27 • 2017 | 67
GENERAL REAL ESTATE | BELGIUM
PUBLIC REITS IN THE BELGIAN
REAL ESTATE MARKET
DIRK CAESTECKER AND TOM SCHEPENS, BRUSSELS
I
ntroduction
Public REITs (real estate
investment trusts), known
as B-REITs under the legal
framework introduced in 2014,
have an important presence in the
Belgian real estate market: there
are currently 17 Belgian public
B-REITs covering a broad range of
sectors (including offices, logistics,
student housing, retail, residential
and health care) with a market
capitalization of EUR 10 billion
and an asset value of up to EUR
14 billion. B-REITs benefit from a
transparent tax treatment.
Until very recently, a nonquoted real estate investment
fund tailored to the needs
of institutional investors and
benefiting from the same tax
treatment as the B-REIT, was
lacking in Belgium.This was not
the case in other European
countries, such as France, the
UK, Germany, the Netherlands,
Luxembourg and Ireland.
However, in November 2016, the
B-REIF, a non-quoted alternative
to the B-REIT was introduced.
The B-REIF is a very flexible
vehicle that is subject to a
light regulatory framework
and benefits from an efficient
68 | REAL ESTATE GAZETTE
tax regime for cross-border
investments (with no tax leakage
on repatriation of non-resident
income to foreign investors).
The B-REIF is therefore clearly
intended as an ideal platform
for institutional investors to
structure their pan-European
real estate investments.
Key features
The key features of B-REIFs are
as follows:
•Investors can choose
to set up a B-REIF as a
limited liability company, a
partnership or a limited share
partnership, or a European
company (with its registered
office in Belgium).
•The shares of a B-REIF can only
be held by “eligible investors”.*
This gives a large group of
potential investors access to
the B-REIF (excluding only
natural persons).The shares are
not listed.
* There are two groups of eligible
investors that are entitled to
hold shares of a B-REIF:
(a) A first group consists
of professional clients and
eligible counterparties
in terms of the Markets
GENERAL REAL ESTATE | BELGIUM
in Financial Instruments
articles of association provide
Directive (MiFID). This
otherwise, a B-REIF may invest
sizeable and diversified group
in a single real estate asset. In
of potential B-REIF investors
all cases (approximately) two
includes credit institutions,
years after its registration with
investments firms, insurances
the Belgian Ministry of Finance,
companies, pension funds,
the minimum asset value of
large undertakings, etc.
the real estate held by the
B-REIF should amount to at
(b) A second group are
least EUR 10 million.
eligible investors “on request”.
These are legal entities that
•A B-REIF can hold a very broad
have registered with the
range of real estate investments.
Belgian Financial Services and
This includes the direct holding
Markets Authority (FSMA)
of real estate assets located
to qualify as eligible investors.
in Belgium,** the direct and
The possibility of voluntarily
indirect holding of real estate
registering as an eligible
assets located abroad, shares in
investor with the FSMA
public and institutional B-REITs
makes the B-REIF accessible
and foreign REITs, option rights
to all legal entities.
on real estate assets, real estate
•Although called a “Fund”, a
certificates, etc.
B-REIF may have only a single
** The indirect holding of
shareholder.
real estate assets located in
Belgium through an ordinary
•A B-REIF is in principle subject
subsidiary is only permitted for
to the AIFMD regulations,
a 24-month period.Within that
subject to certain exemptions
period the B-REIF has to make
and exceptions (such as the de
the necessary adjustments
minimis exemption (EUR 100
(such as a merger).
million) or for a B-REIT held
by a single shareholder).
•No mandatory risk
diversification requirements
apply to a B-REIF. Unless the
•There are no mandatory
restrictions on the use of debt
financing by a B-REIF.
•B-REIF status may be
ISSUE 27 • 2017 | 69
GENERAL REAL ESTATE | BELGIUM
obtained by following a simple
registration procedure. No
FSMA approval is required.
•Just like B-REITs, a B-REIF is
subject to IFRS accounting (as
opposed to Belgian GAAP),
which implies real estate
properties are assessed at their
fair value (no depreciations are
acknowledged).
•A B-REIF needs to pay out at
least 80 per cent of its profits
annually (subject to off-balance
sheet correction, ie the same
rule that applies to B-REITs).
•A B-REIF has a limited term of
a maximum 10 years.This may
be extended by unanimous
shareholders’ decision for
successive periods of up to five
years at a time (if a B-REIF is
owned by a sole shareholder,
its term can thus be extended
indefinitely).
Tax benefits of the
B-REIF
The B-REIF benefits from the
same beneficial tax regime as the
B-REIT. This tax regime is based
70 | REAL ESTATE GAZETTE
on a look-through approach.
Rather than at the level of the
B-REIF/B-REIT, taxation of the
B-REIF/B-REIT’s rental income,
capital gains, etc takes place
at the level of the investors
receiving dividend distributions
from the B-REIF/B-REIT.
Provided certain subject-to-tax
(and other) requirements are
met, Belgian corporate investors
receiving dividends from B-REIFs
that stem from foreign real
estate assets, will be allowed a
deduction of 95 per cent of the
dividend received (lowering the
effective taxation on the dividend
to a maximum of 1.7 per cent).
Similarly, non-resident investors
may benefit from an exemption
of Belgian withholding tax on the
dividends they receive from the
B-REIF that stem from foreign
real estate. Both measures result
in a tax-neutral treatment of
foreign source real estate income
received by the B-REIF, which fits
the purpose of the B-REIF as a
platform for cross-border real
estate investments.
Other measures may increase
the tax efficiency of the B-REIF.
Qualifying non-resident pension
funds, for example, may benefit
from a general exemption from
Belgian withholding tax on
dividends received from the B-REIF,
irrespective of the source of
income—Belgian or foreign—that
is being distributed by the B-REIF.
Also, subject to a case-by-case
analysis, double taxation treaty
benefits may be available to the
B-REIF and non-resident investors.
Existing ordinary taxed real
estate companies may be
converted into B-REIFs. Such
a conversion would result in
beneficial tax treatment, as the
unrealized capital gains and
untaxed reserves at conversion
would only be taxed at a rate
of 16.995% (half of the current
standard CIT-rate).The same
beneficial tax rate applies to
restructurings involving B-REIFs,
including the contribution by an
ordinary taxed company of a real
estate asset into the share capital
of a B-REIF.
In contrast to these tax
advantages, however, dividends
GENERAL REAL ESTATE | BELGIUM
distributed by B-REIFs out of
Belgian real estate income will
be fully taxable at the level of
the receiving Belgian corporate
shareholder (ie the dividends
will not qualify for the 95
per cent dividend received
deduction). To the same extent,
capital gains on the transfer of
the B-REIF shares will also be
fully taxable at the level of the
Belgian corporate shareholder
(whereas capital gains on the
transfer of shares of an ordinary
taxed real estate company may
benefit from an exemption).
These tax aspects, combined
with the obligation on a B-REIF to
distribute at least 80 per cent of
its profits, constitute an important
restriction to the use of the
B-REIF by Belgian corporate
investors to hold (a portfolio
of real estate investments that
includes) real estate investments
located in Belgium.
Conclusion
With the B-REIF, Belgium has
introduced a very accessible
and lightly regulated vehicle
for undertaking and holding
real estate investments in both
Belgium and abroad. Futhermore,
given its advantageous tax
regime, the B-REIF should serve
as a very efficient international
platform for real estate
investments, regardless of the
type of investment (development
of new projects, the acquisition
and financing of existing projects,
the restructuring of cross-border
portfolios of real estate interests,
etc) by foreign investors.
However, the same cannot be
said for Belgian investors.
That said, the setting up
of vehicles and investment
structures always requires
careful consideration and
planning. In the case of B-REIFs,
the obligation to pay out 80
per cent of corrected profits
and the tax treatment of these
dividends will require particular
attention. Also, with regard to
investments by foreign investors
and/or in foreign real estate, the
regulatory and tax features of
the relevant jurisdictions must
be taken into account.
“
Given its
advantageous tax
regime, the B-REIF
should serve as
a very efficient
international
platform for real
estate investments
”
ISSUE 27 • 2017 | 71
GENERAL REAL ESTATE | ETHIOPIA
REGULATION OF PRIVATE
REAL ESTATE DEVELOPMENT
IN ETHIOPIA
BEREKET ALEMAYEHU HAGOS, ADDIS ABABA
I
ntroduction
(such as a memorandum and
articles of association), proof
The real estate sector
of a minimum capital injection
has been flourishing in
into Ethiopia of USD 200,000
Ethiopia recently. Factors
for a wholly foreign owned
such as the rising demand for
investment and USD 150,000 for
housing and urban expansion
a joint investment of foreign and
contribute to making the future
domestic investors, and payment
bright for private real estate
of registration and permit fees.
development for both residential
Once the necessary permits and
and commercial purposes in
certificates have been acquired,
the country.A crucial aspect of
an investor must then be issued
success in real estate investment
hinges on an investor’s compliance with a construction permit from
the competent town planning
with government regulations
department or designated office,
and contracts.The purpose
on presentation of documents
of this article is to outline the
such as the proposed building plan
key regulatory requirements
and a land lease certificate.
and contractual aspects of the
business of private real estate
Real estate contracts
development in Ethiopia.
After an investor secures all the
Key regulatory
regulatory documents required
requirements
for real estate development,
the next step is to start the
An investor who wants to
development and enter into real
develop real estate in Ethiopia
estate contracts with clients
must first secure an investment
wishing to buy the property.
permit, commercial registration
certificate and business permit
Since there is no law specifically
from the Ethiopian Investment
regulating the contractual aspects
Commission. It is necessary
of real estate transactions in
to submit to the Commission
Ethiopia, the 1960 Civil Code
various supporting documents
is the principal law governing
72 | REAL ESTATE GAZETTE
such contracts.The Code
contains different sections and
provisions that are applicable
to the transfer of ownership
of real estate (houses, buildings
or apartments) depending on
whether the agreement is made
before or after the completion of
construction of the building. If a
contract relates to constructing
and delivering a house, apartment
or other building which does not
yet exist, the Code states that
it is a contract of work and skill
relating to immovable property
and not a contract of sale.As
GENERAL REAL ESTATE | ETHIOPIA
“
The lack of detailed regulations makes
the role of real estate contracts pivotal
in filling the loopholes in the law, avoiding
disputes before they occur and ensuring
the smooth development of real estate
transactions in Ethiopia.
such, it is the section of the
Code governing the relationship
between an independent
contractor and a client which
primarily regulates such contracts.
The Federal Supreme Court
Cassation Division, whose
decisions bind all lower courts,
has affirmed this in the recent
case of May Real Estate Private
Limited Company v Fassil Getachew
et al.A contract for the transfer
of existing real estate, on the
other hand, is considered to be
a contract of sale, hence, the
Code’s provisions on sale of
immovable property and sale of
goods generally will apply. Finally,
a contract for the lease of real
estate is mainly regulated by
the provisions of the Code on
lease of immovable property and
special rules regarding the leasing
of houses.This part of the Code is
relatively detailed and is therefore
adequate to govern leases of real
estate.
In contrast, the Civil Code’s
provisions on work and skill
relating to immovable property
(governing contracts for the
delivery of buildings still under
construction) are more general
in nature and do not fully capture
the special features of contracts
relating to real estate.This has led
to some problems, and the lack
of express detailed regulations
in this area makes the role of
real estate contracts pivotal in
filling the loopholes in the law,
avoiding disputes before they
occur and ensuring the smooth
development of real estate
transactions in Ethiopia.
The Ethiopian Government has
acknowledged the existing gaps in
the law and the repeated failures
”
of some real estate companies to
meet their contractual obligations.
It recently announced its intention
to pass a law relating specifically
to real estate transactions, and
has gone as far as designing
and drafting such a law.This is
currently out for consultation
with various stakeholders, but
has not yet been endorsed by the
Ethiopian Parliament.
Conclusion
Investors wishing to engage
in real estate development in
Ethiopia must be aware of the
regulatory laws of the country,
and take the necessary measures
to comply with these regulations.
It is also important that any real
estate contracts entered into
with clients are properly drafted
in order to close the existing
legal gaps and to reduce risk.
Mehrteab Leul & Associates is a
member of the DLA Piper Africa
Group, an alliance of leading
independent law firms working
together in association with DLA
Piper across Africa.
ISSUE 27 • 2017 | 73
GENERAL REAL ESTATE | HUNGARY
VAT AND
REAL ESTATE
TRANSACTIONS
ATTILA REMES, BUDAPEST
A
cquiring real
estate in Hungary
may have
significant VAT
implications for the purchaser
dependent on the circumstances
of the acquisition. It is therefore
important to be aware of
such implications before the
transaction takes place, taking
into account the VAT status of the
parties and the target property.
General rule and
exceptions
As a general rule, the transfer
of real estate is exempt from
VAT in Hungary. That said,
in most cases, one of the
exceptions to the general rule
applies, and the transaction will
qualify as taxable supply under
the Hungarian VAT Act.
There are two statutory
exceptions that will make any
74 | REAL ESTATE GAZETTE
transaction subject to VAT:
a) the sale of a building site; and
b) the sale of a new property.
For the purposes of the
Hungarian VAT Act, a new
property is a property that has
not yet been put into operation,
but a property is also considered
new under the two-year rule,
that is, if less than two years have
passed from either the date the
occupancy permit of the property
became final and enforceable, or
the date the official certificate
confirming completion of the
property was issued.
Option to tax
When a property is not a
building site or is no longer
considered new, the sale of the
property is by default exempt
from VAT, unless the seller
chooses to apply VAT to its sales
of real estate. This is a optional
and needs to be reported to
the Tax Authority prior to the
transaction taking place.
Sellers may opt to charge VAT
for many reasons. For instance,
opting for VAT may make the
input VAT charged by other
suppliers on their services related
to the real property (which would
otherwise be non-deductible for
VAT purposes) deductible by the
seller. On the other hand, the
VAT payable on the completion
of the purchase may be reclaimed
by the purchaser in accordance
with the provisions of the VAT
Act. Under the general rule, input
VAT is deductible from output
VAT charged in the same VAT
period. In case the amount of
input VAT exceeds the amount
of output VAT within the same
period, the excess can be carried
forward to the next filing period
or reimbursed to the taxpayer’s
GENERAL REAL ESTATE | HUNGARY
bank account through a VAT
reclaim procedure. In certain
cases, a seller may opt to have its
property sales subject to VAT at
the purchaser’s specific request
prior to the transaction as this
would better suit the latter for
VAT purposes.
Applicable rates
In Hungary, there are three VAT
rates.The standard rate is 27
per cent, whilst there are two
reduced rates (5 per cent and
18 per cent). In most business
to business (B2B) transactions,
the general 27 per cent rate
will apply. For the sake of
completeness, it should be noted
that (typically in business to
consumer (B2C) transactions) a
reduced 5 per cent rate applies
to the sale of new residential
buildings and residential
apartments having a usable floor
area not exceeding 300 sq. m.
and 150 sq. m., respectively.
Reverse charge
Where the transaction is subject
to VAT and this is based on the
statutory exceptions (ie the
property is a building site or is
considered new), the seller will
be liable for the VAT, and the
invoice will be issued for the
gross amount of the purchase
price. If the transaction is taxable
as a result of the seller’s choice
to make its otherwise nontaxable property sales taxable,
the reverse charge mechanism
will apply, and the purchaser
will be liable for the VAT. In this
case, the seller’s invoice will not
include VAT, instead reference
to the reverse charge will be
indicated. As the reverse charge
is subject to a couple of further
requirements, these need to be
fulfilled as well otherwise the
seller will be required to issue its
invoice as normal (VAT included).
VAT structuring
As can be seen from the above,
real estate transactions in
Hungary can trigger various VAT
implications depending on the
status of the contracting parties,
the target property or both.
Any prudent investor should
therefore pay particular attention
to the potential VAT issues. For
most foreign investors, the tax
structuring services will also
cover property VAT, although in
more complex cases (for example,
if the status of the property
is controversial, whether or
not VAT should be taken into
consideration when determining
the transfer tax base, etc) VAT
might need to be addressed as a
standalone item.
ISSUE 27 • 2017 | 75
GENERAL REAL ESTATE | MAURITIUS
ACQUISITION OF PROPERTY
BY FOREIGNERS IN MAURITIUS
ASHWIN MUDHOO, PORT LUIS
T
he Non-Citizen
(Property)
Restriction Act
1975 has recently
been amended to remove some
restrictions on the possibility of
non-citizens acquiring immovable
property in Mauritius. Prior
to this amendment, only noncitizens who were granted
76 | REAL ESTATE GAZETTE
permits to invest, work or live
in Mauritius could purchase
specific types of immovable
property in Mauritius. Now,
any non-citizen can purchase
immovable property in Mauritius
subject to obtaining the approval
of the Prime Minister’s Office,
channelled through the Board of
Investment of Mauritius.
Who is a non-citizen?
For the purposes of the NonCitizen (Property) Restriction
Act, a non-citizen is:
(i) any person who is not a
citizen of Mauritius;
(ii) an association or body of
persons, whether corporate
or incorporate where such
association or body of persons
GENERAL REAL ESTATE | MAURITIUS
“
Any non-citizen
can purchase
immovable
property in
Mauritius subject
to obtaining the
approval
of the Prime
Minister’s Office
”
is not domiciled in Mauritius, or
is quoted on the official list of
the Stock Exchange of Mauritius
or admitted to any second
market established under the
Mauritian Securities Act and its
control or management is vested
in one or more persons who are
not citizens of Mauritius, or such
association of body of persons is
not so quoted or admitted and
one of its shareholders is not a
citizen of Mauritius; or
(iii) a trust in relation to
any transfer or vesting of an
immovable property situated
in Mauritius upon a trust of
which a beneficial interest is
held by a non-citizen or in
relation to the appointment
of a non-citizen as beneficiary
of a trust the trust property
of which includes immovable
property situated in Mauritius.
What immovable
property can be
purchased by a noncitizen in Mauritius?
A non-citizen may purchase
or otherwise acquire or lease
an immovable property or a
right to immovable property or
part of a building for business
purposes. At the time of
writing this article, there is no
minimum purchase value for
any such property purchased.
According to guidance issued
by the Board of Investment,
authorizations will be granted
where the business activity is for:
(i) the development of high
activity commercial use building
including but not limited
to, shopping centers, office
buildings or warehouses, for
own use, sale, rental or lease;
(ii) the development of residential
properties under the Property
Development Scheme; and
ISSUE 27 • 2017 | 77
GENERAL REAL ESTATE | MAURITIUS
( iii) any other activity carried
out for reward, gain or profit
but excluding the acquisition
for resale or lease or rental of
any bare land or serviced land.
Before this amendment, noncitizens were not able to
purchase property in Mauritius
for business purposes as set
out above unless they were
registered as investors with the
Board of Investment and subject
to the authorization of the Board
of Investment after approval from
the Prime Minister’s Office.
A non-citizen may also acquire
one or more apartments,
used, or available for use,
as residential property in a
building of at least two floors
above ground floor provided
that the purchase price is
not less than Rs. 6 million
(approximately USD 168,000
78 | REAL ESTATE GAZETTE
as at 24 January 2017) or its
equivalent in any other hard
convertible currency.
However, a non-citizen
will not be able to purchase
an apartment where it
is located in a building
constructed on state land
which includes defence
lands, Pas Geometriques
(ie reserved lands along
the Mauritian coastline) or
projects developed under the
Housing Estate Scheme (which
is a scheme reserved for
middle-income households of
Mauritian citizens).
Furthermore, in terms of
the guidelines issued by the
Board of Investment relating
to the acquisition of residential
properties by non-citizens, noncitizens cannot engage in any
property speculation whatsoever.
Regarding the purchase by
non-citizens of apartments
for residence, before the
amendment, non-citizens
registered as investors, selfemployed, retired non-citizens
or non-citizens holding a
permanent residence permit in
Mauritius could purchase only
one apartment, in a building
of at least two floors above
ground floor, as a personal
residence, but still subject to the
authorization of the Board of
Investment after approval from
the Prime Minister’s Office.
It should be noted that there
are other existing schemes
which allow non-citizens to
purchase immovable property
in Mauritius, namely the
Property Development Scheme
(PDS), which replaces the now
defunct Integrated Resort
GENERAL REAL ESTATE | MAURITIUS
Scheme (IRS) and Residential
Estate Scheme (RES).
Non-citizens are also entitled to
purchase a residential unit under
the Smart City Scheme, which
is a scheme for cities to be built
around the “work-play-live”
lifestyle in a vibrant environment
with technology and innovation
at their core.There are fiscal and
non-fiscal incentives attached to
the Smart City Scheme.
Will the acquisition
of immovable
property by noncitizens in Mauritius
give the right to
reside in Mauritius?
Only the purchase of a
residential unit acquired under
the IRS, RES, PDS or Smart
City Scheme give a right to
residency in Mauritius to a
purchaser and their family,
provided that the residential
unit’s purchase price is above
USD 500,000.
A final word
Lastly, and importantly, it should
be noted that where a property
is purchased without the
approval of the Prime Minister’s
office, that purchase will be void
and the Curator of Vacant Estates
will take possession of the
property and order it to be sold
under the relevant laws relating
to such seizures in Mauritius.
Juriconsult Chambers is a
member of the DLA Piper Africa
Group, an alliance of leading
independent law firms working
together in association with DLA
Piper across Africa.
“
Where a property
is purchased
without the
approval of the
Prime Minister’s
office, that purchase
will be void
”
ISSUE 27 • 2017 | 79
GENERAL REAL ESTATE | NORWAY
REVENUE-BASED RENT
AND COMPETITION FROM
E-COMMERCE
THOMAS RINDAHL HÅKONSEN , OSLO
I
ntroduction
E-commerce is growing
at record speed and
continues to take an everlarger share of the traditional
retail market. Many landlords
with retail premises consider
this to be a threat to their
80 | REAL ESTATE GAZETTE
revenue-based rent. Challenges
arise both as a consequence of
tenants experiencing general
growth from e-commerce,
but also as a consequence of
the fact that many tenants
themselves are setting up online
stores in competition with the
business undertaken in the
rented premises.
This article discusses whether
e-commerce represents a
threat for landlords with retail
premises, and the important
points for landlords to consider
going forward. In addition, it
GENERAL REAL ESTATE | NORWAY
also looks at how competition
from e-commerce affects lease
agreements over traditional
retail premises.
Developments in
Norway
There is no doubt that internet
trade and commerce is here to
stay. Consumer research studies
suggest that the surge in online
shopping will only escalate in
the future.
In 2015, Norwegian spending
within e-commerce on consumer
goods and services exceeded
NOK 70 billion, distributed
between approximately 54.5
million individual transactions.
Figures for 2015 showed
a revenue increase in the
traditional physical retail trade
of just over 3.5 per cent. In the
same period Norwegian online
stores experienced a revenue
increase of 14.3 per cent, ie
almost five times the growth of
the traditional retail sector.
In addition to the fact that
an increasing share of retail
trade is taking place online,
categories of goods that
previously were never bought
online are now experiencing
a boom in e-commerce trade.
For example, the total revenue
for grocery shopping online
increased by more than 50 per
cent in Norway in 2016. This
growth is expected to continue
in 2017. At the same time
product groups that were early
Image credits: Shutterstock
starters in the e-commerce
arena, such as the trade in
electronic goods online, are
now experiencing stability or
even a reduction in the number
of online transactions.
But even if some slowdown
may be expected over time,
there is good reason to believe
that the development trend
will continue for many years
ahead. As a consequence of
increased innovation and the
ever-increasing use of digital
technology by society generally,
better and more trading
options are becoming available
month by month. This includes
the development of new and
improved mobile shopping
solutions, and new and efficient
digital payment arrangements.
This trend represents a
paradigm shift within the retail
sector that both landlords and
tenants must acknowledge.
E-commerce and
commercial lease
agreements over
retail premises
For landlords with traditional
retail premises with revenuebased rent, a reduction in the
tenant’s revenue will directly
affect the cash flow from the
property. As a consequence,
when e-commerce seriously
began to make an entry in the
market, many landlords initiated
futile attempts to combat the
competition from e-commerce.
This was done for instance
through agreement clauses that
placed revenue from internet
sales on par with revenue from
the physical retail store, or
through clauses that prohibited
marketing to online stores. Not
only were such clauses difficult
to agree on in negotiations
with potential tenants, they
were also impossible to comply
with in practice. In addition, any
such efforts had a very limited
effect since competition from
e-commerce takes place on a
global basis.
Today it is clear that landlords,
to a much greater extent,
have accepted that the battle
against e-commerce cannot
be won through these kinds
of regulations, and they now
focus on how e-commerce
can actually contribute to
strengthening revenues achieved
in a physical retail store.
Thus the focus has moved to
measures ensuring the tenant’s
turnover in rented property,
something which will positively
affect the landlord’s interests.
Generally, there is a more
proactive approach to these
issues. When entering into
lease agreements for retail
premises today, the aim of both
landlord and tenant is to ensure
circumstances which contribute
to securing or increasing the
tenant’s revenue in the property.
To this end, they agree:
ISSUE 27 • 2017 | 81
GENERAL REAL ESTATE | NORWAY
and development characteristics
that may be highlighted.
For example, fewer landlords
•This is achieved by good
presentation of a varied selection are willing to take on the risk
of a lease with revenue-based
of products and services.
rent. Our experience is that
•Good service, high levels of
landlords are now more likely
competence and availability of
to set the minimum rent at a
products no longer constitute
level which is acceptable to the
just a competitive advantage,
landlord for the entire term of
they are an absolute necessity
the lease.This means that lease
if a retail business is to survive
agreements with revenue-based
in a market with ever-more
rent elements in reality become
demanding consumers.
lease agreements with a fixed
•Adaptations for multi-channel
rent, where any additional rent
solutions that contribute to a
above the minimum rent is
better shopping experience,
considered more like a bonus for
together with increased
the landlord.
customer loyalty through the
We also see that landlords are
use of digital loyalty schemes,
digital customer magazines, etc more likely to determine both
can contribute to increasing the the minimum and the revenuebased rent on a specific appraisal
revenue in physical stores.
of the tenant’s actual expected
•Development of “shop in
shop” solutions and delivery of gross earnings, as opposed to a
more generic use of set branchservices in-store will become
developed levels of minimum
ever more important.
rent and the revenue-based rent.
•The use of “click and collect”,
“pick up points”, offers of home Additionally, landlords
increasingly want lease
delivery, etc is increasingly
agreements with shorter lease
expected by consumers.
terms. In Norway landlords,
•Consumers want to
including those within the
experience the benefits and
retail sector, have traditionally
comfort of shopping online
preferred 10-year lease terms,
even when they are in a
as a way of securing a long-term,
physical retail store.
predictable cash flow. More
Recent trends
often today, we see shorter
lease terms of five years, usually
In addition to the above-noted
with the option to add one
ways of meeting the challenges
or more extension periods. In
of e-commerce, there are also
some specific contractual trends contracts with an option for
•It is important to create a
good shopping experience.
82 | REAL ESTATE GAZETTE
GENERAL REAL ESTATE | NORWAY
additional lease periods, the
landlord will normally reserve
a right of renegotiation where
the non-commercial parts of
the lease agreement may also
be subject to renegotiation.
This is challenging for many
tenants, who rely on a certain
predictability and duration of the
agreement in order to receive
a return on their investment in
the leased property.
In addition to the commercial
terms in the lease agreement
we have also noted, both on
the landlord and tenant side,
an increased focus on areaefficient premises. The mutual
requirement for area-effective
solutions applies especially to
centrally located properties
and shopping centers. Some
landlords have also introduced
more stringent requirements
to area efficiency, with a right
to reduce the leased object
or move the tenant to other
premises on the property if the
requirements for area efficiency
are not met or maintained by
the tenant.
These examples represent
only a small portion of the
experienced and anticipated
effects that e-commerce may
have on lease agreements over
retail premises. Further exciting
developments are expected in
the future.
ISSUE 27 • 2017 | 83
GENERAL REAL ESTATE | RUSSIA
SELF-REGULATION IN THE
RUSSIAN CONSTRUCTION
INDUSTRY
OXANA DEREVYANKO AND RENATA POLYAKOVA, ST PETERSBURG
S
ince 2009, the
construction industry
in Russia has been
self-regulated. This
means that those involved in
the construction industry are
not required to be licensed by
the state authorities; instead,
those companies that undertake
survey work, draft project
documentation or perform
construction works must be
approved by other specialists
(their colleagues) in the same
industry. Once approved, the
companies become members
of a self-regulated organization
(SRO), a non-profitmaking
association of businesses
engaged in surveying, drafting
project documentation, or in
construction.
Ceding control to a community
of professionals is a way
of avoiding excessive state
regulation and red tape, whilst
preserving high standards in
84 | REAL ESTATE GAZETTE
construction and affording
those involved in the real
estate market (as the most
interested and well-informed
parties) the chance to develop
requirements for the industry’s
participants independently. As a
result, construction work can
be carried out with minimum
intervention from government
authorities. At the same time the
necessary degree of state control
is ensured by providing legal
minimum requirements for SROs
and their members.The SROs
themselves can add to these
requirements.
SROs are jointly liable for
damage caused by defects in
works undertaken by their
members. In order to ensure
there is money available to
meet these compensation
requirements every SRO must
maintain funds for this purpose,
financed through membership
contributions. A minimum
membership contribution is laid
down by law and depends on the
total amount of the proposed
contractual obligations of every
member. It can be increased by
a decision of the SRO.The joint
liability of the SRO is limited by
the size of its compensation fund.
As well as acting as a deterrent
to poor quality construction
work, these financial reserves
ensure the customer is
protected in the event that
substandard work is rendered.
As indicated above, SROs
are established as a separate
undertaking on a nonprofitmaking basis and without
any state involvement. SROs
must meet binding statutory
requirements as to type, the
number and expertise of
their members, procedure for
establishing a compensation
fund and the size of that
fund, and procedure for the
development of standards,
GENERAL REAL ESTATE | RUSSIA
“
It is very important that the company
selects the right SRO for its scheduled
projects.
”
by-laws, etc. If an SRO meets
the necessary requirements, it
will be registered in the state
registry of SROs and companies
wishing to join them may rely on
the information given there.
Construction SROs may be
one of three types, depending
on the works carried out by
their members, namely: survey,
design, or construction SROs. A
company engaged in several types
of works must be a member of
several SROs at the same time.
According to the Federal Service
for Ecological,Technological
and Atomic Supervision, as
at the beginning of 2017, the
state registry of SROs contains
information on 40 survey SROs,
194 design SROs and 287
construction SROs.
Self-regulation is mainly aimed
at preventing harm caused to
the life or health of individuals,
to the property, and to the
ISSUE 27 • 2017 | 85
GENERAL REAL ESTATE | RUSSIA
“
The level of the
SRO requirements
on its members
must not be
lower than those
prescribed by
statute
”
86 | REAL ESTATE GAZETTE
environment due to defects in
construction works, and at the
improvement of quality of those
works in general. Therefore,
it focuses on the development
of standards and monitoring
the industry to ensure these
standards are met. Every SRO
must develop:
•its own requirements for its
members;
•rules aimed at controlling the
activities of its members;
•a system of disciplinary
measures to be applied in the
event the requirements and
rules are breached.
The level of the SRO
requirements on its members
must not be lower than those
prescribed by statute, although
it can add to the statutory
requirements. Moreover,
the Town Planning Code of
the Russian Federation sets
requirements on:
GENERAL REAL ESTATE | RUSSIA
•the qualifications of those
employed in an SRO member
company (including level
and scope of education,
and ongoing professional
development, to be confirmed
by performance evaluation on
a regular basis);
•the number of the company’s
employees who must meet
the foregoing requirements;
•the size of contributions to
the SRO’s compensation fund.
SRO membership is open-ended,
however in the event of breach
of the SRO requirements, a
company’s membership may be
terminated by the SRO.
It should be noted that the
system of self-regulation in
the construction industry is
currently undergoing extensive
reform, with material changes
due to take effect from 1 July
2017. In particular, new rules
provide for a change in those
who are required to hold
SRO membership. Currently,
a company is required to be a
member of an SRO in order
to carry out any of the works
on a list approved by the
Government of the Russian
Federation. In the future, as a
general rule, SRO membership
will be required for all those
undertaking survey works,
drafting project documentation
and involved in construction, but
this will only apply to parties
performing these works on their
own account or on the basis of
an agreement with an ultimate
customer. In other words,
subcontractors will not be
required to be SRO members.
The requirement to be a
member of an SRO applies
both to Russian and foreign
contractors. This means
that even where the place
of performance of works is
not the Russian Federation,
where their deliverables
(for example, the developed
project documentation) must
be presented in Russia, a
foreign designer having a direct
agreement with the ultimate
customer must become an SRO
member. The requirements for
foreign SRO members are the
same as those applicable to
Russian SRO members, save for
some additional requirements,
such as the requirement to
submit all necessary documents
to the SRO with a certified
Russian translation.
There is an additional
regulation applicable to those
companies undertaking works
under agreements entered
into based on state or other
tenders, which must by law, be
governed by contract. From 1
July 2017 these companies must
be members of those SROs
where there is an additional
compensation fund to secure
contractual obligations, and they
must pay a contribution to that
fund. The size of contribution
paid will affect the obligations
which may be undertaken
by the company. SROs must
establish compensation funds to
secure contractual obligations
only where there is a minimum
number of members interested
in that. As this kind of fund is
not established in every SRO,
it is very important that the
company selects the right SRO
for its scheduled projects.
ISSUE 27 • 2017 | 87
GENERAL REAL ESTATE | RUSSIA
GRANTING A PERMIT
AFTER CONSTRUCTION HAS
STARTED
IVAN GRITSENKO, MOSCOW
I
ntroduction
In practice, many
developers start
construction work on
their land before they apply for a
construction permit. Frequently
an application and supporting
documents are filed when at
least part of a building has
already been constructed and
the time between the issuing
of the construction permit and
the issuing of the commissioning
permit is often only a couple
of months. Developers are
committing administrative
offences in proceeding in this
way, but they do it to save time.
Right of competent
authorities to issue
a permit after
construction has begun
Lack of the necessary documents
and/or the nonconformity of
those documents with the
land plot development plan
may result in refusal by the
competent authorities to grant
a construction permit. However,
88 | REAL ESTATE GAZETTE
the Russian Federation’s Urban
Planning Code does not stipulate
completing construction without
a permit as a basis for refusing
to issue a construction permit.
The decision to grant the
permit is taken on the basis of
particular town planning and
project documentation.A site
visit and verification of whether
certain construction activities
have already been started are
not preconditions for granting a
permit.Therefore, it is possible to
argue that a construction permit
may be granted after construction
has started. Indeed, some local
court decisions support this
argument.They do so on the basis
of the finite nature of the grounds
listed for denying a construction
permit, as well as the claimed
impossibility of refusing a permit
on a building that has already been
constructed.
However, this is not the position
taken by the Supreme Court of
the Russian Federation. On 16
June 2015 the Supreme Court
ruled that the delivery of formal
documents necessary for the
issuing of a construction permit
listed in Article 51 of the Urban
Planning Code is not the sole
precondition of obtaining a
construction permit. It stated
further that there was an
obligation to obtain a construction
permit before beginning the
construction work.
It is argued that this ruling
GENERAL REAL ESTATE | RUSSIA
“
A developer who has begun
construction without first having
obtained the proper permit is breaking
the law
”
contradicts the provisions of
Article 222, paragraph 3 of the
Russian Federation’s Civil Code,
as well as contradicting the case
law of the Supreme Commercial
Court of the Russian Federation,
which has held that, under
certain circumstances, a court
may recognize the owner or
leaseholder of land as the owner
of the buildings and structures
constructed on them without
proper permission.
If a court can recognize
ownership rights to a building
constructed without a
construction permit, and if the
construction has been completed
without any substantial
infringements of local building
rules and regulations, is not a
threat to life or health, and does
not infringe the interests of
third parties, then it is not clear
why a construction permit may
not be granted after the fact.
This is particularly so given the
law does not expressly prohibit
this. Furthermore, granting a
construction permit under such
circumstances does not relieve a
developer from liability under the
Administrative Offences Code.
Conclusion
The current position is that
a developer who has begun
construction without first having
obtained the proper permit is
breaking the law.This is supported
by case law from the Supreme
Court. Developers should be
aware that construction without
the necessary permit is not only
an offence, it is also a serious
financial risk, particularly if the
application for a construction
permit is not filed until the final
stages of a project.
It should also be noted that
the Supreme Court ruling may
significantly reduce the number
of cases where the ownership
right to buildings constructed
without a construction permit
are later recognized by the
courts. If this ruling is interpreted
to mean that commencing
construction works without a
permit excludes the possibility
of issuing a construction
permit after completion, then
consequently the recognition of
such buildings will be impossible.
It is hoped that this interpretation
of the Supreme Court judgment
will not prevail in practice,
however it should be taken into
consideration when planning
development on greenfield
sites or acquiring existing or
unfinished buildings.
ISSUE 27 • 2017 | 89
GENERAL REAL ESTATE | SPAIN
RECENT JUDICIAL
CHALLENGES TO
THE SPANISH
MORTGAGE
ENFORCEMENT
SYSTEM
JOSÉ MARÍA OLIVA, MADRID
I
ntroduction
There is no doubt that
in the last few years the
world has experienced
the greatest financial crisis
since 1929. Although global
in nature, this crisis has had a
particularly significant impact
on Spain and other southern
European countries.
Against this background,
however, the Spanish system
for financing real estate
transactions has proven largely
resilient.The legal system for
the enforcement of mortgages
partially responsible for this
resilience was established in 1861
90 | REAL ESTATE GAZETTE
and slightly amended in 2001.
The key elements of mortgage
enforcement proceedings were
traditionally the following:
( i) It was aimed at the sale of
the property by auction which
was monitored by the courts.
(ii) It was designed to be
triggered unilaterally by
the lender in the event of a
“major” breach of a financing
undertaking (mainly, failure by
the borrower to repay).This
did not prevent the lender
from claiming early termination
of the financing agreement
on the grounds of breach of
other financial covenants or
undertakings, but that judicial
process did not benefit from
the privileges granted to lenders
by enforcement proceedings.
(iii) The borrower had a very
narrow set of legal arguments
with which to oppose and
counter claim against the
lender. It was a judicial process
without a hearing except when
the auction took place.
(iv) The asking price at auction
was agreed by the borrower
and the lender in the original
financing documents, well
before enforcement.
(v) At least theoretically, it
ended in an auction open to
GENERAL REAL ESTATE | SPAIN
the public; that is, it was not a
process where the lender could
directly claim or repossess the
property. Only in the event that
the auction failed because the
price offered by third parties
did not reach certain thresholds
could the bank acquire the
property by credit-bidding.
(vi) The proceedings did not
allow the borrower to redeem
the debt by handing over the
keys to the mortgaged property.
Even after the auction, the
borrower could still be liable
to the lender for any shortfall
between the auction price and
the outstanding debt.
(vii) In terms of timing and cost,
it was efficient, to a certain
degree. Only lack of resources in
some courts delayed mortgage
enforcement proceedings longer
than expected.
(viii) Finally, it did not
differentiate between situations
in which the borrower was
a consumer, a professional
or a businessperson, or as
to whether the real estate
collateral was a commercial
or residential property or, in
the latter case, whether the
property was the principal
residence of the borrower or
not. It applied the same rules
regardless of which of these
circumstances prevailed.
The crisis and the
intervention of the ECJ
However, this system that had
proven robust for over 150
years started to fall apart in 2013,
mainly due to (i) social pressure
for stronger protection for those
who were evicted from their
homes in the course of mortgage
proceedings; and (ii) legal pressure
to increase protection for
consumers of financial products,
particularly loans to acquire
homes, which saw court decisions
that declared certain standard
financing provisions to be “unfair”.
ISSUE 27 • 2017 | 91
GENERAL REAL ESTATE | SPAIN
In particular, the following
court decisions given from 2013
onwards by the European Court
of Justice (ECJ) and the Spanish
Supreme Court (TS) may
endanger the current Spanish
mortgage enforcement system
and have a significant impact
on the commercial real estate
financing market:
(i) Judgment of the Court (First
Chamber) of 14 March 2013
(Mohamed Aziz) in which it was
considered by the ECJ that
Spanish mortgage enforcement
proceedings should allow
the borrower to contest the
unfairness of a contractual
provision. This resulted in an
amendment by Spanish Law
1/2013, which now gives the
borrower the opportunity
to claim at a hearing that
a provision was “unfair”.
Although this privilege was
initially limited to consumers,
other borrowers (including
shopping center developers)
have also tried to take
advantage of this mechanism
92 | REAL ESTATE GAZETTE
to claim that certain provisions
were “unfair”. Whether or not
it is applicable to a particular
case, this new hearing has
slowed down enforcement
proceedings in all cases.
(ii) Judgment of the Court (First
Chamber) of 17 July 2014 in
which it was considered by the
ECJ that the Spanish mortgage
enforcement system unlawfully
prevented the borrower from
appealing against a court decision
which dismissed his objection to
the enforcement.This resulted
in an amendment by Spanish
Royal Decree 11/2014, which
now allows the borrower to file
such an appeal.This also has an
impact on shopping center loans
since anyone wishing to acquire
distressed loans has to factor in
at least one additional month for
an appeal before an the auction
can proceed.
(iii) Judgment of Court (Grand
Chamber) of 21 December
2016 regarding “floor clauses”,
which were clauses establishing
a minimum (floor) rate limiting
variable interest rate variations.
The TS had already declared
these clauses “unfair” in its
decision of 9 May 2013 but
it had limited the right to
restitution connected to that
unfairness.This meant these
clauses were not permitted but
no compensation was available
to borrowers for the application
of these clauses by lenders up to
the date of that court decision.
However, the ECJ held that this
finding of unfairness should
have retroactive effect and
therefore Spanish banks should
compensate borrowers for that.
(iv) Judgment of the Court (First
Chamber) of 26 January 2017,
where the ECJ held that the
Spanish rule which establishes
that failure to make three
mortgage payments entitles
the lender to trigger mortgage
enforcement proceedings is
subject to the assessment of the
relevant national court, which
will decide “whether the right of
the lender to call in the totality
GENERAL REAL ESTATE | SPAIN
of the loan is conditional upon
the non-compliance by the
consumer with an obligation
which is of essential importance
in the context of the contractual
relationship in question, whether
that right is provided for in cases
in which such non-compliance is
sufficiently serious in the light of
the term and amount of the loan,
whether that right derogates
from the applicable common law
rules, where specific contractual
provisions are lacking, and
whether national law provides
for adequate and effective means
enabling the consumer subject
to such a term to remedy the
effects of the loan being called
in”. Or put simply, the basic rule
which allowed the lender to
enforce the mortgage due to
payment default by the borrower
has been put into question.
It should be noted that all
these court decisions have
addressed questions related to
“consumers” and their housing
needs, and none have dealt
with financing agreements
regarding a shopping center (or
other commercial real estate).
However, their conclusions
and rulings are so widely
and vaguely stated that these
commercial arrangements may
well also be affected.
Conclusion
It is clear that lenders and loan
traders in the commercial real
estate financing market may
now have to ask (i) whether
the time they had allowed for
enforcement remains the same;
(ii) whether the borrower will
have the right to challenge
enforcement even in cases
where they have failed to
make payments; (iii) whether a
particular borrower could be
qualified as a consumer, and
delay the process by claiming
that certain clauses in the
financing agreement are “unfair”.
Another question yet to be
addressed is whether these
court rulings will also apply in
the event of the borrower’s
insolvency, the route by which
many have acquired ownership
of commercial properties.
Only time will provide an
answer both to these questions,
and also whether the court
decisions outlined above will
place the current mortgage
enforcement system at risk. In
our view, however, this is a good
opportunity for lawmakers—at
national and European level—and
other players in the commercial
real estate financing market to
push for reforms that will provide
a model for enforcement and
insolvency exclusively designed
for those acting in the course
of a business, similar to that
prevailing in Spain prior to these
court decisions.This new model
should focus on providing lenders
with a fast and cost-efficient legal
route to obtaining the keys of
commercial properties in the
event of a default by the borrower
of its financial obligations, whether
or not that borrower is involved
in insolvency proceedings.
ISSUE 27 • 2017 | 93
GENERAL REAL ESTATE | SWEDEN
TAXATION OF SWEDISH REAL
ESTATE TRANSACTIONS:
RECENT DEVELOPMENTS
ERIK BJÖRKESON AND ADAM TIDEMAN, STOCKHOLM
S
wedish tax law treats
share deals and asset
deals fundamentally
differently. When
acquiring shares, the book value
of assets and liabilities in the
company remains unchanged
for income tax purposes.
When acquiring the assets,
the purchase price paid by the
buyer is allocated to the assets
and constitutes a new tax base
for amortization. Goodwill
paid can also be amortized in
an asset deal. Goodwill paid
in connection with a share
purchase cannot be amortized
for tax purposes.
Real estate investments are
normally structured so that
inbound investors tend to use
Swedish acquisition vehicles
to which the loan financing is
allocated. The main reason for
this is that a transfer in an exit
can be performed as a transfer
of the shares rather than a
direct transfer of the property.
The shares in AB that holds
the real property are normally
94 | REAL ESTATE GAZETTE
GENERAL REAL ESTATE | SWEDEN
“
Goodwill paid in connection with a
share purchase cannot be amortized for
tax purposes.
”
considered to be “shares held for
business purposes”.This means
that capital gain from disposal of
the shares and received dividends
are exempt from tax for a
corporate holder. Further, stamp
duty does not apply on transfer
of shares, regardless of whether
or not the assets in AB constitute
real property.
To avoid capital gains taxation
and lower stamp duty, it is
general practice that real estate
is sold at tax base value to a
subsidiary and thereafter the
shares in the subsidiary are
sold to an external party for
fair market value. The use of a
subsidiary to sell valuable assets
such as real estate is known as
“packaging”. The price for the
shares is sometimes discounted
due to deferred tax liability
on the difference between tax
basis and the fair market value
of the real estate. This means
that an investor in commercial
real estate normally has
limited options to acquire real
property otherwise than by a
ISSUE 27 • 2017 | 95
share purchase.
A real investment structure is
usually structured with each real
property investment packaged in
separate ABs. This usually leads
to lower stamp duty than if the
property is sold directly. Transfer
tax liabilities may be triggered
on the sale of real estate. The
transfer tax, based on the
purchase price, is 4.25 per cent
if the buyer is a company.
corporate income tax.
•Capital gains on exit are
exempt from tax. Exit is
performed by disposal of the
shares in AB.
•There is no stamp duty liable
on the sale of shares in a
company holding real estate.
•Operating profits and losses in
the property-holding ABs may
be offset by means of group
contributions.This means that
The structure may include a
taxable profit in a company in
Swedish parent holding AB that
the group may be set of against
holds the shares in its propertylosses in another company.This
holding subsidiary ABs.
option is available whether or
not the property-holding ABs
A brief overview of the relevant
are held by a Holding AB.
tax consequences is as follows:
•Each AB is taxed on any
income at 22 per cent
96 | REAL ESTATE GAZETTE
•Capital losses from a sale of
real property from an AB are
deductible only against capital
gains from the sale of real
property (which may be offset
within the group).
•There is no withholding tax in
Sweden on interest payments.
There are no thin capitalization
rules in Sweden. Interest
payment is a deductible item.
However, limitations exist
on intra group loans. The
regulation is aimed at crossborder intra group loans,
amongst others. As a general
rule such interest is nondeductible but there are two
main exemptions:
1.The “ten-percent rule”, under
which interest is deductible
if the beneficial owner of the
“
A Ministry of Finance-appointed
committee is examining the possibilities of
‘packaging’ real estate and other valuable
assets in a special purpose vehicle
”
interest income is taxed at a
rate of at least 10 per cent
and the predominant reason
(approximately 75 per cent
or more) for the debt is not
to obtain a significant tax
advantage within the group.
2.The “business reason test”,
under which interest is
deductible if the underlying
debt is predominantly
(approximately 75 per cent or
more) motivated by business
reasons and the beneficial
owner of the interest income
is resident within the EEA, or,
in certain circumstances, in a
state with which Sweden has
agreed a tax treaty.
The basis for corporate tax,
including the interest deduction
limitation rules, is currently under
review. It is expected that Sweden
will adopt a model based on the
base erosion and profit shifting
(BEPS) proposals.This means that
interest deductions will be limited
to a certain percentage of EBIT or
EBITDA. In such case a 20–25 per
cent threshold may be possible.
In June 2015, the Ministry of
Finance appointed a committee
to examine the possibilities
of “packaging” real estate
and other valuable assets in a
special purpose vehicle (SPV).
The committee is due to
present its findings by 31 March
2017 at the latest.
In its report, the committee
will propose tax legislation
to prevent “packaging” being
used as a tool for tax evasion.
At this stage, we can only
speculate on the legislation the
Committee will propose but it
is suggested that the proposal
may include specific holding
period requirements for unlisted
shares for the participation
exemption, or a provision that
ABs which only or mainly hold
real estate be excluded from the
participation exemption.
The political faction called
“the Alliance” (made up of four
liberal to right wing parties that
are currently in opposition) is
in fact in agreement with the
Government that these tax rules
require reform.This may lead to
tax-exempt sales via SPVs being
limited in the future.
ISSUE 27 • 2017 | 97
ISSUE 27 | www.dlapiperrealworld.com
REAL ESTATE
GAZETTE
BELGIUM
POP-UP LEASES IN
BELGIUM
KENYA
THE RISE OF THE
SHOPPING CENTER IN
KENYA
MIDDLE EAST
THE CHALLENGES OF
COMPLEX RETAIL LEASING
ARRANGEMENTS IN DUBAI
ROMANIA
DIFFERENT OWNERS
WITHIN A RETAIL PARK:
PRACTICAL ASPECTS
USA
THE RESCUE OF
AÉROPOSTALE: A NEW
FASHION FAD FOR RETAIL
LANDLORDS
MAURITIUS
ACQUISITION OF
PROPERTY BY FOREIGNERS
IN MAURITIUS
FOCUS ON:
SHOPPING CENTERS
CONSIDERING THE MYRIAD LEGAL ISSUES
FLOWING FROM THE CONSTRUCTION
AND OPERATION OF SHOPPING CENTERS
CONTRIBUTORS
Janice Yau Garton – Hong Kong +852 2103 0884 [email protected]
Kenneth Lee – Hong Kong +852 2103 0752 [email protected]
Michael Bollen – Brussels +32 2 500 1635 [email protected]
Joris Beckers – Brussels +32 2 500 1633 [email protected]
Jakub Adam – Prague +420 222 817 400 [email protected]
Martin Šerák – Prague +420 222 817 810 [email protected]
Jérôme Halphen – Paris +33 1 40 15 66 36 [email protected]
Vanessa Li – Paris +33 1 4015 25 40 [email protected]
Paolo Foppiani – Milan +39 02 80 618 531 [email protected]
Alessia Bilotti – Milan +39 02 80 618 825 [email protected]
Emanuela Nitti – Milan +39 02 80 618 836 [email protected]
Jane Wangari – IKM Kenya, Nairobi +254 20 2773 000 [email protected]
Tom O’Grady – Dubai +97144386322 [email protected]
Helen Hangari – Dubai +97144386326 [email protected]
Paweł Białobok – Warsaw +48 22 540 74 80 [email protected]
Aleksandra Kozłowska – Warsaw +48 22 540 74 07 [email protected]
Anna Krzanicka – Warsaw +48 22 540 7814 [email protected]
Luís Filipe Carvalho, ABBC & Associados Portugal – Lisbon +351 21 358 36 20 [email protected]
Tânia Gomes, ABBC & Associados Portugal – Lisbon +351 21 358 36 20 [email protected]
Florina Toma – Bucharest +40 372 155 865 [email protected]
Claudiu Stan – Bucharest +40 372 155 849 [email protected]
Marlies Van Schoonhoven-Sloot – Amsterdam +31 20 541 9363 [email protected]
Kirsy Corten – Amsterdam +31 20 5419 691 [email protected]
Rick Chesley – Chicago +1 312 368 3430 [email protected]
Ann Lawrence – Los Angeles +1 213 330 7755 [email protected]
Shauneen Militello – Los Angeles +1213.330.7761 [email protected]
Chansa Mulela – Chibesakunda & Co Zambia, Lusaka +260 211 366 420 [email protected]
Rebecca Wylie – Leeds +852 2103 0727 [email protected]
Peter Faludi – Sydney +61 2 9286 8159 [email protected]
Rebecca Tan – Sydney +61 2 9286 8160 [email protected]
Dirk Caestecker – Brussels +32 2 500 1595 [email protected]
Tom Schepens – Brussels +32 2 500 1636 [email protected]
Bereket Alemayehu Hagos – Ethiopia +251 115 159 798 [email protected]
Attila Remes – Budapest +36 1 510 1118 [email protected]
Ashwin Mudhoo – Mauritius +230 465 00 20 [email protected]; [email protected]
Thomas Rindahl Håkonsen – Olso +47 2413 1694 [email protected]
Oxana Derevyanko – St. Petersburg +7 812 448 7200 [email protected]
Renata Polyakova – St. Petersburg +7 812 448 7200 [email protected]
Ivan Gritsenko – Moscow +7 495 221 4426 [email protected]
José María Oliva – Madrid +34 91 788 7340 [email protected]
Erik Björkeson – Stockholm +46 8 701 78 89 [email protected]
Adam Tideman – Stockholm +46 8 701 78 93 [email protected]
Image credits: Shutterstock
98 | REAL ESTATE GAZETTE
ISSUE 27
KEY CONTACTS
AMERICAS
Jay Epstien
Co-Chair, Global Real Estate Practice
Co-Chair, Global Real Estate Sector
Washington, DC
T +1 202 799 4100
[email protected]
EMEA
Olaf Schmidt
Co-Chair of the Global Cross-Practice Real Estate Secor,
Milan, Italy
T +39 02 80 618 504
[email protected]
ASIA
Susheela Rivers
Head of Asia-Pacific Real Estate
Hong Kong, People’s Republic of China
T +852 2103 0760
[email protected]
AUSTRALIA
Les Koltai
Head of Australia Real Estate
Melbourne
T +61 2 9286 8544
[email protected]
MIDDLE EAST
Tom O’Grady
Head of Middle East Real Estate
Dubai
T +971 4 438 6322
tom.o’[email protected]
UK
Laurence Rogers
Co-Head of UK Real Estate
London
T +44 20 7796 6272
[email protected]
William Naunton
Co-Head of UK Real Estate
London
T +44 207 153 7065
[email protected]
USA
John Sullivan
Chair, US Real Estate Practice
Boston
T +1 617 406 6029
[email protected]
Although this publication aims to state the law at 27 January 2017, this publication is intended as a general overview and discussion of the
subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking
legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication.
This may qualify as “Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. If you would
like further advice, please speak to Olaf Schmidt, Co-Chair of the Global Cross-Practice Real Estate Sector, on +39 02 80 618 504 or your
usual DLA Piper contact on +44 (0) 8700 111 111.
DLA Piper is an international legal practice, the members of which are separate and distinct legal entities. For further information please refer
to www.dlapiper.com.
Copyright © 2017 DLA Piper. All rights reserved.
ISSUE 27 • 2017 | 99
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