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					                                   TABLE OF CONTENTS
   A.         Parties and Interests

   1.         Parties – Who can own real estate?

   2.         Property – What property interests are currently sold?

   3.         Ownership – What types of ownership are there?

   4.         Matters burdening or benefiting real estate – What matters can affect real estate?

   5.         Occupation of real estate – Who may occupy real estate?

   6.         Brokers – What is the broker’s role?

   7.         Employees – What employment issues affect real estate acquisitions?

   B.         Procedure and Terms

   8.         Procedure – What are the steps in a sale and purchase transaction?

   9.         Other common contract terms – What other provisions does a real estate sale
              contract commonly contain?

   10.        Due Diligence – What investigations does the buyer normally make?

   11.        Terms implied by law – What provisions are implied by Statute, Code or
              otherwise?

   12.        Registration and Notarisation of real estate – What are the basic requirements?

   13.        Disputes – How are they dealt with and resolved?

   C.         Permits Insurance and Environment

   14.        Permits – What permits are required for the use and occupation of real estate and
              are they personal?

   15.        Insurance and Risk – What insurance will the parties effect and when does the
              insurance risk pass at the time of sale?

   16.        Environmental – What are the common environmental issues?

   D.         Finance and Taxes

   17.        Pricing/Valuation – What sets the price/valuation of real estate?

   18.        Financing – How is a real estate acquisition financed?

   19.        Security over real estate – How is security over real estate created and protected?

   20.        Taxes and Costs – What are they and who pays them?




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                                               PART A

                                   PARTIES AND INTERESTS

   1.         Parties - Who can own real estate?

              Both natural persons and legal entities can own real estate. Legal entities are
              incorporated companies, such as public companies and private limited companies,
              and also incorporated persons, associations, such as foundations or institutions.

              Owners of commercial real estate include private developers, insurance
              companies, pension funds, banks and other financial institutions, private or public
              property companies, charities, trusts, the government, local authorities and open-
              end or closed-end real estate funds. The legal framework for open-end real estate
              funds was laid down in the real estate fund act (Immobilien-
              Investmentfondsgesetz).

              The law concerning the purchase of real property by foreigners
              (Ausländergrunderwerbsgesetz), which is different in each Austrian province, has
              to be observed when acquiring property. Citizens of Austria do not require any
              permission according to this law. Persons with a EU or EEA citizenship usually
              need a so-called negative confirmation, otherwise acquisition proceedings are
              notifiable or subject to approval according to the law concerning the purchase of
              real property by foreigners. However, the Austrian Supreme Court recently
              decided that the need for a so-called negative confirmation (Negativbestätigung)
              contravenes EU law.

   2.         Property - What property interests are currently sold?

              Property in Austria is defined as the right of the owner to use the substance of a
              property according to his own discretion and exclude any other party from the
              same. This involves an almost unlimited right of dominion over a property, that is
              protected against any other party. Ownership of a property also comprises
              ownership of the ground underneath the real estate and the air above it.

              Ownership of an apartment is a right in rem granted to a joint owner of a
              property to use an independent apartment or any other independent space
              exclusively and to dispose of it alone.

              Besides residential property, there are other rights in rem, such as easements and
              servitudes. These involve limited real rights of use of third party properties.
              Basically, there are easements (or real servitudes) and personal servitudes:

                  •    The most common easements are those relating to access and supply lines

                  •    Examples of personal servitudes are usufructuary rights (the right to use a
                       third-party object without any limitation except conserving the substance)
                       and residential rights (the right to use a dwelling)

              By incorporating a limited tenancy into the land register such tenancy can become
              a quasi-real right. The legal relationships can be concluded for either an unlimited
              or a limited period of time.



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              An option can be granted on all legal transactions and all legal transactions can be
              conclude d as preliminary contracts.

   3.         Ownership - What types of ownership are there?

              In Austria property can be acquired by:

                  •    Original acquisition - this means that the property right is immediate and
                       new on purchase independent of the rights of a predecessor, e.g. treasure
                       trove, where there is no contractual relationship between the property
                       owner and the finder, or acquisition by prescription, i.e. acquisition of a
                       right by means of qualified possession as owner for the legally determined
                       period of time. With real property this period is 30 years and is not
                       affected by the entries in the land register

                  •    Derivative acquisition - this is an acquisition derived from the rights of the
                       predecessor

                  •    Bona fide acquisition of property - with regard to real property, the
                       acquisition is based on the principle of material publicity (principle of
                       confidence) of the Land Register according to which a bona fide person
                       who trusts in the correctness and completeness of the entries in the Land
                       Register is protected. A purchaser is regarded as being bona fide if he acts
                       without any fault or negligence on his part

              Residential property in the form of apartments and other independent spaces and
              parking spaces must not comprise areas of the property which are determined for
              general use, such as stairwells, corridors and paths.

              There is also the possibility of establishing a right to build. This is the alienable
              and inheritable right in rem to have a building on or below the surface of a piece
              of land belonging to a third party. However, this right cannot be established for
              less than 10 and more than 100 years. It can be established also in the form of the
              right to erect a residential building.

              A similar form of the acquisition of property is the erection of independent
              structures on third-party land. Different from the right to build, such structures
              are erected on third-party land with the intent that they will not remain there
              permanently.

   4.         Matters burdening or benefiting real estate - What matters can affect real
              estate?

                  •    Easements - as mentioned in section 2, there are basically easements or
                       real servitudes and personal servitudes. The first are rights of supply lines
                       and rights of way, the second are usufructuary and residential rights

                  •    Tenancy rights limited in time can also be entered into the Land Register




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                     •   Pre-emption and option to repurchase - pre-emption means that the real
                         property is sold under the condition that, if the purchaser wants to resell
                         it, he has to offer it to the seller for payment. The option to repurchase
                         means that the seller is granted the right to buy the property back at a
                         specified price

                     •   Restraints on encumbrance and alienation - restraint on encumbrance
                         means that liens and real rights of use must not be the granted, while
                         restraint on alienation means that the property must not be transferred. As
                         a rule, restraints on alienation granted in the context of a legal transaction
                         only have obligatory effect. A disposition in rem contrary to the restraint
                         is valid in relation to the third party. However, a restraint becomes
                         effective in rem, if it is established between spouses, parents and children,
                         adoptive children, foster children or stepchildren or their spouses and
                         entered into the Land Register

              Payment obligations under public law and charges in terms of building law or
              other charges under public law can also be entered into the Land Register.

   5.         Occupation of real estate - Who may occupy real estate?

              Real estate is usually occupied by one of the following categories of person:

                 •        Owners – those persons with a freehold interest in the property

                 •        Tenants – those persons with a lease of the property or part of it. It is
                          possible for any number of leases to be created in relation to the same
                          property. Normally, however, a restriction will be contained in the first
                          lease created limiting the number of subsidiary leases that may be created
                          out of it. Tenants of business premises sometimes have statutory rights
                          to renew their leases when the contractual term ends

                 •        Persons who hold a property in their qualified possession although they
                          are not the entitled owners and who do so beyond the period of time set
                          for this by law

                 •        Holders of a wayleave – a contractual right of occupation usually given
                          to companies supplying utility services. Holders of wayleaves often have
                          statutory rights to remain in occupation even if the wayleave agreement
                          terminates

              Please also see our CMS Lease Guide

   6.         Brokers - What is the broker's role?

              Brokers generally fall into five categories:

              Investment
              Valuation
              Buildings




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              Management
              Rent Review

              They are employed by any party to any transaction involving real estate. Their
              role may include:

                 •      acting for a seller to find a buyer for a sale property, including marketing
                        the property for sale

                 •      acting for a landlord to find a tenant for a leasehold property, including
                        marketing the property

                 •      acting for a buyer to find a property to buy

                 •      acting for a tenant to find a property to lease

                 •      acting for any party to a transaction drafting and negotiating heads of
                        terms

                 •      valuing a client’s existing and target properties

                 •      day to day management of property owned by clients, including
                        managing maintenance programmes and landlord and tenant work and

                 •      project management of development of new buildings or refurbishments

              Brokers available in the market range from those employed by major international
              organisations to specialised advisers providing advice on a more restricted basis.

   7.         Employees - What employment issues affect real estate acquisitions?

             Pursuant to Council Directive 77/187/EEC on the approximation of the laws of
             the Member States relating to the safeguarding of employees’ rights in the event of
             transfers of undertakings, businesses or parts of businesses, rights and duties of a
             transferor of a business resulting out of an employment contract are passed to the
             transferee of the business upon transfer.

             The Austrian Employment Law Harmonisation Act
             (Arbeitsvertragsrechtsanpassungsesetz) was passed in order to implement the
             Council Directive 77/187/EEC and applies when a transfer of a business or of
             parts of a business takes place.

             Main elements of the Employment Law Harmonisation Act are that:

                 •      employment obligations pass to a purchaser as a matter of law

                 •      there is a one year cushion against making employment
                        conditions less beneficial in certain cases

                 •      works agreements remain valid after the transfer of the




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                        business and

                 •      there is joint and several liability of the transferor and transferee for
                        obligations of the employment contract, which is particularly
                        important with respect to entitlements for pension and severance
                        payments

             The transfer of a part of the business as stated in Directive 77/187 and the case
             law of Austrian Courts depends upon:

                 •      the existence of a part of the business

                 •      the maintenance of the part of the business during the change
                        of the operator

                 •      the maintenance of the previous business activity in the part
                        of the business or

                 •      the restart of the business after a short or conditional interruption

             The concept of transfer relates to cases in which an economic entity - that is to
             say an organised group of persons and assets facilitating the exercise of an
             economic activity which pursues an objective specific to it - retains its identity
             following the transaction in question. This will not apply to all real estate
             transactions.

             As a matter of general principle, a transfer of a business to another owner will not
             affect the employment relationship. The transferee takes over by operation of law
             the existing employment relationships together with all rights and obligations
             existing on the date of the transfer.

             The previous employment conditions must remain the same, unless the provisions
             dealing with collective bargaining agreements, corporate pension promises or the
             validity of work agreements state differently.




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                                                    PART B

                                       PROCEDURE AND TERMS

   8.         Procedure - What are the steps in a sale and purchase transaction?

              Transactions formally start when proposed heads of terms are drafted, negotiated
              and agreed by the brokers for the seller and the buyer. The heads of terms (or
              memorandum of understanding or letter of intent) set out the principal terms
              agreed between the parties and are generally expressed to be “subject to contract”.
              They form the basis of the documents to be drafted by the lawyers.

              The buyer, when purchasing real estate and buildings, normally has his lawyers
              draw up a due diligence report concerning not only technical aspects, but also the
              legal aspects of the real estate transfer. At the same time negotiations are likely to
              take place concerning the principle terms. The intermediate or final result of the
              due diligence check will form part of these negotiations. An agreement is then
              reached which frequently provides for a variety of other conditions, particularly in
              the case of large transactions.

              The next step will be for the contract to be exchanged, followed by fulfilment of
              any relevant conditions. A transfer of assets will then be executed and registered
              in the Land Registry; such registration is not required in the case of share sale
              transactions.

   9.         Other common contract terms - What other provisions does a real estate
              sale contract commonly contain?

              An agreement for the sale and purchase of land is commonly in writing and
              contains or clearly refers to all main terms and conditions, and is in a form in
              which one part is signed by both the seller and the buyer.

              Very often a fiduciary settlement with the help of a trustee (barrister or notary
              public) is agreed in the context of the transfer contract. Various legal
              constructions and securities can be chosen in determining the trust conditions.

              The trustee is subsequently responsible for ensuring that the trust payment in his
              possession is not made to those authorised until all prerequisites provided for and
              agreed on have been fulfilled. Appropriate evidence of this is to be submitted to
              the trustee.

              After all the agreed prerequisites have been fulfilled, the trustee makes the
              payment to the authorised party.

              Because the buyer has the opportunity of conducting full title investigation or due
              diligence before exchanging agreements, the buyer is usually prohibited from
              making any objection to any matter of title after the date of exchange.

              Provisions relating to value added tax will be included where relevant to ensure
              the agreed tax position.




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              If the property being sold is in the course of construction, the contract for sale
              will incorporate provisions dealing with the obligations of the seller to construct
              in accordance with an agreed specification and to provide to the buyer separate
              deeds of warranty from the building contractor and persons such as the architect
              in order to safeguard the buyer against defective design or workmanship.

   10.        Due Diligence - What investigations does the buyer normally make?

              Pre-exchange of agreements

              The buyer is likely to commission a survey of the building and in appropriate
              cases, soil and geological investigations, plant and machinery tests, and
              environmental investigations. There are three limbs to the pre-exchange due
              diligence by the buyer’s lawyers.

              Firstly, title to the property will be investigated. The buyer’s lawyers will consider
              the entries on the Land Register and relevant historic title documents. Where title
              to the property is not registered at the Land Registry, the buyer’s lawyer will
              consider the unregistered deeds to satisfy that the seller has a sufficient title to the
              property.

              Secondly, the buyer’s lawyers will commence their due diligence, which will
              include the position regarding municipal and zoning consents, environmental
              matters, utilities serving the property, financial encumbrances etc. Where the
              seller is a company, the buyer’s lawyers will also conduct searches of the seller’s
              name at the Companies Registration Office to ascertain whether the company is
              solvent and therefore able to dispose of its assets freely. Where the search result
              refers to security, the buyer’s lawyers will ask for confirmation that such matters
              do not encumber the property and that no third party consents are required for
              the transaction to proceed.

              Thirdly, during the due diligence process the buyer may often arrange that a
              survey of the property is carried out.

              Pre-completion

              Requisitions deal with completion formalities such as the seller’s lawyers’ bank
              details etc. The buyer’s lawyers will also conduct pre-completion searches
              including a priority search of the Land Registry.

              Reporting to the client

              Before exchange of agreements the buyer’s lawyers usually report their due
              diligence findings to their client, raising any matter of particular importance or
              concern.

   11.        Terms implied by law - What provisions are implied by Statute, Code or
              otherwise?

              Some of the most significant are as follows:




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              Buyer Beware (Caveat Emptor)

              The buyer must satisfy itself in all respects as to the nature of the property it is
              acquiring. However, this does not absolve the seller from the obligation to
              provide truthful replies to enquiries raised by the buyer’s lawyers. Warranty rights
              outside consumer protection can be modified by contract.

              Land Register

              All property and lien entries in the Land Register have a legally binding effect and
              the entries in the Land Register are deemed to be correct and complete.

              Misdescription and misrepresentation

              There are both statutory and common law rules which protect against clear
              misrepresentations or misdescriptions of fact made by the seller to the buyer
              which have the effect of inducing the buyer to enter into a transfer of land. In
              such cases, damages may be payable to the buyer and the buyer may be entitled to
              withdraw from the transaction.

              Unfair terms

              Agreements for sale that include exemption clauses, which seek to allocate risk,
              can be subject to section 879 ABGB (Austrian Civil Code). The Austrian
              Supreme Court of Justice, however, generally upholds clauses agreed upon
              between companies.

   12.        Registration and Notarisation of real estate - What are the basic
              requirements?

              According to Austrian law, the ownership of real property and easements etc. is
              acquired only by the entry of the right into the Land Register.

              It is therefore necessary to have at least the signatures of all agreements
              concerning such rights attested by a notary public, if attestation by a notary public
              is not otherwise compulsory.

              Moreover, the agreement must contain a declaration (consent to the transfer)
              made by the seller in which he consents to the implementation of this agreement
              in the Land Register. This declaration can also be made outside the contract. In
              this case, the signature of the person who makes the declaration has also to be
              attested by a notary public.

              The entry into the Land Register is an essential element for the acquisition of the
              property right to real property and easements etc. According to Austrian civil law
              and the land register law, the original of the agreement as the basis for registration
              and original ancillary certificates specified by law (clearance certificate furnished
              by the tax office, proof of citizenship etc.) are to be submitted to the competent
              land register court. After positive examination of the certificates by the registrar at
              the land register court, the entry is made into the Land Register. Thus the
              acquisition of the property right takes effect.




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   13.        Disputes - How are they dealt with and resolved?

              Conflicts can either be solved by obtaining a court decision or by way of a
              contractually agreed arbitration. It is to be noted that in the Austrian legal system
              the possibilities of contesting an arbitration award are limited.

              When choosing a method of resolving disputes, the parties will have regard to
              various issues, including the following:

                 •      The domicile/nationality and governing law of the contracting parties
                        and any relevant statutory limitations which may inhibit such choice or
                        the effectiveness of such a choice

                 •      Can awards be enforced in the relevant jurisdictions? For example, is
                        there an international treaty that will allow enforcement of an award in a
                        particular jurisdiction? If such a treaty does exist, does it recognise
                        arbitration awards and agreements arising out of a mediation process?

                 •      If the remedy sought is the transfer of an interest in land, rather than
                        payment of money, a consideration is whether or not the particular
                        system of law, jurisdiction or method of dispute resolution permits such
                        an award

                 •      If technical know-how is required, the need to seek an expert’s opinion




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                                                    PART C

                                PERMITS INSURANCE AND ENVIRONMENT

   14.        Permits - What permits are required for the use and occupation of real
              estate and are they personal?

              Any proposed development of property must always correspond to the planned
              use and the provisions of the land development plan.

              If applicable, a notice of proposed building is made. In other cases, a building
              permit can be applied for. The building permits granted are regarded as being
              invalid if the building operation has not started within 4 years or the building is
              not finished within 4 years after the start of construction.

              After completion of the construction project, the building structure is inspected
              for compliance with the building permit. Thereupon, a licence for use is granted
              by the authority following submission of a statement of completion. Apart from
              the procedures required under the building regulations, the business or trade to be
              run in the building requires a relevant commercial licence to be obtained.

              For the business location itself, a permit for the operating equipment
              (Betriebsanlagengenehmigung) may be necessary according to the Austrian
              Industrial Code (Gewerbeordnung).

              In the course of the building operation, architectural conservation requirements
              and limitations have to be observed, particularly in the urban centres and in
              protected zones contained in a land development plan. Compliance must also be
              made with the regulations concerning the respective interests of adjoining owners
              during the carrying out of building operations.

   15.        Insurance and Risk - What insurance will the parties effect and when does
              the insurance risk pass at the time of sale?

              Before a sale is contemplated, insurance is generally the responsibility of the
              owner of the freehold interest in a property. The seller always bears the risk prior
              to the conclusion of the contract of sale. The transfer of risk from the seller to the
              purchaser is specified in the contract of sale. The purchaser bears the risk after the
              contractually agreed date.

              The purchaser is always obliged to take over existing insurance contracts.
              However, he has the right to terminate the insurance relationship within one
              month after purchasing the property.

              The insuring party should have a fully comprehensive buildings insurance policy
              to protect the structure and fixtures and fittings of the property in the event of
              damage or destruction by any of a comprehensive list of insured risks, such as
              storm, lightning, fire and water damage. The policy may also cover additional
              special heads of cover such as subsidence, heave, earthquake and, if applicable,
              terrorism.




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              Insurance policies (the insurance contracts containing the contractual terms
              between the insurance company and the insured) may either comprise a single
              policy for one particular property or a block policy designed to cover a portfolio
              of properties. Larger institutional investors may self-insure.

              Occupying owners generally have separate policies to cover the contents of the
              property, especially if the property includes costly plant and machinery.

   16.        Environmental - What are the common environmental issues?

              The liability for pollution of real estate and its removal is basically regulated
              according to the principle of causal responsibility. The buyer as owner of the real
              property is secondarily liable for pollution.

              Due diligence as part of the acquisition process may involve the appointment of
              environmental consultants to consider documentary information and to carry out
              a site visit (Phase I). If considered necessary, further more intrusive investigations
              (Phase II) may then be undertaken. It is important to identify potential problems
              early so that there can be negotiation on price, the need for and scope of any
              remediation and/or the need to put in place protection in respect of any existing
              contamination related losses that may arise in the future. Such protection may take
              a number of forms, including obligations to remediate any contamination
              discovered post-acquisition, indemnities in respect of third party claims, or
              environmental insurance to cover these risks.




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                                                    PART D

                                          FINANCE AND TAXES

   17.        Pricing/Valuation - What sets the price/valuation of real estate?

              Pricing of real estate investments is a combination of the aggregate rent being paid
              by occupational tenants of the property and the value that investment buyers
              consider that a property of the specific type and location is worth at the time of
              valuation taking into account that income.

              The rent for a particular property is likely to be assessed by multiplying the area of
              the property by the market rental value per square metre. The market rental value
              will take into account factors such as the location of the property, its type and
              condition, and the length of the lease term.

              In the case of retail shops, it is common for the rent of the property to have
              differential values according to the positioning of the floor space – that nearest to
              the frontage is the most valuable. The rental values of the various areas will be
              added together to provide an overall rental value for the property.

              The value of a piece of land is determined according to the property evaluation
              law (Liegenschaftsbewertungsgesetz) and the evaluation methods detailed in that
              law. Accordingly, if the law or the legal transaction do not stipulate otherwise, the
              market value of the property is to be determined. This is the price that can
              normally be achieved by sale in a business transaction. Value ascertainment
              methods are to be used for the evaluation. These are the method of comparison,
              the gross rental method and the asset value method.

              Investment properties are commonly referred to as being sold on a particular
              yield, meaning the investment return that will be gained from the capital sum
              which it is necessary to pay to buy the property. For example, where a property
              with an aggregate rent of € 10.000,00 is sold for € 200.000,00 it will have a yield of
              5%. Conversely, the interest can be said to have been sold at a YP (years’
              purchase) of 20.

   18.        Financing - How is a real estate acquisition financed?

              The principal ways in which real estate acquisition is financed are:

                 •      Through the purchaser’s own cash resources or general corporate
                        banking facilities

                 •      By using the capital value of the property to raise specific finance
                        secured on the property

                        Normally, the financing banks or other financiers hedge themselves with
                        an appropriate lien that is entered into the land register for the property.
                        If the borrower should become insolvent, the financer can receive
                        preferential satisfaction as the pledgee with regard to the lien. This




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                        means that a so-called preferential right to the bankrupt's estate ensues in
                        favour of the pledgee.

                        Lenders require floating or fixed interest rates.

                 •      Raising finance by bond/debenture stock issue

                        Here the interest rate is usually fixed by reference to the nearest
                        equivalent government stock plus a spread or margin.

   19.        Security over real estate - How is security over real estate created and
              protected?

              As a rule, an agreement in the form of a pledging deed (Pfandbestellungsurkunde)
              is concluded between the financer and the real estate owner to hedge the financer.
              In normal case the financer is given the real estate in pledge as security for the
              sum of money financed.

              Under Austrian law, however, the lien to real property is only established with an
              entry being made into the Land Register.

              For this reason, the pledging deed has to be drawn up in compliance with the
              requirements for deeds pursuant to the land register law. In particular, this means
              that the contracting party's signatures must be attested by a notary public and that
              the pledgor has to make a declaration of consent called Aufsandungserklärung for
              the Land Register.

              There is a right to secure the pledge in the case of insolvency. If several liens are
              entered, satisfaction of the pledgees is not in equal parts, and the assets will be
              allocated firstly to satisfy the claims of the pledgees of first priority. The remaining
              assets, if any, will be used to satisfy the claims of the pledgees of secondary
              priority and so on. The liens are entered into the Land Register according to the
              principle of priority, so that the pledgee entered into the Land Register at an
              earlier date enjoys priority over those entered later. The date of submission to the
              court is decisive.

   20.        Taxes and Costs - What are they and who pays them?

              Generally, please refer to our CMS transaction costs guide as to the nature and
              amount of the taxes and costs.

              With regard to taxation, the transfer of property is subject to real property
              acquisition tax amounting to 3.5 % of the purchase price. The real property
              acquisition tax is not normally levied in case of a share deal.

              A further fee of 1% of the purchase price is charged for the entry of the right into
              the Land Register.

              Pursuant to the Turnover Tax Law (UStG), sales of property are fictitiously
              exempted from the turnover tax. However, a buyer has the option of treating the
              transaction as subject to the tax payment. This is to be recommended if input tax




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              charges are to remain deductible or if a correction of input tax charges already
              asserted is to be avoided. However, it needs to be noted that the turnover tax
              (20%) added increases both the purchase price and the real property acquisition
              tax.

              During the due diligence for the acquisition, the buyer will also pay the costs of
              conducting searches, including in particular of the local authority (which includes
              zoning matters, building regulations and general municipal consents, notices, etc),
              and, if relevant, companies providing utilities, the local waterways boards, the
              Environment Agency, railway operators, and coal authority. The buyer will also
              pay for any valuations and surveys of the physical state of the property and for
              any environmental audits or desktop studies.

              Occasionally, the negotiated heads of terms for a transaction will provide for one
              or other party to pay the other’s costs. Generally, each party pays its own
              expenses. If the property is leasehold, the seller is usually responsible for paying
              the costs of obtaining any consent required from any landlord in order to sell.

              Finally, the buyer will be responsible for the payment of the Land Registry fees
              associated with registration of the transfer to the buyer.




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                                                    PART A

                                        PARTIES AND INTERESTS

1.         Parties - Who can own real estate?

           Any legal person can own real estate.

           As to legal capacity, Belgian law distinguishes between individuals, legal entities and
           foundations.

           Legal entities may either be private law entities (such as non-profit making associations,
           commercial companies or organisations of economic interest), or public law entities (such as the
           State, communities, regions, public establishments or public autonomous companies).

           Foundations are patrimonies allocated to one or several individuals or legal entities for altruistic
           purposes. They can be of public or private use.

           Owners of real estate therefore include private developers, insurance companies, banks and
           other financial institutions, private or public companies, government and local authorities, etc.

           There is no restriction on real estate ownership based on the citizenship of the owner.

2.         Property - What property interests are currently sold?

           In Belgian law, patrimonial rights are divided into two categories: real rights (rights in rem) and
           personal rights (rights in personam).

           In property law, rights in personam essentially originate from the relationship between landlord
           and tenant pursuant to the lease agreement.

           There are four types of property lease under Belgian law: the standard (civil) lease, the retail
           lease (often misleadingly called “commercial lease”), the residential lease and the agricultural
           lease. Business leases are governed by the rules applicable to standard (civil) leases.

           In contrast to rights in personam, there are a limited number of rights in rem. Under Belgian
           law, the following are considered real rights:

           •          Ownership

           •          Usufruct

           •          Rights of usage

           •          Rights of residence

           •          Emphyteotic lease

           •          Right of superficies (also referred to as building right)

           The most absolute right in rem is the right of ownership.

           Real estate ownership entails all the rights and privileges afforded to the owner, which includes
           the right to use the property, the right to receive all revenues flowing from the property and the


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          right to abuse the property (including its destruction), subject to restrictions imposed by any
          applicable laws and regulations and subject to sanctions arising pursuant to the rules of civil
          liability when the owner is either causing damage to others through his/her fault or, through no
          fault, is causing abnormal damage to neighbouring properties.

          In addition, ownership of land includes ownership of the ground and of the subsoil, together
          with all the proceeds and income deriving therefrom.

          Pursuant to the principle of accession, ownership of land automatically brings with it ownership
          of all that is erected on it. Accession is therefore a method of acquiring ownership whereby the
          owner of a principal asset becomes the owner of all that is incorporated therein.

          According to this principle, the owner of a plot of land automatically becomes the owner of any
          construction erected on the land, regardless of the identity of the person who erected the
          building and/or the ownership of the building materials, unless otherwise agreed with that
          person. It is possible for the owner to waive its right of accession. Such waiver results in the
          builder becoming owner of the building and is generally construed as giving rise to a right of
          superficies or an emphyteotic right (long lease) which, by law, are limited to 50 years
          (superficies) or 99 years (emphyteotic).

          Rights in rem (other than the right of ownership) over property are from time to time created to
          grant a right of use over property. Usufruct, emphyteotic lease and the right of superficies are all
          examples of this. For the “lessee” they usually offer more stability than a mere lease. For the
          “lessor” they usually guarantee income over a long period of time.

          Moreover, in certain circumstances, the acquisition of rights in rem can be considered as an
          alternative to a purchase. Rights in rem are usually granted for a very long period (up to 99
          years), and procure extensive rights for their holder.

          Transactions having the effect of transferring title to a real estate property or of creating a right
          in rem encumbering such a property may be recorded at the Mortgage Registrar Office. Such
          registration is required in order to have a title good against all third parties, who may take
          precedence in the absence of registration (see section 12).

3.        Ownership - What types of ownership are there?

          Ownership is either private or public, depending upon the whether the person with title to the
          property is a legal person under private law or a legal entity in public law (State, regions,
          communities, provinces, municipalities, etc.).

          Private ownership can also be either individual or plural, according to whether the legal person
          with title is an individual or a group of individuals, e.g. co-ownership. Co-ownership describes
          the situation where two or more people each have a portion of legal ownership of the same
          thing. The co-owner can encumber its portion of the rights in rem (e.g. mortgage).

          The Belgian law of 30 June 1994 governs the regime for enforced co-ownership, in particular
          the enforced co-ownership of buildings such as apartment blocks.

          It is to be noted that Belgian law draws a distinction between ownership and possession.
          Possession is where a person behaves as the owner of the thing regardless of the question of
          whether the possessor is the owner or not. Belgian law, in the field of real estate, offers
          protection to a person in possession, granting him possessory actions permitting him to defend
          himself quickly, at little cost, against each person interfering with his possession.


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          A person in possession for a certain period can, subject to compliance with certain conditions,
          become the owner. This mechanism is known as adverse possession. In this regard, article 2262
          of the Civil Code stipulates that a real property is “adversely possessed” after 30 years, meaning
          that the ownership of a property will only be acquired by adverse possession after 30 years have
          elapsed.

4.        Matters burdening or benefiting real estate - What matters can affect real estate?

          Common matters affecting real estate include:


                 Matter                          Effect                             Example
           Easements                 Charge imposed over property        Rights of passage, servitude
                                     for the benefit of other            providing right of support
                                     property                            from an adjoining building,
                                                                         servitude not to build
                                     The owner of the servient
                                     tenement, under an obligation
                                     to bear the easement, cannot
                                     do anything that seeks to
                                     reduce its usage or render it
                                     less convenient. Thus, it
                                     cannot change its location,
                                     nor can it move the easement
                                     from its original location

           Adverse possession        Mechanism conferring a right        A right of ownership
                                     in rem to those exercising it       exercised for more than 30
                                     for an uninterrupted period         years
                                     without any action on the part
                                     of the title holder
           Mortgage                  Security over an immovable          Financing the purchase of a
                                     property permitting the             property is usually secured by
                                     mortgagee to be repaid the          a mortgage granted over a
                                     sale price of the encumbered        property. It is required that the
                                     property, regardless of whose       mortgagor owns the property
                                     hands it is in, over and above      for it to mortgage it, but the
                                     the other creditors                 owner of the land may grant a
                                                                         mortgage over buildings in
                                     The mortgage permits the            the course of being erected or
                                     mortgagor to use, enjoy and         which could be erected on the
                                     even freely dispose of the          land in the future
                                     property. In doing so,
                                     however, it cannot interfere
                                     with the security to which it
                                     has consented

           Mortgage mandate          Used in order to avoid the
                                     payment of taxes and fees. A
                                     mortgage mandate does not
                                     give any security to the
                                     creditor; it is merely a tool for
                                     the creditor which enables it,


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                                        where necessary, to enter into
                                        an effective mortgage before a
                                        notary

              Contractual rights        Contractual rights for a            Option agreement or right of
                                        determined period exercisable       pre-emption
                                        by one party over the property
                                        of another


5.        Occupation of real estate - Who may occupy real estate?

          Real estate is usually occupied by the following categories of person:

          •        Owners

          •        Title holders of rights in rem (other than the right of ownership). As outlined in section
                   2, besides the right of ownership, several rights in rem exist in Belgian law by virtue of
                   which real estate may be occupied : e.g. the usufruct, right of usage, right of residence,
                   the emphyteotic lease and the right of superficies

          •        Tenants and sub-tenants. As regards standard leases, in the absence of any provision to
                   the contrary the tenant is free to sublet the lease to other parties; it is for this reason that
                   landlords frequently require that a lease prohibits sub-letting. Specific rules in relation to
                   sub-letting also apply to residential leases

          •        Contracting parties. A contractual right of occupation may be given by one party to
                   another, not exceeding the extent of the rights enjoyed by the grantor

          Please also see our CMS Lease Guide

6.        Brokers - What is the broker's role?

          The role of the broker is, most frequently, to put at the client’s disposal its methods of
          advertising, its contacts and business experience with a view to entering discussions with
          candidates for the completion of the envisaged property transaction, be it a sale or a lease.

          Its initial role, therefore, is to search for and put into contact candidates for contracts relating to
          immovable property.

          This basic role can, however, be extended to include other services such as participation in the
          negotiations, drafting the contract, obtaining funds/credit, etc.


7.        Employees - What employment issues affect real estate acquisitions?

          Employment issues are not common in relation to the acquisition of real estate. Those which
          may be relevant to real estate transactions typically concern the transfer of undertakings and
          redundancies.

          Transfer of undertakings – TUPE

          TUPE is likely to have significant consequences on employment issues. TUPE applies when
          there is a change of employer. There is no change of employer when the operation only consists

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          in the change of shareholder. It may apply when there is the sale or transfer of a business or, for
          example, the outsourcing of the management of a property to a third party. This might occur in
          the sale of a shopping centre having its own management and security staff. The broad effects
          of TUPE are that:

          •       the employment contracts are automatically transferred from the transferor to the
                  transferee

          •       the working conditions (seniority, salary, responsibilities, working time, etc.) and
                  collective bargaining agreements (working hours, thirteenth month, salary, etc.) existing
                  with the transferor have to be maintained, except in principle for the old-age, invalidity
                  and pension benefits payable under schemes supplementing the official social security
                  system

          •       transferor and transferee are in principle jointly liable for the debts resulting from the
                  employment contracts existing at the time of the transfer

          •       dismissal for a reason connected to the transfer is automatically unlawful - unless for an
                  “economic, technical or organisational reason entailing changes in the workforce”

          •       employees’ representatives must be informed and consulted about the transfer prior to the
                  transfer (if there are no employees representatives, the employees concerned by the
                  transfer will have to be informed)

          Although the legal effects of TUPE cannot be avoided, it is possible to apportion TUPE
          liabilities by agreement between the transferor and the transferee. Normally the transferor will
          agree to be responsible for all claims and liabilities relating to employees up to the date of
          transfer, and the transferee will take on all post-transfer employment liabilities. Such an
          agreement concluded between the transferor and transferee has no effect as against third parties.

          Redundancies

          Redundancies may arise on the closure of a business or part of a business or where there is a
          reduction in the number of employees required, for example on the merger of two businesses or
          a TUPE transfer. Care should be taken to ensure that the redundancies are carried out according
          to a strict procedure which entails consultation with the employees or their representatives
          before any decision is taken.




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                                                    PART B

                                        PROCEDURE AND TERMS

8.         Procedure - What are the steps in a sale and purchase transaction?

           The direct acquisition of a property is made by the seller and the buyer entering into a contract
           of sale. The contract of sale is concluded when there is an agreement between them on the
           property being sold and on the price.

           The contract of sale is documented in writing. This written contract may be drafted privately,
           i.e. without the intervention of a public notary. It is then commonly called a compromis de
           vente/verkoopscompromis.

           The compromis de vente/verkoopscompromis is only enforceable between the seller and the
           buyer.

           For the purpose of making the transfer of title enforceable against third parties, the sale must be
           recorded on the land register maintained by the Mortgage Registrar (see section 12). This
           formality is called the transcription/overschrijving.

           For the purpose of recording the sale in the land register, the seller and the purchaser must
           normally sign a notarial deed with a public notary.

           The public notary takes care of recording the deed with the Mortgage Registrar.

           In practice, the compromis de vente/verkoopscompromis is signed in a first phase. The signature
           of the notarial deed takes place in a second phase, not exceeding four months. The transfer tax
           (see section 20) is due prior to recording the deed with the Mortgage Registrar and no later than
           four months after the signature of the compromis de vente/verkoopscompromis.

           The public notary must notify the tax authorities of the sale transaction at least 12 business days
           prior to the execution of the notarial deed. If taxes are due by the seller, they will be deducted by
           the notary public from the purchase price.

           Certain formalities, which may include an environmental survey and/or the delivery of
           information in respect the energy performance of the building, must be carried out in order to
           validly complete the sale of the property.


9.         Other common contract terms - What other provisions does a real estate sale contract
           commonly contain?

           A contract of sale, as mentioned in section 8, is at the outset an agreement between the seller
           and the buyer, and is called a compromis de vente/verkoopscompromis.

           This contract is made in writing and contains agreement on the property sold and on the price.

           By the signature of the compromis de vente/verkoopscompromis, the sale is perfected between
           the seller and the buyer. It is definitive. The seller is under the obligation to transfer the property
           to the buyer and the buyer must pay the price to the seller. The agreement must provide for the
           timing and means of transfer. Normally, the transfer takes place at the signing of the notarial
           deed.


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          The parties can, however, postpone the definitive character of the compromis de
          vente/verkoopscompromis and defer its effects by way of conditions precedent.

          A real estate sale agreement commonly contains, whatever the nature of the property sold,
          provisions concerning the identification of the parties and the property being sold and the state
          of the property. Since the buyer buys the property in its current condition at the moment of the
          transfer of title and such transfer is usually deferred until the signature of the notarial deed, if
          damage occurs between the compromis de vente/verkoopscompromis and the signature of the
          notarial deed, the seller will have to make reparations. The parties do, however, have the ability
          to provide for other arrangements.

          Every easement on the property being sold and known by the seller or which appears on the title
          deeds of the property will be mentioned in the agreement.

          As the price is an essential element of the contract of sale, it has to be established with a certain
          degree of certainty. In the majority of the cases, the price will be paid on the day of execution of
          the notarial deed. A deposit, normally 10% of the total sale price, is usually paid on signature of
          the compromis de vente/verkoopscompromis.

          The compromis de vente/verkoopscompromis and the notarial deed usually contain a clause
          discharging the seller of all its obligations due to any hidden flaws (but only those the seller was
          not aware at that time).

          It is usual for the seller to declare that the property is insured against fire and other connected
          risks until the notarial deed is signed. By law, this cover extends for a period of 3 months
          following the sale.

          The agreement contains a discharge for the property concerning charges and mortgages and the
          notary will carry out the necessary steps to that effect.

          In Belgium, the town planning legislation is very strict in some areas. The contract of sale will
          provide for some general clauses concerning the conformity of the property sold with this
          legislation. Similarly, the contract for sale will also contain clauses dealing with conformity
          with environmental legislation.


10.       Due Diligence - What investigations does the buyer normally make?

          Before signing the compromis de vente/verkoopscompromis

          The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil
          and geological investigations, plant and machinery tests, and environmental investigations.

          In the context of the pre-acquisition due diligence, the buyer’s lawyers will investigate the title
          to the property. The buyer’s lawyers will consider the entries in the land register maintained by
          the Mortgage Registrar and all relevant historic title documents.

          In practice, the buyer’s lawyers will order a mortgage certificate from the Mortgage Registrar.
          The certificate will confirm whether or not the title is registered. Additional details of all other
          registered interests of the seller need also to be obtained from the Mortgage Registrar.

          Where the property is leasehold, or subject to leasehold or other occupational interests, the
          terms of the relevant occupational documents need to be considered carefully to ensure they are
          not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to

CMS Legal Services | May 2011                                                                             22
          check whether these documents require the consent of any third party to be given to the
          transaction.

          The buyer’s lawyers will also conduct various searches to check the position regarding
          municipal and zoning consents, environmental matters, easements, works carried out, etc.
          Where the seller is a company and the sale relates to its business or activities, the buyer’s
          lawyers will also conduct searches regarding all properties owned or occupied by the company
          in relation to its business or activities. A search will also be done to ascertain whether the
          company is solvent and may dispose of its assets freely.

          The buyer’s lawyers will then raise any particular matter of concern with the seller.

          The seller generally gives replies, which may be actionable if wrong or misleading.

          Reporting to the client

          Before the execution of the agreement the buyer’s lawyers usually report their due diligence
          findings to their client, raising any matter of particular importance or concern. This may lead to
          the negotiation of specific indemnity clauses.

          Pre-completion

          Before completion (normally on the execution of the notarial deed), the buyer’s lawyers will
          usually ask the seller to divulge any further information that has arisen since the signature of the
          compromis de vente/verkoopscompromis..

11.       Terms implied by law - What provisions are implied by Statute, Code or otherwise?

          The Civil Code provides for two guarantees : a guarantee in respect of hidden defects affecting
          the property and a guarantee in respect of the title to the property.

          The guarantee in respect of hidden defects is generally waived by the buyer. Such waiver does
          not, however, cover defects of which the seller was aware at the time of the sale.


12.       Registration and Notarisation of real estate - What are the basic requirements?

          In Belgium, the land register is maintained by the Mortgage Registrar (Bureau de la
          Conservation des Hypothèques/Kantoor van Bewaring der Hypotheken).

          Belgium has a Mortgage Registrar for each judicial district.

          Registration of title with the Mortgage Registrar is required in order to have enforceable title
          vis-à-vis third parties who are entitled to rely on the absence of public registration in the
          register. Only persons legally succeeding to the owner and persons acting mala fides are deemed
          to have knowledge relating to the title of the owner even if the transaction relating to the transfer
          of title has not been recorded with the Mortgage Registrar.

          Transactions having the effect of transferring title to a property, or of creating a right in rem
          encumbering such a property, such as a right of superficies, may be recorded with the Mortgage
          Registrar but only if they occur pursuant to a contract between living persons. Transfer of title
          occurring following the death of a person or pursuant to the law (such as by way of accession)
          may not be recorded with the Mortgage Registrar.



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          Recording the relevant transactions must occur as soon as possible in order to render the transfer
          of title enforceable vis-à-vis third parties.

          The costs of registration consist of the notarial fees and the fees of the Mortgage Registrar.
          These fees are fixed by royal decree and depend on the type of transaction and the amount
          involved. They are usually based on a scale or on a percentage of the amount involved in the
          transaction.

13.       Disputes - How are they dealt with and resolved?

          The ordinary method to resolve any disputes between contracting parties is through the courts,
          although methods of dispute resolution could also include arbitration, mediation or conciliation.

          The choice should be stated expressly in the contract.




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                                                       PART C

                                PERMITS, INSURANCE AND ENVIRONMENT

14.       Permits - What permits are required for the use and occupation of real estate and are they
          personal?

          Planning/Zoning permit

          In general, a building permit will be required for the construction of a new property or for the
          re-building (i.e. refurbishment or amendment of an existing use) of an existing building.

          The Flemish, Brussels and Walloon Regions are mainly responsible for developing and setting
          up the town planning policy. In each Region, the municipal authorities (Collège des
          bourgmestres et échevins/College van Burgemeester en Schepenen or Council of the Mayor and
          his Aides) are competent to deliver the building permits.

          When deciding on the issue of a building permit, the municipal authorities will first examine
          whether the intended construction or re-construction complies with the applicable zoning plans,
          if any, which have been adopted at the regional and/or municipal levels. The municipal
          authorities will also consider the general interest of the public and the interest of the so-called
          good town planning.

          Moreover, for most of the building projects, a prior evaluation of the building project’s effect on
          the environment is to be provided by the permit applicant at the time of application. For specific
          projects, a study of such effects must be performed by agreed bodies and will give rise to a
          public inquiry.

          If the building permit application requires derogation from an applicable zoning plan or if no
          zoning plan applies to the construction in question, the delivery of the building permit will be
          subject to the prior advice of the so-called public officer (fonctionnaire-délégué/gemachtigd
          ambtenaar).

          After completion of construction, the competent authority will verify whether construction was
          made in accordance with the provisions of the permit granted.

          A different type of specific permit is required for construction works related to historically or
          architecturally important buildings or landscapes. In execution of the (old) law of 7 August 1931
          on the protection of monuments and landscapes, the Flemish, Brussels and Walloon Regions
          have adopted Decrees which set up an inventory of such protected monuments or landscapes in
          the property of each Region.

          Socio-economic permit

          In addition to a building permit, the Act of 13 August 2004 on Commercial Exploitations
          provides that projects relating to commercial developments of certain sizes are subject to the
          issue of an authorisation from the competent municipal authority.

          Environmental permit

          In relation to environmental issues, the municipal authorities are responsible for issuing low
          level environmental permits.




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          High level environmental permits have to be issued by the provincial authorities or, in the
          Brussels region, by a special body: the Brussels Institute for Environmental Management
          (IBGE/BIM).

          In the Flemish Region, environmental permits are governed by the Decree of 28 June 1985
          regarding environmental permits ("Environmental Permit Decree"). The Environmental Permit
          Decree has introduced a comprehensive environmental permitting system for listed facilities in
          this region. The Environmental Permit Decree was implemented by the Flemish governmental
          Decree of 6 February 1991 (commonly referred to as VLAREM I). The Environmental Permit
          Decree applies to so-called installations and/or activities which are considered to be harmful to
          human beings or the environment. The Decree distinguishes between three classes of
          installations: Class 1 and 2 installations require a prior environmental permit whilst Class 3
          installations only need to be notified to the municipal executive board. An application must be
          filed with the municipal executive board (Class 1 installations) or the provincial executive board
          (Class 2 installations). The holder of the permit granted under the Environmental Permit Decree
          must comply with any applicable environmental regulations, such as, but not limited to, those
          contained in the Flemish governmental Decree of 1 June 1995 (commonly referred to as
          VLAREM II).

          In the Brussels Region, environmental permits are governed by the Regional Act of 5 June 1997
          on environmental Permits (BRAEP). The BRAEP introduces a comprehensive environmental
          permitting system for listed facilities in the Brussels region. The BRAEP applies to installations
          and/or activities that are deemed to be harmful to human beings or the environment. Listed
          installations are classified into four categories: class IA, class IB, class II and class III. Class IA
          and class IB installations require a prior environmental permit to be obtained from the Brussels
          Institute for Environmental Management (IBGE/BIM). Class II installations require a permit
          from the municipal executive board. Class III installations need only to be notified to the
          municipal executive board. The holder of the permit granted under the BRAEP must comply
          with any applicable environmental regulations.

          In the Walloon Region, environmental permits are governed by the Regional Act of 11 March
          1999 on Environmental Permits (WRAEP). The WRAEP has introduced a comprehensive
          environmental permitting system for listed facilities in this region. The WRAEP was
          implemented by the Walloon governmental decrees of 4 July 2002. The WRAEP applies to so-
          called installations and/or activities that are considered to be harmful to human beings or the
          environment. The WRAEP distinguishes between three classes of installations: Class 1 and 2
          installations require a prior environmental permit whilst Class 3 installations need only to be
          notified to the municipal executive board. An application must be filed with the municipal
          executive board (Class 1 and 2 installations). The holder of the permit granted under the
          WRAEP must comply with any applicable environmental regulations.

          It is to be pointed out that environmental permits related to risk activities are issued in
          compliance with the IPPC regulation.

          In the three Regions, the building permit will only become effective once an environmental
          permit has been obtained and vice versa.



15.       Insurance and Risk - What insurance will the parties effect and when does the insurance
          risk pass at the time of sale?

          The owner of a property will in most cases be responsible for the insurance of the property prior
          to a contemplated sale.

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          However, where the property is subjected to a lease, the terms of the lease will determine which
          party has the responsibility to insure the property. Often, commercial or residential lease
          agreements provide that the tenant is held liable for insuring the content of the leased property,
          whereas the lessor remains responsible for the outside of the building and for construction-
          related damage.

          With regard to buildings which are under construction, it is important that parties arrange clearly
          for the changeover of the insurance responsibility from the constructor to the buyer. During the
          construction of the property, the contractor (unless the parties agree otherwise) remains liable
          for all risks related to and damages caused by or in the process of construction. As from the
          delivery of the buildings to the buyer (or tenant), the construction policy will no longer apply
          and the buyer (or tenant) will need to take out other insurance.

          Insurance policies are contracts intuitu personae, implying that their conclusion and existence
          depend on the personal qualities or capacities of the contracting party. Insurance policies are
          therefore not transferable on the sale of a real estate property. In larger real estate transactions it
          is often contractually provided that the seller of the property undertakes, during a certain time
          after the closing of the sale, to maintain and hold the insurance policies applicable to the
          property. This allows the buyer some time to arrange for the required insurance transition.

16.       Environmental - What are the common environmental issues?

          Note: Besides soil contamination, the presence of all required and valid environmental
          permits/socio-economic permits (see section 14) is also an important issue in real estate
          transactions.

          Soil contamination

          Following the Flemish Soil Decree of 27 October 2006 (replacing an earlier decree), every
          owner of land located on Flemish territory must, prior to any transfer of land, request a soil
          certificate from the Flemish Waste Administration (OVAM) and inform the prospective acquirer
          of the land about the content of this certificate. The content of said soil certificate must also be
          copied into the private and notarial transfer deed.

          “Transfer” is broadly defined in the Decree. It includes the transfer of ownership as such, the
          establishment of any rights in rem on land, and mergers, etc. Share transactions do not,
          however, qualify as a transfer under the legislation. Transfers of properties that fall under the
          regime of co-ownership are also excluded.

          Failure of the owner to comply with the obligation set out above carries fines. Moreover, the
          purchaser and/or OVAM may nullify the transaction.

          The soil certificate does not constitute a guarantee that there is no pollution on the transferred
          land. It only reflects the data available in OVAM’s registers of contaminated land as to the state
          of contamination of the land.

          In addition to this general transferor's duty, a strict procedure must be followed for land on
          which an installation/activity is or was established/performed, and which is listed as a risk
          installation/activity in the schedules to the VLAREBO Decree (see section 14). This list
          specifies activities and installations which require an environmental permit, normally industrial
          activities/installations involving dangerous and/or hazardous substances.

          Land on which such risk activity or installation is or has been located can only be transferred
          after the owner complies with a specific procedure as provided by the Decree.

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          In the Brussels Region, a Decree on soil pollution was adopted on 5 March 2009 (replacing an
          earlier decree). The Decree has entered into force on 1th January 2010. The procedural rules
          provided by this Decree in respect of property transfers do not substantially differ from those of
          the Flemish Decree of 27 October 2006. The Decree provides for the creation of an inventory of
          contaminated soils and soils where there is a strong presumption of pollution. In this inventory,
          the name of the owner is recorded. To delete the polluted character of a site, remediation may
          be needed at the cost of the seller. This inventory is public and constitutes a source of
          information for a prospective buyer.

          In the Walloon Region, a Decree on soil pollution was adopted on 5 December 2008 (also
          replacing an earlier decree). The Decree has entered into force on 16 June 2009, with the
          exception of its provisions on transfers of properties which will into force at a later date (to be
          determined by the government).




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                                                        PART D

                                               FINANCE AND TAXES

17.       Pricing/Valuation - What sets the price/valuation of real estate?

          The price must be certain, be it determined or determinable (specified by the square metre or
          according to expert opinion.) Furthermore, the price must be real, i.e. not simply nominal. It
          may be that a nominal price is an attempt to disguise a gift. A gift will be upheld at law.

          The determination of the price cannot turn on the will of one of the parties or upon the
          conclusion of an agreement post-sale.

          Pursuant to article 1591 of the Civil Code, the price is, in principle, fixed by the parties.

          Article 1592, however, envisages that the price can be determined by a third party expert. The
          third party may play either an ancillary or a principal role. In the former case, the parties decide
          on the basic sum, and the exact price is calculated by an expert. The contract governs the actions
          of the expert. Alternatively, the determination of the price could be left to the discretion of the
          expert, through an express clause in the contract. In these circumstances, the sale will only be
          complete and the property transferred once the expert has fixed the price.

          The choice of expert can be agreed upon after the sale in some cases (see below). Should the
          parties be unable to reach agreement, the judge can only intervene to replace the expert where
          this is provided for in the contract. If the parties cannot agree on an expert, the sale will be void.
          If one of the parties refuses to choose the expert, the other party cannot force him to participate,
          the sale will be void, but damages can be claimed from the unco-operative party.

          When the parties decide that an expert will set the price but do not appoint an expert, for the
          price to be determinable, they must have agreed upon the criteria to be taken into consideration
          when making the valuation. Where the expert has been appointed, this appointment is in itself
          sufficient to render the price determinable.

18.       Financing - How is a real estate acquisition financed?

          Financing the purchase of a property is usually achieved by the following means:

          Mortgage

          A mortgage can be granted over a property to raise specific finance. The mortgagor must own
          the property for it to mortgage the same but the owner of the land may grant a mortgage over
          buildings in the course of being erected or which may be erected in the future on the land.

          Mortgaging a property triggers the payment of the certain taxes, namely a registration tax of 1%
          of the debt secured and a mortgage tax of 0.3% of the debt secured . Various fees must also be
          met, notably public notary fees and the fees of the Mortgage Registrar.

          Mortgage Mandate – Conversion into a mortgage

          Due to the fact that recording a mortgage triggers the payment of taxes and fees, the practice of
          using a mortgage mandate, instead of an effective mortgage, has developed in Belgium. This
          practice is appropriate when an assessment of the credit risk of the debtor indicates that it would
          be unlikely that the creditor would have to resort to the enforcement of the mortgage for
          reimbursement of the debt. This is due to the fact that a mortgage mandate does not constitute

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          security; it is merely a tool for the creditor, enabling it, where necessary, to enter into an
          effective mortgage before a notary and to perfect the mortgage through filing the summary
          statement with the Mortgage Registrar.

          The main reason why mortgage mandates are used rather than a mere undertaking from the
          debtor to grant a mortgage is that it is generally considered that the debtor's undertaking to grant
          a mortgage cannot be enforced in court to obtain a mortgage.

          The main peculiarities of a mortgage mandate are that:

          •          it is preferable that the mortgage mandate be conferred by the debtor to persons
                     or entities which are not the creditor itself

          •          as long as the mortgage mandate has not been converted into an effective mortgage
                     recorded with the Mortgage Registrar, there is no effective mortgage, hence the
                     creditor has no security on the property

          •          it follows that the creditor can lose all protection if prior to the execution and
                     recording of the mortgage:

                     •          the debtor sells the property

                     •          another creditor seizes the property

                     •          a mortgage is recorded on the property to secure debts owed to another
                                creditor

                     •          the debtor is declared bankrupt or enters into liquidation


          •          if the mortgage is executed and recorded prior to the declaration of bankruptcy but
                     during what is known as a suspect period preceding such declaration, the mortgage
                     will be set aside to the extent that it secures debts outstanding at that time (which is
                     highly likely to be the case)

          •          the mortgage mandate must contain a clear description of the property to be mortgaged
                     and of the debts to be secured and should describe the terms and provisions which
                     would need to be set out in the mortgage deed to the extent that they would be
                     unusual.

          The mortgage mandate requires therefore an appropriate level of comfort and trust with respect
          to the debtor and a constant monitoring of the debtor's financial situation so as to act in a timely
          manner to convert the mortgage mandate into an effective mortgage.

          The mortgage mandate cannot be assigned by the proxy holder to another person without the
          consent of the person who granted the mortgage, unless the contrary is specifically provided for
          in the mortgage mandate.

          In order to transfer the benefit of the mortgage mandate to the purchaser of the portfolio, the
          purchaser needs the consent of the principal who gave the mandate.

          It should be noted that a mortgage mandate, like any other mandate, is automatically terminated
          in the case of bankruptcy or insolvency of the proxy holder.


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          Private funds

          Some individuals and businesses will have sufficient cash resources and banking facilities to
          acquire real estate.

19.       Security over real estate - How is security over real estate created and protected?

          Mortgage

          A mortgage is created by a contract between the mortgagor and the mortgagee executed as a
          deed before a public notary. The contract must identify, in detail, the property over which the
          mortgage is granted and its owner, the creditor, the debt and the maximum amount secured by
          the mortgage. The mortgage can secure a specific debt or all debts which exist or may arise in
          the future between the mortgagor and the mortgagee, provided the debts are determined or
          determinable at the time the mortgage is created.

          The mortgage only becomes effective and enforceable as against third parties from the date of
          the submission of a summary statement (bordereau d'inscription/borderel van inschrijving) to
          the Mortgage Registrar, by the notary who executed the notarial deed of mortgage. Upon
          registration, the mortgage is enforceable vis-à-vis third parties. If the mortgage is void, it
          remains void regardless of its registration and if the registration is void, the validity of the
          mortgage is unaffected. The mortgage is valid for 30 years from the date of recording unless
          renewed in the meantime.

          The public do not have direct access to the Mortgage Registrar’s register. Anyone seeking
          information on the charges to which a property is subject are obliged to send a written request to
          the Mortgage Registrar, who will in return deliver the relevant part of the register (charges
          register/état de charges).

          No third party consent is required to create a mortgage unless title to the property states that the
          consent of a specified third party is needed.

          Tax authorities must be notified by the public notary at least 12 business days prior to the
          execution of the deed creating the mortgage.

          Mortgages attract a registration duty of 1% of the debt secured and a mortgage duty of 0.3% of
          the debt secured.

          Seller's lien

          Another form of security is the registration of a seller’s lien over the property. The lien secures
          the payment of the purchase price and can be perfected through recording the notarial deed of
          sale with the Mortgage Registrar and mentioning that the price has not been (fully) paid. The
          Mortgage Registrar will automatically enter the lien in the register unless this right has been
          expressly waived in the notarial deed of sale. The seller's lien will then take preference over the
          mortgage granted by the buyer.

          Mortgage Mandate

          A mortgage mandate is a potential form of security but is not, in itself, a form of security for the
          creditor (see section 18). A mortgage mandate is instead a means of enabling the creditor, where
          necessary, to enter into an effective mortgage before a notary and to perfect the mortgage
          through filing the summary statement with the Mortgage Registrar. Mortgage mandates do not

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          attract a registration duty and consequently are often combined with mortgages as a way to
          reduce tax.

20.       Taxes and Costs - What are they and who pays them?

          Generally, please refer to our CMS transaction costs guide as to the nature and amount of taxes
          and costs.

          Transfer tax

          The transfer or exchange of real estate located in Belgium is as a rule subject to a 12.5% or 10%
          (depending upon whether the property is located in Brussels/Wallonia or Flanders) transfer tax
          (droit d’enregistrement/registratierecht) calculated on the higher of the sale price and the
          market value of the property. The market value of a property is defined as the selling price that
          could be obtained in the open market from a potential purchaser fully aware of all the
          circumstances. The transfer tax is normally payable by the buyer unless otherwise agreed
          between the parties.

          Reduced rates are applicable in some cases. For example, the transfer tax rate is reduced to 5%
          when the buyer is a property dealer whose business activities involve the buying and selling of
          properties, provided that the property is resold within 10 years from the date of purchase. In
          order to benefit from the property dealer status, the buyer will have to provide a guarantee to the
          tax authorities. In order to maintain such status, the dealer has to sell a number of properties
          within the 5 years following the acquisition of the status.

          Where the selling price is proven to be lower than the market value, the tax authorities are
          empowered to impose a penalty on the purchaser and on the seller equal to the amount of the tax
          evaded.

          The transfer tax can be partially recovered when a property is resold within 2 years of its
          acquisition in certain circumstances.

          VAT

          The transfer of buildings is, under certain conditions, subject to value added tax (VAT) at a rate
          of 21%. In such a case, no transfer tax will be due, except on that part of the purchase price
          relating to the land. According to recently enacted legislation (30 December 2009), as from 1st
          January 2011, the transfer of land taking place together with a “new” building will, under
          certain conditions, be subject to VAT and exempt from transfer tax.

          The VAT regime applies to sales of buildings where (i) the seller is either a real estate
          contractor or has opted to sell the building with VAT and (ii) the building is “new” within the
          meaning of the VAT legislation. A building is considered new for VAT purposes until
          December 31 of the year following the year in which the real estate tax was levied for the first
          time. The real estate tax is normally levied for the first time during the year following the year
          in which the building has been used for the first time. Accordingly, a building is as a rule new
          for VAT purposes for a period of 2 to 3 years following its first occupation.

          If the acquisition is made under the VAT regime, the purchaser will be entitled to deduct in
          whole or in part the input VAT insofar as it uses the building for economic activities that are
          subject to VAT.

          According to the Belgian VAT Code, the supply of immovable property (other than “new” as
          defined above) and the letting thereof are VAT-exempt transactions. If buildings that have been

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          constructed or have been acquired with VAT are rented (which is an activity exempt from VAT
          under Belgian VAT legislation), the VAT paid will not be recoverable. If a real estate finance
          leasing agreement which meets the conditions of Royal Decree n°30 is entered into for a newly
          constructed building, such leasing will be subject to VAT and therefore the input VAT on the
          buildings will be recoverable.

          Income tax and real estate withholding tax

          For income tax purposes, a deemed income (the so-called revenu cadastral / kadastraal
          inkomst) is calculated for all properties located in Belgium. This income is determined by
          assessing the “normal” net annual rental income of the property, or of the equipment which is
          regarded as immovable property.

          Based on this deemed income, a real estate withholding tax (précompte immobilier/onroerende
          voorheffing) is levied each year by way of assessment against the owner, emphyteotic lessee or
          the holder of a right of usufruct. The rate varies depending on where the property is situated.
          The aggregate real estate withholding tax often amounts to about one third of the deemed
          income.

          The real estate withholding tax is always assessed in the hands of the person who owns the
          property, or of the holder of a right in rem thereover, on 1 January of the year in question. If the
          property is transferred after that date, the purchaser will not have to bear that charge for the first
          year, unless otherwise agreed between the parties.

          The Belgian real estate withholding tax is to be considered as a once-and-for-all tax, as it will
          not be refunded and cannot be credited against corporate tax. It is, however, deductible from a
          company’s taxable income as a business expense.

          Corporate income tax

          A real estate company is subject to normal corporate income tax at the current rate of 33,99%.
          The taxable income is determined on the basis of the company's annual accounts subject to
          certain tax adjustments, such as the disallowance of certain expenses and the taxation of certain
          provisions for future charges or for bad debts.

          The company's net income will therefore be calculated by deducting from the income the
          expenses connected with the property, such as depreciation of buildings, repairs, maintenance,
          renovation and similar costs, interest on loans taken out to finance the acquisition of real estate,
          real estate withholding tax, etc. Office buildings may be depreciated at the rate of 3% and
          industrial buildings at the rate of 5%. Depreciation of land is in principle not possible. The
          transfer tax or the non-recoverable part of input VAT on a property acquired can either be
          deducted in the year of acquisition or can be depreciated over the depreciation period of the
          building or over a shorter period of time (e.g. 3 or 5 years).

          Foreign companies may be subject to a special withholding tax on the sale of Belgian properties.
          This withholding tax, which constitutes a pre-payment that may be offset against the final
          corporate tax bill, is collected by the civil law notary when the deed is signed. This special
          withholding tax (33.99 %) is calculated on the amount of the capital gain realised by the foreign
          company, without any deduction of losses carried forward.


          Fees



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          All costs associated with the sale of a property are met by the purchaser on the date the notarial
          deed of sale is signed.

          The main costs include the transfer tax, VAT, and the fees of the Mortgage Registrar and the
          notary.




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                                                  PART A
                                       PARTIES AND INTERESTS

1.            Parties – Who can own real estate?

              Any physical person or legal entity may own real estate. This definition includes individuals,
              companies, entities established by statute, (e.g. associations of individuals and/or legal
              entities, associations accumulating property for a given purpose, units of local self-
              government/self-administration), the state of Bosnia and Herzegovina, the Brčko District and
              the cantons of the Federation of Bosnia and Herzegovina.

              Bodies that are not legal entities, such as unincorporated associations, cannot own real estate
              directly. Potential owners of commercial real estate include private developers, insurance
              companies, banks and other financial institutions, private or public property companies, the
              state, the Brčko District, the cantons and local authorities.

              In the Federation of Bosnia and Herzegovina foreign persons (persons who are not Bosnian-
              Herzegovinian citizens) can acquire ownership over real estate, buildings, apartments or land
              for building by succession or if they have a permanent residence in the Federation of Bosnia
              and Herzegovina, unless it is otherwise stipulated in an international treaty. Foreign persons
              and legal entities (legal entities which do not have a registered office in Bosnia and
              Herzegovina) which perform a commercial activity in the Federation of Bosnia and
              Herzegovina are allowed to acquire ownership over business premises, buildings, apartments
              and construction land on which the objects are constructed or will be constructed. The rights
              of persons and legal entities can be limited by reciprocity.

2.           Property – What property interests are currently sold?

              Bosnian-Herzegovinian law recognises several forms of interest in property. These include:

             •       Ownership

             •       Rights of possession

             •      Limited property rights including mortgages, easements, land debts, rights to build and
                    rights based on long term lease agreements

              However, current practice dictates that only ownership interests are sold. The assignment of
              rights and transfer of obligations under occupational leases are relatively rare with subletting
              being favoured.

              Most commercial property is sold by way of a share rather than an asset sale, where the real
              estate is owned by a special purpose vehicle and the shares in it sold. In general these sales
              are used to avoid real estate transfer taxes and the risk of termination of occupational leases
              by tenants after a transfer.

              A “lawful possessor” is a possessor whose possession is based on a legal title that is required
              for the acquisition of ownership and who did not gain this possession by use of force, fraud
              or abuse of reliance. A “bona fide possessor” is a possessor who does not know or is not
              able to know that the property which she/he possesses is not in her/his rightfull ownership. If
              a person who is at the same time a lawful and bona fide possessor possesses real property for
              a 10 year period, or if a person who is only a bona fide possessor possesses real property for
              a 20 year period, she/he might acquire ownership of the real estate by virtue of adverse
              possession (“usucaptio”).

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              As in some other civil law jurisdictions, leases under Bosnian-Herzegovinian law do not
              create a property interest, but merely create a contractual right to use property. The period
              for which a lease can be entered into is not limited by law, and depends on the agreement of
              the parties. Long-term tenancy rights (i.e. of at least 5 years) can be registered at the Land
              Book Registry.

              Generally, there are two types of leases recognised under Bosnian-Herzegovinian law:

             •      Leases of property in general

             •      Leases of business premises, particularly regulated by the Law on Lease of Business
                    Premises (Official Gazette of Socialistic Republic of Bosnia and Herzegovina no.
                    33/77, 2/87 and 30/90)


              The Law on Lease of Business Premises governs only leases of business premises, i.e. of
              buildings and parts of a building where a commercial activity is predominantly performed.
              It should be noted that in relation to leases, upon a change in the owner of the reversionary
              interest, a tenant is entitled to terminate its lease agreement. Such a provision is applicable to
              leases of business premises only if it is expressly agreed by the parties.

3.           Ownership – What types of ownership are there?

              Ownership is the highest title a person or a legal entity can hold in relation to property under
              Bosnian-Herzegovinian law. Real estate in Bosnia and Herzegovina is subject to registration
              at the Land Book Registry. All land and buildings/constructions must be registered.

              Ownership is freely transferable unless restricted by other contractual obligations in
              connection with the property in question, such as pre-emption rights. Agreements on the
              transfer of ownership must be entered in the Land Book Registry. Ownership title passes
              upon execution of the decision of the Land Book Registry but the decision takes effect
              retrospectively from the date on which the application to register the transfer was filed.

              As mentioned above, ownership may also be acquired by possession. For this to occur, the
              property must be (a) in the possession of a person who is at the same time a lawful and bona
              fide possessor for an uninterrupted period of 10 years or (b) in the possession of a person
              who is only a bona fide possessor for an uninterrupted period of 20 years.

              It should be noted that under Bosnian-Herzegovinian law the owner of a building is not
              necessarily the owner of the land beneath the building, as it is possible to have separate
              ownership of a building and the land plot on which it is constructed. Care must be taken to
              establish whether ownership of a property has been split in this manner.

              Bosnian-Herzegovinian law distinguishes between exclusive ownership, co-ownership and
              joint ownership of land and buildings. This means that a condominium style ownership is
              permitted where, for example, a person may be exclusive owner of a part (unit) of a building
              and joint owner with other unit owners of the common areas, the structure and the land on
              which the building stands. Alternatively, more than one person may own the entire building
              and/or plot of land. In each case, the co-owner is said to have an “ideal” share in such
              common parts or the whole of the building or land plot. A co-owner of a building, apartment,
              construction land, agricultural land and forest land in the Federation of Bosnia and
              Herzegovina has a “pre-emption right” in case of a sale of the other co-owned part of the


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              real estate in question i.e., the “ideal” share of the real estate. In regard to business premises,
              the co-owners as well as the tenants who lease the business premises in question for an
              uninterrupted period of at least 5 years have a “pre-emption right”.

4.        Matters burdening or benefiting real estate – What matters can affect real estate?

          Common matters affecting real estate include:

            Matter                Effect                                             Example
            Easements             Under        Bosnian-Herzegovinian       law,      A right of way; a right
                                  easements can be personal (in personam) or         to use pipes and
                                  connected with the ownership of real estate        cables; the right of
                                  (in rem). A personal easement exists when a        usufruct
                                  property is encumbered in favour of a person.
                                  This right cannot be transferred and usually
                                  expires on the death of the entitled person.
                                  This easement runs with the property when
                                  ownership is transferred
                                  An easement must be entered in the Land
                                  Book Registry to exist

            Mortgage              A mortgage is established either on the basis      Mortgage securing
                                  of:                                                receivables arising out
                                                                                     of a loan agreement
                                  •         a written contract

                                  •         a decision made by the court

                                  •         law

                                  A mortgage established on the basis of a
                                  written contract (which has to be notarised)
                                  must be entered in the Land Book Registry to
                                  become effective, and once registered will
                                  give the mortgagee priority over unsecured
                                  creditors of the borrower


            Adverse               Acquisition of ownership to real estate based      a) Lawful and bona
            possession            on long term lawful and bona fide possession       fide possession of real
                                                                                     estate for more than 10
                                                                                     years
                                                                                     b) Bona fide
                                                                                     possession of real
                                                                                     estate for more than 20
                                                                                     years

            Building law          Right of a person to build premises on or
                                  under the land plot of a third person, where
                                  the land plot owner has to accept the
                                  construction on his land plot


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            Matter                Effect                                             Example
            Contractual rights    Leases (see above). Contractual right to use       Lease of land,
                                  the property                                       buildings, flats,
                                                                                     business premises




5.        Occupation of real estate – Who may occupy real estate?

          Real estate is usually occupied by one of the following categories of persons:

           •        Owners – persons with an ownership right to the property

           •        Tenants – persons with a lease of the property or part of it. It is possible to create a
                    sublease to a leased property. A lessee is allowed to sublease the leased property,
                    unless otherwise agreed between the lessor and the lessee. A sublease of business
                    premises is (usually) subject to approval of the owner

           •        Lawful and bona fide possessors – persons who have occupied the property for a
                    prescribed period of time (10 or 20 years)

           •        Persons benefiting from the right of easement – persons who may use the property on
                    the basis of rights in personam (personal) or in rem

                    Please also see our CMS Lease Guide.

6.        Brokers - What is the broker's role?

           There are currently no special legal provisions about real estate brokers in Bosnia and
           Herzegovina. In practice, brokers in Bosnia and Herzegovina follow instructions of any party to
           any transaction involving real estate. Their role usually includes some of the following tasks:

           •        acting for the seller to find a buyer for a property sale, including marketing the property
                    for sale

           •        acting for the landlord to find a tenant for a leasehold property, including marketing the
                    property

           •        acting for a buyer to find a property to buy

           •        acting for a tenant to find a property to lease


7.        Employees - What employment issues affect real estate acquisitions?

           Typical employment issues which may be relevant to real estate transactions include the
           transfer of the shares of the company vehicle that owns real estate (share deal). In the event of
           the transfer of shares of the company vehicle that owns real estate, the “employer” remains
           unchanged and as consequence the rights and duties of “employees” remain unchanged.
           Bosnian-Herzegovinian law does not contain legal provisions about the transfer of the business
           enterprise of a company (asset deal). It is only possible to transfer individual properties of a
           company, (e.g. real estate) to another company. Such individual property transfer does not

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           affect the employment relationships between the seller as employer and the employees of the
           seller.




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                                             PART B
                                       PROCEDURE AND TERMS

8.        Procedure - What are the steps in a sale and purchase transaction?

           Commercial real estate transactions usually start when proposed terms are drafted, negotiated
           and agreed by the seller and the buyer. The terms (or letter of intent or memorandum of
           understanding) set out the principal terms agreed between the parties and are generally
           expressed to be “subject to formal contract” and are not legally binding. They form the basis of
           the documents to be drafted by lawyers.

           Once the terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers
           will usually collate all information relating to the property and send it to the buyer’s lawyers
           together with a draft of an agreement to conclude a future transfer agreement (future
           agreement) with the form of transfer agreement attached. A future agreement is not required if
           there are no conditions to the purchase, in which case the parties proceed directly to the transfer
           agreement. The buyer’s lawyers undertake thorough due diligence of all legal documents
           relating to the property (see section 10). If the purchase is made with borrowed finance, the
           lender of the finance may instruct its own lawyers to carry out due diligence on its behalf and
           negotiate loan and security documentation.

           The seller arranges for the property to be appraised by a court appointed appraiser for real
           estate.

           Once the form of future agreement and transfer agreement are agreed, the seller and the buyer
           sign the future agreement. Once the conditions to the purchase (if any) are satisfied one party
           will invite the other to conclude the transfer agreement.

           Before signing the future agreement and the transfer agreement, the buyer’s lawyers will
           conduct a search at the Land Book Registry to ensure that the seller still owns the property and
           that there are no new encumbrances affecting the property.

           The transfer agreement, must be notarised. The future agreement and transfer agreement may
           be signed in English with a certified Bosnian-Herzegovinian translation of the transfer
           agreement prepared for registration purposes, although in practice it is better to also sign the
           Bosnian-Herzegovinian version of the transfer agreement for registration purposes.
           Following conclusion of the transfer agreement, the lawyers need to deal with registration of
           the transfer documents at the Land Book Registry and the seller needs to arrange for payment
           of the real estate transfer tax.

9.        Other common contract terms - What other provisions does a real estate sale contract
          commonly contain?

           An agreement for the sale and purchase of property must be in writing, must contain all main
           terms and conditions as specified by the law, and must be signed by both the seller and the
           buyer; an agreement for the sale and purchase of property must be notarised.
           Provisions relating to value added tax will be included where relevant to ensure that the agreed
           tax position is preserved. Besides the essential terms of the sale and purchase agreement, such
           as the exact specification of the property and price, the document should also mention the
           following:

           •        the title document under which the seller acquired ownership

           •        all liabilities burdening the property (mortgages, easements, pre-emptive rights, leases)

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           •        the conditions of payment of the purchase price

           •        a date for the handover/takeover of the property

           •        a provision indicating which of the parties will pay the real estate transfer tax

           •        a provision indicating which of the parties will file the petition for the change of
                    ownership

           •        the conditions on which any party will be entitled to withdraw from the agreement

           •        a seller’s warranty that it is the sole unrestricted owner of the property and that the real
                    estate is and will remain in the (legal and actual) condition described in the agreements
                    until registration of the transfer’s title in the Land Book Registry

10.       Due Diligence - What investigations does the buyer normally make?

           Every careful buyer that has an intention of buying a property should conduct an extensive due
           diligence of all the obtainable documentation and evidence concerning the property in question.

           Firstly, it is necessary for the buyer’s lawyers to conduct a thorough investigation of the
           ownership title of the property held by the seller. This will include an extensive investigation of
           the Land Book Registry and the entries that can be found in it, as well as, if necessary,
           historical documents and deeds, that will provide more information regarding the property.

           In order to obtain this information, the buyer’s lawyers firstly need to acquire an extract from
           the Land Book Registry which will contain information concerning the size of the property, as
           well as the title of ownership of it and all the encumbrances and limitations (easements,
           mortgages, pre-emptive rights) which exist over the property. This document will act as a
           confirmation of the seller’s registered ownership right, as well as provide important information
           such as whether the property is subject to a long-term lease (if it has been registered) or other
           occupation interests, or is subject to a mortgage or a land debt etc, all of which can have a
           significant impact on the Buyer’s intention and final decision to purchase the property. It is also
           advisable for the buyer’s lawyers to acquire an additional Land Book extract or make an
           enquiry with the Land Book Registry before the conclusion of the transfer agreement to check
           whether additional interests over the property in question have been added or whether
           procedures have been started for recognition of pending interests, which may endanger the
           buyer’s intentions for the property.

           Secondly, the buyer’s lawyers should conduct due diligence searches in order to check whether
           or not there are unresolved issues concerning the Municipality rights (land use and zoning
           plans), any relevant environmental matters, or any financial burdens that exist over the
           property. If the seller is a registered company in the territory of BiH, the lawyers also need to
           conduct an extensive search of the information provided in the competent court’s Companies
           Register. Since these, in accordance with the Law on Registration of Business Entities,
           represent public books available for access to the wider public, an extract regarding a company
           is easily obtainable which will contain important information such as:

           •         the registered name and corporate office

           •         persons authorised to represent the company

           •         information regarding its subsidiary companies


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            It is necessary to submit a request to the competent court to receive confirmation that a
            bankruptcy procedure has not been initiated against the seller’s company or that a bankruptcy
            procedure has not been opened against the seller’s company. In the event that any of these
            actions have been taken against the company, the court will issue a Resolution confirming this
            and also state that the rights of the debtor to manage and freely dispose of the company assets,
            which now becomes bankruptcy assets, now belong to the bankruptcy officer. Once this
            procedure has been initiated/opened the public registers such as the Companies Register will be
            notified of this and be requested to insert a notification confirming the changes.

11.         Terms implied by law -What provisions are implied by Statute, Code or otherwise?

            Registration of ownership

            To complete the process of the change of ownership, the transfer agreement must be filed with
            the Land Book Registry. Ownership title passes upon fully-effected registration with the Land
            Book Registry.

            The registered right in the Land Book is considered to be correct and it is presumed that any
            right deleted from the Land Book does not exist. If third parties, who in good faith rely on the
            existence of real estate or a right over the real estate acquire such a right, the contents of the
            Land Book are considered correct if it is not disputed through registration of an objection or if
            the third party is not acquainted with the flaws in the Land Books.

12.     Registration and Notarisation of real estate -What are the basic requirements?

        Registration of real estate is done with the competent Land Book Registry. In accordance with the
        new Law on Land Books F BiH (Official Gazette no. 58/02, 19/03, 54/04) and RS (Official
        Gazette no. 74/02, 67/03, 46/04, 109/05, 119/08) the competent courts for managing land book
        registries are the Municipality courts. A Land Book is a public book and a register of all property
        rights over real estate and other rights, which, in accordance with the law, are prescribed to be
        registered. The registration procedure is initiated on the basis of an application for registration.
        Together with the application form, it is also necessary to submit the documentation on the basis
        of which the application for registration is founded. Upon a complete and satisfactory registration
        application, registration is done on the basis of a Resolution on registration which is brought by
        the Land Book referral office.

        Interests that can be registered in Land Books are:

        •             Ownership, co-ownership and joint ownership

        •             Mortgage and land debt

        •             Court pledge rights and a right over a pledge

        •             Long-term lease rights, pre-emptive rights and redemption rights

        •             Servitude rights

        •             Usufruct rights

        •             Real encumbrances


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        •             Rights of use

        The Land Book excerpt consists of three different sections, Parts A, B and C:

        •             Part A contains the number of the cadastre parcel, name, description and the type of
                      the catastar parcel, the size (surface) of the catastar parcel, merger or division of the
                      Land Book subject, and real rights established in favour of the land-book subject

        •             Part B contains the legal basis for registration, the name of the owners of the land-
                      book subject, in case of ownership by different entities the statement whether it is
                      joint or co-owned property, the limitations on the owner’s rights on dealing with the
                      land-book subject as well as notes regarding the ownership

        •             Part C contains the encumbrances and limitations, as well as the legal basis for
                      registration, the rights which burden the land-book subject and notes regarding those
                      encumbrances, and the holder(s) of the rights. It also contains information regarding
                      mortgages or monetary land debts, (the mortgage debt amount), interest rates,
                      amounts of ancillary monetary claims, as well as notes regarding the mortgage or
                      land debt, and information on acceptance of direct execution

        Since April 2007, a requirement for notarisation has been introduced to BiH which has had a
        significant impact on different aspects of providing legal services, sale and purchases and the
        transfer of property rights. All legal dealings whose subject is the transfer or acquisition of
        ownership or other property rights over real estate need to be notarised. This has made the
        process of acquisition and transfer of real estate as well as any changes to the Land Book Registry
        significantly faster and more efficient.


13.         Disputes - How are they are dealt with and resolved?

            In event of a dispute arising between two parties that have concluded an enforceable contract
            on, for example, the transfer of real estate, the method of resolving the dispute is left to the
            parties in accordance with the terms of their agreement as well as the jurisdiction of the
            competent court.

            The standard dispute resolution procedure in BiH is through court proceedings and litigation.

            The normal timeline for all of the procedures, in accordance with the Law on litigation
            proceedings is:

            •     First instance procedure - upon filing a claim the competent court will primarily
                  determine whether the claim complies with the relevant legal requirements and send it out
                  for a Response of the defendant

            •     The defendant has 30 days to provide its Response and it is then sent to the Plaintiff.
                  Upon 30 days after the receipt of the defendant’s Response the court has to schedule the
                  Preliminary Hearing with the purpose of identifying all the evidence and preparing for the
                  Main Hearing

            •     The Main Hearing takes place 30 days after the Preliminary Hearing. The Court decision
                  should be delivered 30 days after the Main Hearing




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           The litigation procedure should not last more than 4 months. However, in practice, due to
           various procedural issues that may occur, the procedure may take up to one or more years.

           After the court decision the defendant may appeal and regardless of having grounds or not, it
           may prolong the procedure for one or two additional years.

           In an event of a court decision resolving the dispute over the real estate in question, the
           enforcement procedure consists of the following phases:


           •     Filing Enforcement Petition to the competent court

           •     Recording of enforcement proceeding in the Cadastral/Land Registry

           •     Evaluation of real estate

           •     Selling real estate

           •     Satisfaction of creditors

           The enforcement procedure over movable assets and real estate lasts ideally up to 6 months, but
           in practice it lasts more.




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                                                     PART C
                                PERMITS INSURANCE AND ENVIRONMENT


14.     Permits -What permits are required for the use and occupation of real estate and are they
        personal?
        Permits for construction, use and occupation of real estate are governed at the Cantonal level in
        the Federation of BiH and at the entity level in the Republic of Srpska. Approval of construction
        requires obtaining urban, construction and use permits.

        Urban permit

        An urban permit is the first step in fulfilling an intention to build on real estate and a way to
        verify whether it is possible to carry out such construction in the requested locality. The permit
        represents an administrative document and acts as evidence that the construction is in accordance
        with the document of environmental planning and other conditions prescribed for that particular
        locality.

        The competent body is under a duty to pass the resolution for approval of the urban permit within
        30 days from the submission of an application form and the permit is valid for a period of one
        year from the date it enters into force. However, obtaining an urban permit does not mean that the
        construction can begin. This only means that the required technical conditions have been
        determined, and represents a pre-condition for submission of an application for obtaining a
        construction permit.

        Construction permit

        Construction cannot begin before obtaining a resolution for approval of a construction permit.
        Once the urban permit, as explained above, becomes enforceable and after the project
        documentation has been drafted in accordance with the conditions of the urban permit within the
        one year period, an application form for the construction permit is submitted.
        A construction permit is necessary to be obtained for newly-built buildings, reconstruction,
        additional construction, a change in the use of the building, (residential to office space or vice
        versa), as well as changes in the activities in the office space if this change significantly affects the
        conditions of use of the building, the surrounding buildings and space, or if it significantly
        changes the conditions of use of the building, the surrounding buildings, traffic and preservation
        of the environment.

        As with the urban permit, the competent authority is required to pass a resolution for approval of
        the construction permit within 30 days from submission of the requested documentation. The
        construction permit ceases to be effective if the construction works have not begun within the
        deadline stated in the resolution.

        The validity of the construction permit can be extended on request for another one year period if
        the conditions under which it was issued originally have not been changed.

        Other necessary approvals

        Upon receipt of a binding construction permit, the owner or the builder is under a duty to notify
        the relevant Municipality building inspector of commencement of works 8 days before the works
        commence.



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        Moreover, it is also necessary to acquire a “principal” permission for construction for
        complicated buildings. It identifies the parts of the complicated construction, the functional and
        technological connections between the different parts of the construction, and the timeline for
        issuing the construction permit.

        After all of the above have been obtained it is necessary to ensure that the building has been
        constructed in accordance with the construction permit. This will be done through a technical
        acceptance inspection organised by the Municipality which issued the construction permit.

        Once the technical acceptance inspection has been conducted, the use permit can be applied for.
        The time frame during which the use permit has to be issued is 30 days. Only upon receipt of the
        use permit can the constructed building be used or put into operation.

        Finally, after issuance of the use permit, it is necessary to submit a Request for recording the
        building and to obtain a notification document at the Service for land surveying, legal-property
        actions and the Land Book Registry as well.

        The constructed building has to then be registered in the Land Books. In order for the owner to
        register the building into the Land Books it is necessary to submit to the Land Book Registry of
        the relevant court the above mentioned notification document as well as the fully binding
        resolution of issuance of a use permit.

15.      Insurance and Risk - What insurance will the parties effect and when does the insurance
        risk pass at the time of sale?

        Before completing the sale, insurance is generally the responsibility of the owner of the property.
        Insurance can be acquired for structures of the buildings and fixtures and fittings in the event of
        damage or destruction by any of a comprehensive list of insured risks, which will mostly depend
        on the requirements of the party seeking insurance and the insurance company. Insurance policies
        are not personal and not transferable on sale. Once the buyer is registered as the rightful owner of
        the property in the Land Books, the buyer can acquire insurance over that property and this is also
        the point at which the risk for the property passes to the buyer.

16.     Environmental - What are the common environmental issues?

        The legislation provides that primary responsibility is imposed on the polluter though the
        principle of “polluter pays”. This principle states that the polluter will pay all the expenditures of
        controlling and preventing pollution, (notwithstanding whether these expenditures have been
        incurred as a result of imposing liability for pollution emission), as well as compensation
        determined by corresponding financial instruments and obligations determined in accordance
        with the relevant regulations regarding environment pollution.

        The environment user is responsible for all of its activities which have an impact on the
        environment, in accordance with the relevant environmental legislation.

        In accordance with this principle, in the event that the real estate in question in any way
        contaminates or causes damage to the environment, the present owner of that property will incur
        the liability.

        Moreover, during the procedure of issuing an urban permit, as mentioned above, the owner whose
        project is considered to have a negative impact on the environment is also obliged to acquire an
        environmental permit. The object of this permit is to ensure that a satisfactory level of protection
        of the environment is maintained. It is an integral document which prescribes the measures of


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        protection of all aspects of the environment, including water, air and soil. It is important to note
        that the relevant body will not issue the urban and other necessary permits for projects which
        require an evaluation of the impact on the environment unless the environment permit has been
        attached.

        The types of construction that need to have an environmental permit are plants within the energy,
        chemical, metal, mineral industries as well as infrastructure projects, (e.g., construction of
        motorways and railways). This group also encompasses construction for waste and water
        management and extractive industry, farming, food industry and infrastructure and other projects
        (including, but not limited to ski slopes, lifts, pipelines for gas, oil and similar chemicals.)
        Certain planned construction in the above mentioned industries needs to go through a procedure
        of evaluating its impact on the environment before obtaining an environmental permit. This
        represents a procedure of determination of the acceptability of the project bearing in mind the
        environment as well as determining measures for environment protection, in order to ensure that
        the negative effects have been decreased to the smallest possible amount and that a high level of
        environment protection has been ensured.

        This procedure is conducted into two different phases. Firstly, it is necessary to conduct an initial
        evaluation of the impact on the environment and secondly, conduct a study on the impact on the
        environment. Once a study on the impact on the environment has been issued and cleared, the
        Ministry for planning and environmental protection issues a Resolution on approval of the study
        on the impact on the environment. The investor is authorised to then submit an application for
        acquiring the environmental permit. The standard procedural timeframe for obtaining an
        environmental permit is 120 days from the submission of the application. However, if the
        procedure for evaluation of the impact on the environment preceded the application for an
        environmental permit, the deadline of using this permit is 60 days from the submittal of the
        application form. Once issued, the environmental permit is valid for a period of 5 years. The
        Resolution on approval of the environmental permit will also prescribe the conditions under
        which the permit can be re-examined before the expiry of its duration.

        All of the above mentioned factors should be taken into account when determining whether to
        construct or purchase any type of property and /or decide to subsequently build new additions to
        it. These procedures are administrative and highly bureaucratic and could postpone the real estate
        acquisition process for a significant amount of time, if the applications submitted are not
        complete and in accordance with the relevant laws.




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                                                       PART D
                                              FINANCE AND TAXES


17.       Pricing/Valuation -What sets the price/valuation of real estate?

           If the property that is being considered for purchase is newly-built, the valuation and the price
           will depend upon the intention of the seller in imposing the sale price as well as the
           negotiations between the parties as to the transfer price. Once the price is agreed between the
           parties, it will be incorporated into the transfer contract. The transfer price of the property will
           also depend on the location, area, type and condition of the property as well as the
           encumbrances that are on the land below the building etc.

           If the property is one which is already constructed, the transfer price may depend on the
           evaluation by an expert of its value as well as the agreement between the contracting parties as
           to the price of the property.

           In case of land, the transfer price will depend on the market value of the land at the time of the
           sale and the negotiations of the contracting parties, who will incorporate the agreed price into
           the transfer agreement.


18.       Financing - How is a real estate acquisition financed?

           The most common ways to finance real estate acquisitions are through:

           •         the buyer’s own cash resources

           •        using the capital value of the property to raise specific financing secured on the
                    property

           Obtaining a loan from a commercial bank through allowing a mortgage to be imposed over a
           property is a typical way of securing funds in the latter case. BiH has a developed system of
           pledges whereby it allows creation of pledges over the assets in the ownership of the debtor as
           well as on the things which the debtor will acquire immediately after the conclusion of the
           contract on pledges.

19.        Security over real estate - How is security over real estate created and protected?

           Security over real estate is normally created by way of a pledge. The pledge can secure one or
           more of the existing or future monetary obligations which represent the obligation of the debtor
           or some other entity.

           Pledges are created with the existence of the following four conditions, irrespective of the order
           in which they are fulfilled:

           •        the registration of a pledge in the Pledges Register

           •        the conclusion of a contract for a pledge between the pledge debtor and the pledge
                    creditor




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           •         the registration of the pledge debtor as the owner of the things which are the subject of
                     the pledge contract

           •         the pledge creditor has issued credit to the registered debtor

               Pledge execution proceedings are started at the request of the pledge creditor after the pledge
               debtor has in some way violated the obligations from the pledge contract. The execution can
               only be implemented if the pledge creditor submits to the court the contract on pledges as
               well as confirmation of the pledge registration. The latter acts as the basis for execution for
               which the relevant court can order:

               •     taking away, (seizing) the subject of pledge in order to effect sale for the benefit of the
                     pledge creditor

               •     the court executor to take away and sell the subject of the pledge.


20.       Taxes and Costs -What are they and who pays them?

           In general, please refer to our CMS transaction guide as to the nature and amount of taxes and
           costs.

           In the Federation of BiH, tax on real estate transfer is governed by legislation at the cantonal
           level. The legislation considers real estate transfer as the transfer of right of ownership over real
           estate with compensation, as well as replacement of one real estate object for another. For the
           purpose of these laws, land and fixed construction objects are normally considered as real
           estate. The person who is responsible for payment of taxes is the seller. The standard basis for
           calculating the tax rate is the transactional value of the real estate and the rights. In the event
           that the real estate and rights are exchanged, the difference between the value of the real estate
           property and rights will represent the basis for calculating the tax rate, and in the case of a
           forced public sale of real estate e.g., in a liquidation procedure, the sale price achieved in the
           procedure of public sale will be used in calculating the tax rate.

           In the Republic of Srpska, the basis for calculation of tax over real estate property will be the
           market value of the assets on 31 December of the previous year. The taxpayers are the owners
           of the property or its co-owners. This law prescribes that the tax rate cannot be less than 0.05%
           of the estimated value of the real estate property, nor larger than 0.50% of the same value.
           Moreover, this tax is to be paid in two parts, the first part being due by 30 June and the second
           part being due by 31 December in that tax year, bearing in mind that the payment of the first
           part cannot be less than 50% of the total tax amount in accordance with the tax calculations.

           Value Added Tax (VAT) is payable for transfer of, amongst other things, goods which are
           made by the taxpayer entity trading in the territory of BiH. It is also important to mention that
           the Law on VAT BiH (published in the Official Gazette BiH no. 9/05, 35/05, 100/08) also
           covers transfer of property in the process of liquidation. Transfer of goods in the sense of this
           Law is defined as transfer of a right to deal with the items to an entity that can then deal with
           those items/goods as a rightful owner.

           Transfer of all or part of the taxpayer’s property cannot be considered as the transfer of goods,
           which is subject of VAT, if all of the following conditions are met:

           •         the taxpayer is a separate business entity



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           •        the buyer is a taxpayer or with the acquisition becomes a taxpayer

           •        the buyer continues to perform the same activities

           •        the buyer has received, or will receive, the same rate for deduction of the registration
                    tax as was imposed on the seller

           Moreover, every further transfer of real estate and parts of that real estate after the sale of a
           newly-built property will be relieved from payment of VAT. However, the obligation to pay
           VAT in all other transfers referring to newly-built property will become the obligation of the
           entity to which the property is transferred.

           A lease or sublease of real estate for residential purposes is also relieved of payment of VAT,
           but leasing property for any other purpose is subject to VAT.

           VAT is calculated on a monthly basis for the determined tax period and on the basis of the total
           transfer of goods shown in the invoices for that tax period. The standard VAT rate to the
           taxable transfer of goods in BiH is 17%.




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                                                PART A

                                   PARTIES AND INTERESTS


1.        Parties – Who can own real estate?

          Any individual or legal entity may own real estate. A legal entity includes the State Treasury,
          limited liability and joint stock companies, state-owned enterprises, foundations, societies
          and other entities that are granted a legal personality by the law. In addition, real estate may
          be owned by certain entities without legal personality, which can legally be the subject of
          rights and obligations, such as registered partnerships and limited partnerships.


          Under PRC law, it is possible for several people to be owners of the same real property in
          one of two forms of co-ownership. The first, and most common commercial form is co-
          ownership in shares. The second is joint co-ownership, which exists solely when provided
          for by law (such as spousal relationships).

          There are restrictions on foreign individuals or companies owning real estate in China. A
          subsidiary or representative office of an overseas-registered institution based in China
          (except for an enterprise that has been approved to engage in real estate operational
          management) or a foreigner that has worked or studied in China for more than 1 year may
          only purchase a commercial property for personal use or accommodation. A resident in
          Hong Kong, Macao or Taiwan, or a Chinese citizen resident overseas, may purchase
          property for personal accommodation in China, subject to a restricted quota regime.


2.        Property – What property interests are currently sold?

          PRC law defines all property interests in land. The exact scope of a given interest is
          specified in a contract or in a deed of establishment.

          The PRC legal system recognizes the following key interests in real property:

          •    Absolute ownership

          •    Perpetual usufruct (occupation and use of a property owned by a third party)

          •    Usufruct

          •    Servitude (a limited right to use another person’s real property, an easement)

          •    Mortgage




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          The absolute ownership and perpetual usufruct interests in a property are transferable.
          Mortgages can generally be assigned along with the debt.

          It is a general rule that buildings, other structures and installations are “integral parts” of
          the land, provided that they are both objectively and subjectively “permanent”. Such
          integral parts are subject to the same legal regime that governs the land. A temporary
          structure does not qualify as an integral part and belongs to its owner, independently of his
          title to the land.

          There are some exceptions to this rule. The most common one is in the case of land
          subject to perpetual usufruct, where the ownership of the buildings belongs to the
          perpetual usufructee and not to the owner of the land (the owner being either the State,
          local government or administrative units).

          In China, leasehold is classified as a contractual right and although transferable, it is not
          mortgageable.


3.        Ownership – What types of ownership are there?

          Absolute ownership is the only type of unrestricted legal ownership in China. The other
          property interests – usufruct, servitude, right of superficies and apartment right restrict the
          absolute ownership, and are called restrictive rights. Both ownership and restrictive rights
          are transferable.

          Some rights are registerable with the competent authorities. According to PRC law, the
          types of interests in real estate that are registerable at the Land Registry are:

          •          Ownership right (similar to the common law concept of freehold) – an absolute
                     right which includes the right to possess the property; the right to use and collect
                     the proceeds from the property; the right to transfer possession or use of the
                     property; the right to encumber or transfer title to the property and the right for
                     the ownership to be protected

          •          Beneficial usage right (or “usufruct”) – the limited right of a natural or legal
                     person to occupy and use a property owned by another and to collect the
                     proceeds from such property

          •          Use right – the limited right of a natural or legal person to use a property owned
                     by another for a definite or indefinite period of time

          •          Land use right – a right conferred upon the owner of a building to use and build
                     on the plot on which the building is situated and to collect the financial proceeds
                     from such plot




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          •          Servitude – a limited right to use another person’s real property, such as a right of
                     passage. In order to grant a right of servitude, the regulations of the establishment
                     of beneficial usage right apply. The servitude, if based on a contract, should
                     therefore be registered with the competent authorities to enable the beneficiary to
                     defend his right against any challenge by a third party

4.        Matters burdening or benefiting real estate–What matters can affect real estate?

          Common matters affecting real estate include:

           Matter                Effect                                  Example

           Usufruct              Usufruct grants a usufructee full       A right given to a usufructee
                                 economic rights over a property         to use and collect income
                                 owned by a third party. Such rights     from property in compliance
                                 are created by a usufruct contract,     with a usufruct contract
                                 must be registered and can be           (registered with the
                                 transferred to a third party by         competent authority). The
                                 contract and subsequent                 owner is not obliged to make
                                 registration                            any improvements or repairs
                                                                         to the property, all such
                                                                         responsibilities belonging to
                                                                         the usufructee

           Servitude             A statutory or contractual right        The dominant property
                                 established for the benefit of the      owner bears the obligation
                                 owner or perpetual usufructee of        to finance, maintain and
                                 land (“dominant”) creating a            repair any installations
                                 corresponding burden on another         necessary to exercise the
                                 piece of land (“servient”). Servitude   easement
                                 is a right that attaches to the land
                                 rather than the individual, so is       Positive: road easement.
                                 transferred with the real property      Restrictive: not to build
                                 (whether dominant or servient)          closer than x metres to the
                                                                         perimeter of a property
           Mortgage              Security of a prescribed debt or a      Contractual or forced
                                 capped amount of security over an       mortgage.
                                 unknown debt                            Ordinary or capped
                                                                         mortgage

           Pre-emption           These are rights that are triggered     An individual, such as a
           rights                by a conditional or preliminary sale    residential tenant, may be
                                 agreement, or by an offer to sell. If   granted a right of pre-
                                 registered on the land and              emption, which becomes


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                                 mortgage register in advance, such      exercisable when the
                                 rights are enforceable against a        absolute owner wishes to
                                 third party buyer. In some              dispose of the premises
                                 instances, violation of pre-emption
                                 rights results in the sale contract
                                 with a third party buyer becoming
                                 void

           Expropriation         A property owner is obliged to sell     Expropriation by a public
           for public            his property in return for an           authority may be for public
           purposes              indemnity from the relevant public      or social purposes
                                 authority to cover his loss. Prior to
                                 the expropriation, a public
                                 investigation is undertaken in order
                                 to justify the expropriation

          Special matters affecting real estate include:

          •          Owners’ partitioned ownership of building areas

                     An owner has the rights to possess, use, seek profits from and dispose of his
                     exclusive parts of the building. An owner enjoys the rights and undertakes the
                     obligations over the common parts other than the exclusive parts of the building,
                     and may not refuse to fulfil the obligations under the pretext of a waiver of rights.
                     Where an owner transfers his residential home or a residential property used for
                     business purposes within the building, his common ownership and the right to
                     common management over the common parts shall be transferred concurrently.

          •          Common ownership

                     A joint owner of a commonly owned realty or chattel shall enjoy the ownership of
                     the realty or chattel on an equal basis (Joint Co-ownership). A co-owner of a
                     commonly owned realty or chattel shall enjoy the ownership of the realty or
                     chattel proportionately to his interest (Co-ownership in Shares). A property owner
                     participating by Co-ownership in Shares may transfer his share of the realty or
                     chattel, subject to the pre-emptive rights of the other co-owners.

5.        Occupation of real estate – Who may occupy real estate?

          Real estate may be occupied by any of the following categories of persons:

          •          Owners – those persons with absolute ownership of the property




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          •          Tenants – those persons with a lease of the property or part of it. A subtenant
                     may also occupy a property by means of an agreement with the tenant, subject to
                     obtaining the consent of the landlord where required

          •          Holders of rights of usufruct, use or habitation – such rights are normally
                     acquired by succession or as part of an arrangement within a family

          •          Usufructee – a person who has a right to use the property and to collect any
                     economic benefit it produces

          •          Possessors – they may establish occupation rights over a property where it has
                     been occupied or used for a long period of time, as if they were legally entitled to
                     do so, without being challenged by the rightful owner of the property. A
                     Possessor will not, however, be able to establish absolute ownership over the
                     property in this manner

          •          Persons entitled to occupy property based on contractual permissions - such
                     rights are personal and are not capable of being transferred to a third party
                     without the consent of the owner of the property. An example is a concession
                     right granted over state-owned land upon which housing for low-income families
                     has been constructed.

                     Please also see our CMS Lease Guide

6.        Brokers – What is the broker’s role?

          The activities of real estate brokers in China are confined primarily to brokerage. Large
          companies also carry out market research, land and premises valuations and, in some cases,
          project development and management.

          The broker’s role may be summarised as follows:

          •    acting for a seller to find a buyer for a property, including marketing the property

          •    acting for a landlord to find a tenant for a property, including marketing the property

          •    acting for a buyer to find a property to buy

          •    acting for a tenant to find a property to lease

          •    valuing a client’s existing and target properties

          •    project management of development of new buildings or refurbishment projects

          •    reporting on rents of comparable commercial and/or residential property and other
               market research

          Brokers are permitted to draft contracts or negotiate preliminary agreements or heads of
          terms. A broker may act for both the seller and the buyer (or lessor and lessee) and may


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          demand a full commission from both parties unless he is expressly forbidden by contract to
          act for both or a conflict of interests arises. In practice, brokers inform the parties that they
          are acting for both at an early stage.


7.        Employees – What employment issues affect real estate acquisitions?

          Typical employment issues which may be relevant to real estate transactions include the
          transfer of an undertaking, redundancies and amending the terms and conditions of
          employment upon the purchase of a building.

          Transfer of undertakings

          This issue can arise when an undertaking or business (or part of one) is transferred from
          one party to another. The broad effects of such a transfer are that:

          •          with effect from completion of the transfer, the buyer assumes responsibility for
                     employees

          •          employees working in the business are transferred

          •          continuity of employment is preserved

          •          dismissal for a reason connected to the transfer is automatically deemed an unfair
                     dismissal, unless it can be shown that it was for an “economic, technical or
                     organisational reason entailing changes in the workforce”

          •          employees transfer with their existing terms and conditions intact

          •          if the buyer seeks to change employees’ terms and conditions of employment by
                     reason of the transfer, such changes are generally ineffective

          •          the employees’ elected representatives must be informed and consulted about the
                     transfer, and if there is a trade union, the trade union shall also be informed and
                     consulted

          Redundancies

          Redundancies may arise on the closure of a business or part of a business, on a merger of
          two businesses or on a transfer of one undertaking to another. Both PRC Labour Law and
          Labour Contract Law provide employees with specific legal rights.

          Changing terms and conditions of employment

          An employer may decide to change or harmonise terms and conditions of employment on
          the acquisition of a new business. This can be a difficult process, as the rules applicable to


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          the transfer of business generally also apply to the change of terms and conditions of
          employment.




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                                                  PART B

                                     PROCEDURE AND TERMS


8.        Procedure – What are the steps in a sale and purchase transaction?

          A set of heads of terms or a memorandum of understanding is not necessary in every sale
          transaction. Non-binding declarations of intent are often used on large transactions, such
          as for the sale of real estate.

          For a purchase by individuals of residential property from real estate developers, the
          developer requires an irrevocable purchase order. The irrevocable purchase order obliges
          the buyer to pay a deposit on the property and provides a longstop date for conclusion of
          the sale contract. If the sale contract is not signed, the irrevocable purchase order ceases to
          be binding and the deposit will not be returned to the buyer.

          It has become common practice for buyers to carry out due diligence so as to identify
          problem areas and seek remedy as soon as possible. On small transactions, the due
          diligence usually consists of an independent search of the property and/or land registries
          and a site visit, which can be conducted by the buyer or his lawyer. On large transactions,
          due diligence is conducted by a combined team of lawyers, architects and other
          professional consultants, as deemed appropriate.

          In tandem with the due diligence process, negotiations are likely to take place concerning
          the principle terms of the sale agreement. The intermediate or final result of the due
          diligence will form part of these negotiations. Once the principle terms have been finalized
          and all the information relating to the property has been collected, a sale and purchase
          agreement is drafted based on a standard form provided by local real estate administrative
          authorities. For large transactions, lawyers representing each party will draft the contract.

          Completion may take place when the competent property registration authority issues the
          property title certificate in the name of the buyer. This certificate may only be issued upon
          submission of the signed (or notarised) sale and purchase agreement and ancillary
          documents. Where the purchase is made with borrowed finance, a mortgage over the
          property will be granted at the same time. The lender may instruct its own lawyers and
          property evaluation institutions to carry out due diligence and evaluation procedures on its
          behalf and negotiate security documentation with the buyer.




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9.        Other common contract terms – What other provisions does a real estate sale
          contract commonly contain?

          An agreement for the sale and purchase of property should be evidenced in writing and
          should contain or clearly refer to all the key terms and conditions of the sale agreement.

          It is common for the sale and purchase agreement to provide for a deposit of between
          10%-50% of the total purchase price to be paid by the buyer on exchange, with the
          remainder of the consideration to be paid once the application to the property registration
          authority for the title transfer has been made successfully. This deposit may also be
          deposited in an escrow account opened with a bank that has been jointly designated by the
          parties.

          Where there are issues of title affecting the property, such as restrictive rights, the seller
          may require reciprocal obligations from the buyer and an indemnity of any liability the
          seller may still have following completion of the transaction. On the other hand, the seller
          should obtain the written consent for the sale from the restrictive right holder, such as the
          mortgagee.

          There are standard terms published by local property administrative authorities for
          property transactions, most of which are incorporated in the sale and purchase agreement.

          Contracts for the sale of property that is subject to occupational interests such as leases will
          include clauses to cover ongoing management matters and provide for the apportionment
          of occupational income and outgoings on completion.

          If the property being sold is in its construction phase, the sale and purchase agreement
          shall incorporate provisions dealing with the obligations of the seller to construct in
          accordance with an agreed specification and to provide the buyer with warranties to
          safeguard the buyer against defective design or workmanship.


10.       Due diligence – What investigations does the buyer normally make?

          Pre-exchange of agreements

          The prudent buyer is likely to commission a survey of the property and, to the extent
          necessary, soil and geological investigations, plant and machinery tests, and environmental
          investigations. There are three limbs to the pre-signing due diligence undertaken by the
          buyer’s lawyers.

          Firstly, title to the property, the land use right of the land that the property occupies and
          existence of any encumbrance or restrictions on the property and the land use right, will be
          investigated. The buyer’s lawyers will consider the entries found on the land registry and


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          the property registry and, where relevant, any historic title documents. Where titles to the
          property and the land use right are not registered, the buyer’s lawyer will advise the buyer
          to enter into a pre-sale or an option agreement pending completion of the registration, as
          no sale is permitted in cases where the property and the land use right are not properly
          registered. In cases where the property and the land have been sealed by court order, the
          lawyer is likely to advise the buyer not to purchase.

          Where the property is leasehold, or subject to a lease or other occupational interests, the
          terms of the relevant occupational documents need to be considered carefully to ensure
          that they are not contrary to the buyer’s intention for the property. The buyer’s lawyer will
          also need to check whether these documents require the consent of any third party to be
          given to the transaction.

          Secondly, the buyer’s lawyers will undertake general due diligence, including conducting
          various searches to check the qualification of the developer, the position concerning
          municipal and zoning consents, environmental matters, utilities serving the property, daily
          management of the property, relationships with neighbouring plots and financial
          encumbrances. Where the seller is a company, the buyer’s lawyers will also conduct
          searches against the seller’s name at the Administration of Industry and Commerce to
          ascertain whether the company is solvent and therefore able to dispose of its assets freely.

          Thirdly, the buyer’s lawyers will raise additional enquires of the seller or its lawyers to
          obtain information regarding a large number of practical matters which may affect the
          property and ask any relevant questions in relation to the title to the property and
          management of it.

          Pre-completion

          Very shortly before the transfer of title by the property and/or land registration authority,
          the buyer’s lawyers will repeat searches with these registries to confirm that there are no
          proceedings pending regarding the property and that the seller has not been declared
          bankrupt. These searches should confirm that the information gained in the due diligence
          process remains unchanged or the problem areas have been remedied as promised in the
          sale and purchase agreement prior to the title transfer.

          Reporting to the client

          Before concluding any agreement, the buyer’s lawyer will report their due diligence findings
          to their client, raising any matter of particular importance or concern.




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11.       Terms implied by law – What provisions are implied by Statute, Code or otherwise?

          The Real Right Law, the Contract Law, the Urban Real Estate Administrative Law and
          other applicable laws create a legal framework for real estate transaction. Some of the most
          significant legal concepts are as follows:

          Buyer beware

          The buyer must satisfy itself in all respects as to the nature of the property it is acquiring, in
          particular where the buyer is a foreign company or a foreign individual, since there are
          restrictions on owning real estate by foreign nationals or companies. However, this does
          not absolve the seller from the obligation to provide truthful replies to enquires raised by
          the buyer’s lawyers. The seller must give information to the buyer (even without enquiry of
          the buyer) if the seller knows that this information is essential for the buyer in respect to
          the buyer’s stated intentions.

          Pre-sale qualification

          A developer is not permitted to launch the pre-sale of a building unless the construction of
          the building has satisfied the statutory requirements and the property administrative
          authority has issued a pre-sale licence.

          Registration of ownership

          To complete the process of the transfer of ownership, the sale and purchase agreement
          must be registered with the property registration authority. Title passes upon the approval
          by the property registration authority and issue of a new title certificate. The issue date of
          the title certificate shall be that when the application for ownership transfer was filed.

          Title guarantee

          The seller is under a general obligation to be truthful in relation to matters affecting its title
          to the property. The seller should warrant that no third party might deprive the buyer of
          the property purchased. Since, however the property registration authority protects a buyer
          acting in good faith with regard to the entries on the registry, the role of such warranty is
          extremely limited. Once the buyer is registered with the property registration authority as
          the new owner, he is protected against claims brought by third parties that have not been
          registered. The buyer does not, therefore, have to revert to the seller with a claim.


12.       Registration and notarisation of real estate – What are the basic requirements?

          According to PRC law, the title to and security over the property will not come into force
          unless registered with the competent property or land registration authority. In accordance


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          with the Real Right Law, which came into effect on 1 October 2007, the information
          recorded by the property or land registration authority shall be deemed the most accurate.
          Where there is a discrepancy between the information on the title certificate and that
          registered with the property or land registration authority, the latter shall prevail.

          The notarisation of the sale and purchase agreement is not mandatory unless any of the
          parties is a foreign registered company or a foreign individual. If this is the case, the local
          public office notary shall notarize the sale and purchase agreement.


13.       Disputes – How are they dealt with and resolved?

          PRC law provides for the exclusive jurisdiction of the court residing over the area in which
          the property is located.

          The parties have the ability to choose arbitration as a dispute resolution mechanism instead
          of engaging court proceedings. However, the option of arbitration must be provided for in
          the sale and purchase agreement or in a supplementary agreement to it, otherwise the
          dispute will be automatically submitted to the appropriate court.

          PRC law also provides that PRC law and the local rules and regulations of the place where
          the property is located shall exclusively govern any dispute over the ownership of the
          property.




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                                                  PART C

                         PERMITS INSURANCE AND ENVIRONMENT


14.       Permits – What permits are required for the use and occupation of real estate and
          are they personal?

          PRC law provides detailed rules for the development of land. Planning and construction
          laws and regulations (which are governed by central government, provincial law and
          municipal law) need to be complied with.

          The following main administrative approvals and permits are necessary to develop a new
          real estate project:

          •          Land use right certificate

          •          Construction site approval certificates

          •          Opinion from the Planning Bureau and Land Administration Bureau on the
                     selection of the construction site

          •          Planning Bureau approval for the project

          •          Construction and Administration Committee examination and approval of the
                     project

          •          Construction land use planning permits

          •          Construction project planning and work permits

          •          Project acceptance qualification/acceptance filing form (including without
                     limitation certificates issued by authorities of planning, civil defence, fire
                     prevention, construction and etc.)

          •          Commodity building pre-sale permits (if any)

          •          Approval certificate on use of selected name of the site (if any)

          Additionally, certain additional decisions, permits and studies (such as public disclosure of
          the intended project, giving affected third parties the opportunity to object) should be
          obtained during the process of obtaining the above approvals and/or permits. Special
          approvals and permits are required when it is proposed to carry out work on historically or
          architecturally important buildings.




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          The above-mentioned approvals and permits are generally not transferable, but under
          restricted circumstances specified by law, some may be transferable to defined transferees.

          For other real estate development projects, such as the conversion of the use purpose of a
          building, only a few of the aforementioned approvals and permits are required.
          Development of retail shops requires special consent to be issued by the local Economic
          Committee, which controls and overseas the distribution of retail shops and associated
          planning.

          For use and occupation of real estate, a property title certificate, rent certificate (for state-
          owned real estate) or occupation certificate (for collective owned land use right) is
          necessary to justify an owner, user or occupant’s rights (respectively) and to defend against
          any third party claim.


15.       Insurance and risk – What insurance will the parties effect and when does the
          insurance risk pass at the time of sale?

          Insurance is generally the responsibility of the owner of the freehold interest in a property.
          However, where such property is the subject of a lease, the terms of the lease will prescribe
          which party bears the responsibility to insure. It is common for landlords to insure rather
          than tenants. Whatever the term of the lease, the tenant will generally insure the contents
          of the property belonging to the tenant and in some cases certain parts of the property for
          which the tenant is contractually responsible.

          The insuring party should have a fully comprehensive buildings insurance policy to protect
          the structure, fixtures and fittings of the property in the event of damage or destruction by
          any of a comprehensive list of insured risks, such as storm, lightning, fire and water
          damage. The policy may also cover additional special heads of cover such as subsidence,
          earthquake and, if available, terrorism. Generally it is buildings, and not land, which are
          insured for the reinstatement cost rather than the reinstatement value.

          Insurance policies may either comprise a single policy for one particular property or a block
          policy designed to cover a portfolio of properties.

          Insurance policies concerning real property are not transferable on sale. Termination
          options are defined in the general terms and conditions of these policies. On a sale, timing
          of the transfer of risk is normally prescribed by the sale agreement. If not prescribed in
          this way, the standard position is that the transfer of risk occurs simultaneously with the
          completion of the change of ownership of the property, once registered with the
          competent authorities.




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16.       Environmental – What are the common environmental issues?

          For developments and activities that are likely to cause significant environmental impact
          (such as the establishment of a manufacturing company or the production of chemical
          products), an environmental assessment will need to be made. Such an assessment will
          explain the likely environmental impact of the development or activity.

          Consequently, upon the sale of a majority stake in a manufacturing company, or a disposal
          of a manufacturing unit, it is also necessary to pass an environmental assessment procedure
          to obtain approvals from the environment protection bureau.

          The responsibilities of the acquirer or the developer are laid down in an environmental
          conformity plan, the terms of which are negotiated between the acquirer or developer and
          the environmental authority. These may refer to both reduction and remediation measures.

          The liability for pollution of real estate and its removal is regulated according to the
          principle of causal responsibility. The buyer as owner of the real property is secondarily
          liable for pollution, which means an entity or a person who becomes the owner of polluted
          real estate bears responsibility for its remediation from the day of taking possession,
          otherwise they shall become liable to financial penalties.

          Due diligence, as part of the acquisition process, may involve qualified environmental
          consultants to consider documentary information and to carry out a site visit. If considered
          necessary, more intrusive investigations may then be undertaken. It is important to identify
          potential problems early so that the price can be negotiated, and so that reserves can be
          made for any potential losses that may arise in the future. Pre-acquisition protections for a
          buyer may be put in place in the form of imposing obligations on the seller to remedy any
          contamination discovered post-acquisition, indemnities in respect of third party claims, or
          environmental insurance to cover these risks.




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                                                PART D

                                       FINANCE AND TAXES


17.       Pricing/Valuation - What sets the price/evaluation of real estate?

          Pricing of real estate investments is based on a combination of the aggregate rental income
          (if applicable) and the value that a buyer considers that a property of the specific type and
          location is worth at the time of valuation.

          Rental value for a particular property is likely to be assessed by multiplying the floor area of
          the property by the market rental value, per square meter. The market rental value will
          include factors such as the location of the property, its type and condition, and the length
          of the lease term.

          Another important factor that influences the price of real estate in China is the cost of
          acquiring the State-owned land use right. Most cities in China divide the land within their
          administrative territory into several grades and set a basic price for the right to use the land.
          A premium is then added to such basic price, to be paid by the developer, and is likely to
          be passed on to any future buyer. Such basic price is set and changed by the State Land
          Administrative Bureau and/or its local authorised authority from time to time.


18.       Financing - How is a real estate acquisition financed?

          Financing the purchase of a property is usually achieved using one or both of the following:

          •          Buyer’s own capital or reserves

          •          Loans secured by mortgage

          The buyer can apply to banks or any other lender for a loan that will be secured on the
          property by a mortgage in favour of the lender. The mortgagor usually must own the
          property for it to mortgage the same. It should be noted that the owner of the construction
          land use right might also grant a mortgage over buildings in the construction phase.

          The amount of the loan that the lender will agree to grant depends on the value of the
          property and the borrower’s credit status and solvency. With commercial property, the
          expected profit from the relevant business to be undertaken will be an additional important
          factor for the lender.

          Loans of up to 70% of the market value of a residential property may be granted to a first-
          time buyer. Loans secured by mortgages will attract an interest rate that is set by the lender


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          based on the rate published by the People’s Bank of China, which may change from time
          to time.

          PRC law will invariably govern the mortgage when the property in question is situated in
          the PRC, irrespective of the law that governs the accompanying loan documentation.


19.       Security over real estate-How is security over real estate created and protected?

          Under PRC law, real property may be pledged as security only in the form of a mortgage.
          Mortgages may only be taken over the entire property that is registered with the land
          and/or real estate registry.

          A mortgage is considered valid only if evidenced in writing and registered with the land
          and/or real estate registry. A mortgage agreement must clearly identify the property over
          which the mortgage is granted and must refer to its specific location, construction area and
          current status, the debtor, the creditor, the debt, the term of the mortgage and the
          maximum amount secured by the mortgage. The mortgage can secure a specific debt or all
          debts that exist or may arise in the future between the creditor and the debtor, provided
          that the debts are determined or determinable at the time the mortgage is created.

          Since the mortgage only becomes effective and enforceable as against third parties from the
          date of registration, in practice, the mortgagor and the mortgagee shall submit the
          mortgage agreement to the competent land and/or real estate registry as soon as possible
          after such agreement has been signed. Upon the submission of an application for mortgage
          registration, the land and/or real estate registry should complete registration within seven
          days and issue a mortgage registration certificate on which the main information related to
          the debt and the mortgage is recorded. The mortgagee holds the original of such mortgage
          registration certificate.

          During the mortgage term, the pledged property remains in the possession of the
          mortgagor, who is entitled to use the property. However, the mortgagor must maintain
          such mortgaged property in good condition. In the event that the mortgagor, or a third
          person, risks the condition of the mortgaged property, the mortgagee is entitled to demand
          that the offending act be prohibited and that an order be issued to take the necessary
          measures to eliminate the risk. If any deterioration in the conditions of the mortgaged
          property jeopardizes the satisfaction of a claim, the mortgagee may demand replacement of
          the mortgaged property or security that corresponds to the degree of risk. Should the
          mortgagor fail to comply with any request of the mortgagee within the allotted time, the
          mortgagee is entitled to call in the loan and demand early repayment.

          The same property may be subject to several mortgages as long as the total amount secured
          by the mortgages does not exceed the market value of the property. A registered mortgage
          has priority, as at the date of registration, over any subsequent mortgage that is registered.

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          A mortgage remains effective as long as the underlying debt is valid; following satisfaction
          or cancellation of the debt, the mortgage is no longer effective.

          The mortgaged property cannot be sold or transferred unless the mortgagee agrees with
          such sale or transfer, otherwise the buyer should first undertake to repay the debts or loans
          on behalf of the mortgagor.


20.       Taxes and costs - What are they and who pays them?

          Generally, please refer to our CMS transaction costs guide as to the nature and amount
          of the taxes and costs.

          There are various taxes associated with real estate transactions in China, namely business
          tax, stamp duty, land value added tax, enterprise income tax, individual income tax and
          deed tax. Whether a tax liability arises depends on a number of factors, principally
          including the legal standing of the seller, the legal standing of the buyer, the location of the
          real estate and the nature of the real estate. The most important aspects of these taxes are
          briefly summarised below.

          Business Tax

          Generally, the transfer of property is subject to business tax amounting to 5% of the
          difference between the new selling price to be paid by the purchaser and the original
          purchase price already paid by the seller. The sale of ordinary residential property by
          individuals is exempt from business tax, unless such residential property is sold within a
          very short period of time after its acquisition. Local real estate administrative authorities
          define the time period and the meaning of ordinary residential property, according to their
          local real estate markets.

          Stamp Duty

          Both the seller and the buyer must pay stamp duty, in each case amounting to 0.05% of the
          purchase price.

          Land Value Added Tax

          The seller shall pay land value-added tax (“Land VAT”) on any profit derived from transfer
          of the State-owned land use right and the ownership of a property, after deducting the
          price originally paid, related costs and expenses and other deductible items stipulated under
          the Provisional Regulations of the PRC on Land Value Added Tax. Land VAT shall be
          levied in four progressive levels, namely 30%, 40%, 50% and 60%. The sale of ordinary
          residential property by individuals is Land VAT exempt. Local real estate administrative
          authorities, as mentioned above, issue the definition of ordinary residential property.

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          Enterprise Income Tax

          Companies and various other Chinese corporate entities are liable to pay Enterprise
          Income Tax (“EIT”) on any gains derived from the sale of real estate, at a current rate of
          25%. There is no specific capital gains tax in China.

          EIT is levied on both domestic entities and foreign enterprises that have no institution or
          establishment inside China that generates income. It should be noted that the tax rate
          applicable to those foreign enterprises is 10%, not 25%.

          Individual Income Tax

          If an individual transfers his property, he has to pay individual income tax (“IIT”) at a rate
          of 20% on the gains made from the transfer of the property. When calculating the amount
          of such gains on the sale of a residential property, certain costs and reasonable expenses
          may be deducted from the original purchase price, including all costs and expenses incurred
          in relation to the initial acquisition. Note that where the sale of a sole residential property
          by a PRC individual takes place five years after acquisition, gains are IIT exempt.
          Deductions are not available where an individual sells commercial property.

          Deed Tax

          The transfer of real estate is subject to deed tax, which shall be paid by the buyer. The deed
          tax rate for ordinary residential property is normally 1.5% of the purchase price while the
          rate for non-ordinary residential property and non-residential property is 3% of the
          purchase price. The local real estate administrative authority shall issue the definition of
          ordinary residential property from time to time as mentioned above.

          In addition, PRC tax authorities may challenge the purchase price and substitute the price
          paid with the actual market value of the property sold, if higher.

          Fees

          Both the seller and the buyer are equally responsible for the payment of transaction
          processing fees. The buyer is obliged to pay the registration fee and if applicable, the
          property maintenance fee. The specific rates of these fees vary between cities in China.




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                                                   PART A

                                       PARTIES AND INTERESTS

1.        Parties – Who can own real estate?

           Any legal “person” may own real estate. This definition will include individuals, companies,
           entities established by statute, (e.g. associations of individuals and/or legal entities, associations
           accumulating property for a given purpose, units of local self-government / self-administration)
           plus the Czech State itself.

           Bodies that are not legal persons, such as unincorporated associations, cannot own real estate
           directly. Potential owners of commercial real estate include: private developers, insurance
           companies, banks and other financial institutions, private or public property companies, the
           Czech State and local authorities.

           There are a number of legal restrictions preventing foreign nationals from acquiring real estate
           in the Czech Republic, and despite EU accession, pre-accession restrictions still apply to
           individuals who are neither Czech citizens nor have official residency status in the Czech
           Republic. However, a foreign national may acquire real estate in certain limited circumstances,
           including via the unapportioned co-ownership of a married couple where one spouse is a non-
           resident, by the exchange of real estate or by acquiring property from a spouse, parent or
           grandparent by inheritance. In order to avoid restrictions in respect of direct ownership of real
           estate by foreign nationals, acquisitions through a Czech-based company (LLC or similar) is
           often used.

           Individuals who are citizens of EU member states may acquire all types of real estate in the
           Czech Republic; for acquisition of some of them they must satisfy certain conditions.
           Agricultural land and forestry land may only be acquired by EU citizens who are registered as
           entrepreneurs in agriculture and they have permanently resided in the Czech Republic for more
           than 3 years. Further, in case of acquisition of other property, including residential property,
           EU citizens must obtain an occupancy residency permit for EU citizens issued by the Czech
           Foreign Police. Citizens of Norway, Ireland, Liechtenstein and USA may acquire real estate in
           the Czech Republic under the same conditions as the EU citizens provided that they obtain a
           temporary residence permit or visa for a period no longer than 90 days.

           Foreign companies cannot directly own real estate in the Czech Republic. There are, however,
           two ways in which such companies may indirectly acquire real estate. The first route is to
           acquire real estate through a company vehicle established and registered in the Czech Republic.
           The second is to acquire real estate through a foreign company that has a branch located and
           registered in the Czech Republic, or through one which locates its enterprise in the Czech
           Republic and is allowed to carry on business in the Czech Republic.

           Foreign companies are not permitted to directly acquire forestry land or land forming part of
           the Agricultural Land Fund, as managed by the Land Office.

2.        Property – What property interests are currently sold?

           Czech law recognises several forms of interest in property. These include:

          •          Ownership

          •          Rights of possession and



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          •          Limited property rights - e.g. mortgages, easements, pledges and contractual rights,
                     such as leases

           However, current practice dictates that only ownership interests are sold. The assignment of
           rights and transfer of obligations under occupational leases is relatively rare with subletting
           being favoured.

           Much commercial property is sold by way of a share rather than an asset sale, where the real
           estate is owned by a special purpose vehicle and the shares in it sold. In general such sales are
           used to avoid real estate transfer tax and the risk of termination of some of occupational leases
           by tenants after a transfer.

           A person who treats property as his own or exercises such right for himself is deemed to be the
           possessor of the property in question. If a person, taking into account all the circumstances,
           possesses the real property in good faith for a 10 year period, he might acquire ownership of the
           real estate by virtue of adverse possession (“usucaptio”).

           As in some other civil law jurisdictions, leases under Czech law do not create a property
           interest, but merely create a contractual right to use property. Rights created under leases are
           not registrable at the Cadastral Registry. The period for which a lease can be entered into is not
           limited by law, and depends on the agreement of the parties.

           Generally, there are two types of leases recognised under Czech law:

          •          Leases of property in general, regulated by the Civil Code

          •          Leases of non-residential premises, regulated by Act No. 116/1990 Coll. on the Lease
                     and Sublease of Non-Residential Premises (as amended) (Act on Leases) and by the
                     Civil Code and the Commercial Code

           In practice the Act on Leases governs only leases of non-residential (i.e. commercial) premises
           where only part of a building is leased, such as multi-let office buildings, shopping centres and
           the like, and not to a letting of a whole building or land. The Civil Code, on the other hand,
           applies to leases in general.

           It should be noted that in case of leases governed by the Civil Code the Civil Code stipulates
           explicitly that on a change of the owner of real estate, a tenant is entitled to terminate its lease
           agreement. This much criticized provision unreasonably favouring the tenant is, however,
           applicable for non-residential only if expressly agreed by the parties.

3.        Ownership – What types of ownership are there?

           Ownership is the highest title a legal person can hold in relation to property under Czech law.
           Ownership of real estate can be equated to freehold title under Anglo-American legal systems.

           Most of the real estate in the Czech Republic is subject to registration at the Cadastral Registry.
           All land and most developments must be registered.

           Ownership is freely transferable. Agreements on the transfer of ownership title must be entered
           in the Cadastral Registry. Ownership title passes upon execution of the decision of the
           Cadastral Registry but the decision takes effect retrospectively from the date on which the
           application to register the transfer was filed.



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           Ownership may also be acquired via possession. For this to occur, the property must be in the
           possession of a so-called “rightful possessor” who believes in good faith that the property
           belongs to him for an uninterrupted period of 10 years.

           It should be noted that under Czech law the owner of a building is not necessarily the owner of
           the land beneath the building, as it is possible to have separate ownership of a building and the
           land plot on which it is constructed. Care must be taken to establish whether ownership of a
           property has been split in this manner.

           Czech law distinguishes between exclusive ownership and co-ownership of land and buildings.
           This means that a condominium style ownership is permitted where, for example, a person may
           be exclusive owner of a part (unit) of a building and co-owner with other unit owners of the
           common areas, the structure and the land on which the building stands. Alternatively, more
           than one person may own the whole of a building and/or plot of land. In each case, the co-
           owner is said to have an “ideal” share in such common parts or the whole of the building or
           land plot.

4.        Matters burdening or benefiting real estate – What matters can affect real estate?

           Common matters affecting real estate include:


           Matter                   Effect                                        Example

           Easements                Under Czech law, easements can be             A right of way; a right
                                    personal (in personam) or connected with      to construct a building
                                    the ownership of real estate (in rem). A      on land in the
                                    personal easement exists when a property      ownership of a third
                                    is encumbered in favour of an individual      party land; a right to
                                    legal entity. This right cannot be            use pipes and cables
                                    transferred and usually expires on the
                                    death or winding up of the entitled legal
                                    entity. Easements which are connected
                                    with the ownership of real estate are
                                    similar to Anglo-American easements, as
                                    the property is encumbered with the rights
                                    of the owner from time to time of the
                                    other property in question. This easement
                                    runs with the property when ownership is
                                    transferred
                                    An easement must be entered in the
                                    Cadastral Registry to exist

           Mortgage                 A mortgage is established either on the       Mortgage securing
                                    basis of:                                     receivables arising out
                                                                                  of a loan agreement
                                    •         a written contract
                                                                                  Statutory mortgage of
                                    •         an agreement on the settlement      the Czech tax
                                              of inheritance which has been       authority securing tax
                                              approved by the court               obligations

                                    •         a decision made by the court


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              Matter                   Effect                                          Example
                                       •         a decision made by an
                                                 administrative authority or

                                       •         law

                                       A mortgage established on the basis of a
                                       written contract must be entered in the
                                       Cadastral Registry to become effective,
                                       and once registered will give the
                                       mortgagee priority over unsecured
                                       creditors of the borrower


              Adverse possession       Acquisition of ownership to real estate         Rightful possession of
                                       based on long term possession in good           real estate for more
                                       faith                                           than 10 years in good
                                                                                       faith that the possessor
                                                                                       is a rightful owner

              Contractual rights       Leases (see above). Contractual right to        Lease of land,
                                       use the property                                buildings, residential
                                                                                       and non-residential
                                       “Pre-emption right”, is a right of the seller
                                                                                       premises
                                       to be offered purchase of the real estate in
                                       case the buyer wishes to sell the real
                                       estate to a third party in the future
                                       Pre-emptive rights can be established
                                       either as in personam or in rem rights. In
                                       personam pre-emptive rights cease to
                                       exist with transfer of the real estate to the
                                       third party
                                       In rem pre-emptive rights remain in place
                                       after a transfer of the property, and must
                                       be recorded in the Cadastral Registry




5.        Occupation of real estate – Who may occupy real estate?

           Real estate is usually occupied by one of the following categories of person:

          •            Owners – persons with an ownership right to the property

          •            Tenants – persons with a lease of the property or part of it. It is possible to create a
                       sublease to a leased property. However, a sublease of the property is usually subject to
                       approval of the owner of the property

          •            Rightful possessors – persons who have occupied the property for a prescribed period
                       of time in good faith



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          •          Persons benefiting from the right of easement – person who may use the property on
                     the basis of in personam (personal) or in rem

           Please also see our CMS Lease Guide.

6.        Brokers - What is the broker's role?

           Brokers in the Czech Republic are employed by any party to any transaction involving real
           estate. Their role may include any of the following tasks, namely:

          •          acting for a seller to find a buyer for a sale property, including marketing the property
                     for sale

          •          acting for a landlord to find a tenant for a leasehold property, including marketing the
                     property

          •          acting for a buyer to find a property to buy

          •          acting for a tenant to find a property to lease

          •          acting for any party to a transaction drafting and negotiating heads of terms

          •          valuing a client’s existing and target properties

          •          day to day management of property owned by clients, including managing
                     maintenance programmes and landlord and tenant work

          •          project management of development of new buildings or refurbishments

           Brokers available in the market range from those employed by major international
           organisations to specialised advisers providing advice on a more restricted basis.

7.        Employees - What employment issues affect real estate acquisitions?

           Typical employment issues which may be relevant to real estate transactions include (i) the
           acquisition of real estate through the transfer of business enterprise of the company that owns
           real estate and (ii) the transfer of the shares of the company vehicle that owns real estate.

           In the event of the transfer of a business enterprise of a company that owns real estate, rights
           and duties arising from employment relationships with employees of the enterprise pass from
           the seller to the buyer. The change in the entity of “employer” applies as a consequence of the
           transfer of enterprise.

           In the event of the transfer of shares of the company vehicle that owns real estate, the
           “employer” remains unchanged and as consequence the rights and duties of “employees”
           remain unchanged.

           In both cases above:

          •          accrued continuity of employment is preserved




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          •          the buyer cannot unilaterally change the terms and conditions of employment
                     agreements by reason of the transfer; the buyer can only agree on changes with the
                     employee

          •          elected representatives of the employees must be informed and consulted about the
                     transfer of a business enterprise

           Redundancies may arise as a result of a dismissal of employees where there is a reduction in the
           number of employees required. Care should be taken to ensure that the redundancies are carried
           out in a procedurally fair manner.




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                                                       PART B

                                            PROCEDURE AND TERMS


8.        Procedure - What are the steps in a sale and purchase transaction?

           Commercial real estate transactions usually start when proposed heads of terms are drafted,
           negotiated and agreed by the seller and the buyer. The heads of terms (or letter of intent or
           memorandum of understanding) set out the principal terms agreed between the parties and are
           generally expressed to be “subject to formal contract” and not legally binding. They form the
           basis of the documents to be drafted by the lawyers.

           Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s
           lawyers will usually collate all information relating to the property and send it to the buyer’s
           lawyers together with a draft of an agreement to conclude a future transfer agreement (future
           agreement) with the form of transfer agreement attached. A future agreement is not required if
           there are no conditions to the purchase, in which case the parties proceed direct to the transfer
           agreement. The buyer’s lawyers undertake thorough due diligence of all legal documents
           relating to the property (see section 10). If the purchase is made with borrowed finance, the
           lender of the finance may instruct its own lawyers to carry out due diligence on its behalf and
           negotiate loan and security documentation.

           The seller arranges for the property to be valued by a court appointed valuer for tax purposes
           (as to which see below).

           Once the form of future agreement and transfer agreement are agreed, the seller and buyer sign
           the future agreement. Once the conditions to the purchase (if any) are satisfied one party will
           invite the other to conclude the transfer agreement.

           Before signing the future agreement and the transfer agreement, the buyer’s lawyers will
           conduct a search at the Cadastral Registry to ensure that the seller still owns the property and
           that there are no new encumbrances affecting the property.

           The signatures of the parties on the transfer agreement (but not the future agreement) must be
           verified by a notary. The future agreement and transfer agreement may be signed in English
           with a certified Czech translation of the transfer agreement prepared for registration purposes,
           although in practice it is better to also sign the Czech version of the transfer agreement for
           registration purposes.

           Following conclusion of the transfer agreement, the lawyers need to deal with registration of
           the transfer documents at the Cadastral Registry and the seller needs to arrange for payment of
           real estate transfer tax, which is assessed on the higher of the price paid and the valuation
           carried out by the court appointed valuer. It is common practice for the purchase price to be
           paid into escrow (bank or notary) to be released partly on registration of the buyer as the
           exclusive owner in the Cadastral Register free from encumbrances and partly (equal to the
           amount of the tax) when the real estate transfer tax is paid by the seller.

9.        Other common contract terms - What other provisions does a real estate sale contract
          commonly contain?




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              An agreement for the sale and purchase of property must be in writing, must contain all main
              terms and conditions as specified by the law, and must be signed by both the seller and the
              buyer; signatures of the parties must be notarised.

              Provisions relating to value added tax will be included where relevant to ensure that the
              agreed tax position is preserved. Besides the essential terms of the sale and purchase
              agreement, such as the exact specification of the property and price, the document should
              also mention the following, namely:

          •          the title document under which the seller acquired ownership

          •          all liabilities burdening the property (mortgages, easements, pre-emptive rights,
                     leases)

          •          the conditions of payment of the purchase price

          •          a date of a handover/takeover of the property

          •          a provision on which of the parties will pay the real estate transfer tax

          •          a provision on which of the parties will file the petition for the change of ownership

          •          the conditions on the basis of which any party will be entitled to withdraw from the
                     agreement and

          •          a seller’s warranty that it is a sole unrestricted owner of the property and that the real
                     estate is and will remain in the (legal and actual) condition described in the
                     agreements until registration of the transfer’s title in the Cadastral Registry

10.       Due Diligence - What investigations does the buyer normally make?

          General

           The prudent buyer is likely to commission a survey of the building and in appropriate cases,
           soil and geological investigations, plant and machinery tests and environmental investigations.
           There are three limbs to due diligence by the buyer’s lawyers.

           Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries
           on the Cadastral Register and, where relevant, historic title documents.

           By submitting details of the property to the Cadastral Registry, the buyer’s lawyers will receive
           the relevant list of ownership for the seller and the property confirming whether the ownership
           right of the seller is registered. Additional details of the registered interests (easements,
           mortgages, pre-emptive rights) then need to be obtained from the Cadastral Registry. If the
           ownership list reveals a “P” (plomba) in the relevant section it means that there are pending
           proceedings regarding the property. More details about the pending proceedings can be found
           in the relevant Cadastral Registry.

           Where the property is leased, or subject to other occupational interests, the terms of the relevant
           occupational documents (e.g. administrative permissions) need to be considered carefully to
           ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will
           also need to check whether these documents require the consent of any third party to be given
           to the transaction.


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           Secondly, the buyer’s lawyers will carry out due diligence, which will include conducting
           various searches to check the position regarding municipal land use plan and zoning plans,
           environmental matters, financial encumbrances etc. Where the seller is a company, the buyer’s
           lawyers will also conduct corporate searches of the seller at the Companies Register to
           ascertain whether or not the company is registered or declared insolvent and / or bankrupt and
           therefore able to dispose of its assets freely, the current name and registered office of the
           company and who is entitled to act on behalf of the company.

           Thirdly, the buyer’s lawyers will raise additional enquiries of the seller’s lawyers to obtain
           information regarding a large number of practical matters which may affect the property and
           ask any relevant questions in relation to the title to the property.

          Pre-completion

           Very shortly before completion the buyer’s lawyers will also conduct searches at the Cadastral
           Registry for confirmation that there is no pending proceedings regarding the property and at the
           Companies Registry for confirmation that the seller has not been declared insolvent and / or
           bankrupt. These searches should confirm that the information gained in the due diligence
           process remains unchanged just before execution of the transfer agreement.

          Reporting to the client

           Before the signing of agreements, the buyer’s lawyers usually report their due diligence
           findings to their client, raising any mater of particular importance or concern.

11.       Terms implied by law – What provisions are implied by Statute, Code or otherwise?

           Some of the most significant issues are as follows:

          Registration of ownership

           To complete the process of the change of ownership, the transfer agreement must be filed with
           the Cadastral Registry. Ownership title passes upon execution of the decision of the Cadastral
           Registry. The decision of the Cadastral Registry has legal force as of the date upon which the
           application was filed to make an entry.

           The principle of reliability

           The “principle of reliability” of the Cadastral Registry, which is explicitly stated in law,
           presumes that the information registered after 1 January 1993 is correct and can be relied upon
           by third parties, unless the third party had knowledge that the information registered was
           incorrect. Notwithstanding this, there remains the possibility that the information on the
           Cadastral Registry may be incorrect. There is a procedure for rectifying the records kept by
           Cadastral Registry to comply with the actual state of affairs. Notwithstanding this principle, the
           State is not liable for damage caused simply as a result of an incorrect entry in the Cadastral
           Register. An unlawful act on the part of the Cadastral Office would need to be established and
           then a link between the unlawful act and the damage. The information registered in the
           Cadastral Register before 1 January 1993 are deemed to be correct unless proven otherwise.

           Change of landlord

           It should be noted that the Civil Code explicitly stipulates that on a sale of property which is
           subject to leases, although the new owner takes on the position of a landlord vis-à-vis the
           tenants, a tenant is entitled to terminate its lease agreement. Unless the parties expressly agree

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           so, this provision is not applicable for the lease of non-residential premises under the Act on
           Leases (as described above).

12.       Registration and Notarisation of real estate - What are the basic requirements?

           The Czech Republic has a central land register, the Cadastral Registry. The Cadastral Registry
           is run through regional district land registries which are responsible for specific areas of the
           country. The Cadastral Registry shows the legal status and details of the owners and other
           persons authorised in connection with the property. As the Cadastral Registry is accessible by
           the public, third parties are assumed to have knowledge of the contents of the records kept by
           the Cadastral Registry.

           As mentioned above, the Cadastral Registry provides a record of who owns which property, the
           registrable rights benefiting or burdening the property and the title under which the seller
           acquired the property. The record is contained on an ownership list, which shows all property
           owned by a particular legal entity in a certain cadastral area, in relation to which:

          •          Part A gives details of the registered owner of the property

          •          Part B gives a description and location of the property by reference to land plots and
                     identification numbers for buildings together with any rights benefiting the property
                     and a note on protection of the property (for example national monument property). It
                     should be noted that the street address of the property is not shown on the list of
                     ownership for the property. It is sometimes difficult for lawyers to identify property
                     and additional advice is taken from a “geodet”

          •          Part C gives a description of rights encumbering the property, such as mortgage right
                     or easement or pre-emptive rights

          •          Part D can contain various pieces of relevant information relating to the property

          •          Part E refers to agreements or documents on the basis of which the ownership as well
                     as other rights registrable in the Cadastral Registry were created

           The Cadastral Registry may also contain, where appropriate, a special note “P” (plomba),
           which might mean either a pending procedure concerning the property or a restriction of the
           owner’s ability to deal with its ownership title without obtaining the consent of another party.

13.       Disputes - How are they dealt with and resolved?

           Agreements on acquisition and disposal of property as well as agreements on rights registrable
           in the Cadastral Registry must be governed by the Czech law. The parties can choose what
           method of dispute resolution they would prefer. Methods of dispute resolution could include
           court proceedings or, in case of property (asset) disputes, arbitration. The choice should be
           stated expressly in the contract. If not, disputes will be determined by the relevant Czech court.

           Arbitration may be conducted by the Czech Arbitration Court attached to the Economic and
           Agricultural Chamber of the Czech Republic in Prague, or by another permanent arbitration
           court or by any arbitrators chosen by the parties.

           Czech courts are perceived to be slow and judges in some cases inexperienced, and therefore
           arbitration proceedings are favoured particularly in cross-boarder high volume transactions.
           Arbitration proceedings have the following advantages/disadvantages:


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          •          except in certain limited circumstances, it is not possible to appeal against the arbitral
                     award rendered at the end of the proceedings. The arbitral award is also enforceable
                     by ordinary courts

          •          rapidity and considerably fewer formalities

          •          possibility to appoint a selected arbitrator/specialist to decide on complicated/technical
                     matters and

          •          wide scope of enforceability of arbitration awards all over the world. In accordance
                     with the relevant multilateral international conventions it is possible to enforce an
                     arbitral award rendered in the Czech Republic in more than 120 countries world-wide

           When choosing the method of resolving disputes, the parties will have regard to various issues,
           including the following:

          •          The domicile/nationality and governing law of the contracting parties and any relevant
                     statutory limitations which may inhibit such choice or the effectiveness of such a
                     choice

          •          Whether or not awards can be enforced in the relevant jurisdictions. For example, is
                     there an international treaty that will allow enforcement of an award in a particular
                     jurisdiction? Many jurisdictions will not enforce awards that have not arisen through
                     the consideration and final judgment of a court/judge

          •          The fact that obtaining the decision of an expert may be faster and cheaper than
                     obtaining one from an arbitrator

           The Czech legal system does not provide specific regulation for nor does it legally recognise
           mediation proceedings.




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                                                         PART C

                                  PERMITS INSURANCE AND ENVIRONMENT


14.       Permits - What permits are required for the use and occupation of real estate and are they
          personal?

           On 1 January 2007, a new Construction Act came into effect in the Czech Republic. It has
           partly changed the types of permits for the planning, construction and use of property as well as
           the procedure for their issue.

           Structures or facilities and alterations thereto may be placed and their impact on the use of the
           area may be changed only on the basis of:

          •          planning permit

          •          planning consent

          •          planning agreement between the applicant and construction authority or

          •          if the structures or facilities are contemplated to be placed in built-up area, on the basis
                     of a regulatory plan to the extent approved by regulatory plan, without specific
                     planning permit

           Applications to obtain a planning permit to develop land must be filed with the local
           construction authority, which has responsibility for controlling the use and development of land
           in its area. Local construction authorities have statutory time periods within which a decision
           must be made as to whether a planning permit should be issued. There are various statutory
           rights in relation to appeals, which can be made if an application is refused. The applicant does
           not necessarily need to be the owner of the land so anyone can apply for a planning permit in
           respect of land, provided that the applicant received the approval of the owner of the land on
           which the applicant intends to build. During the planning permit proceedings the relevant
           authority considers each application with regard to (i) compliance with the zoning plan of
           relevant territory (ii) protection of the environment and health and safety and (iii) the
           standpoints of other participants in the planning proceedings. A planning permit will contain
           conditions which will regulate the impact of the development of the land.

           In certain cases, for example, where a structure does not require a building permit or
           notification, the construction authority may issue a planning consent instead of a planning
           permission. A planning consent is issued within 30 days of the date of notification (if the
           concerned authorities agree with the project).

           The Construction act provides what kind of structures, technical infrastructure, pylons, aerials,
           facilities, conservatories or sheds, landscaping work, maintenance and construction works or
           alterations do not require neither building permit nor notification to the respective construction
           authority.

           In some cases only notification to the construction authority is all that is required to construct,
           e.g. a residential house of up to 150m2 with one basement floor and a ground floor (assuming
           certain other conditions are met). Permission is automatic if the authority does not prohibit the
           construction within 40 days of the notice.



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           In remaining cases construction cannot commence until a valid, effective building permit has
           been issued. The construction authority determines the binding conditions for implementation
           and use of a development in the building permit. The conditions determined by the construction
           authority will ensure protection of public interests during construction and use of the building,
           its integrity, compliance with general technical building requirements, or other regulations and
           technical standards, and also compliance with the requirements set by the state administrative
           authorities concerned, primarily the exclusion or restriction or negative impact of the building
           and its use on the environment. A building permit generally ceases to be valid if construction
           has not commenced within two years of the date on which the building permit took legal effect,
           although a longer period may be granted by the construction authority, or the validity can be
           extended on request by the applicant.

           Generally, a building permit will be required for the construction of a “new build” property and
           for work that is proposed for refurbishment of an existing building, and where an existing use
           (for example office space) is to be changed to another distinct use (for example retail premises).

           A new type of professional was introduced, called Authorised Inspectors, whose main role is to
           certify plans for new constructions, especially when the developer wants to avoid traditional
           construction proceedings. Notification with specific certificate made by Authorised Inspector to
           construction authority will be sufficient instead of building permit where apart from other
           things:

          •          the Authorised Inspector confirms that the proposed construction complies with the
                     legislation and the planning permit

          •          all affected authorities issue approving opinions and

          •          all parties involved in the construction proceedings consent to the construction

           Building permits can in some cases be replaced by the construction agreement between the
           applicant and construction authority.

           If works are to be carried out to historically or architecturally important buildings, the investor
           must get a positive statement from the cultural heritage protection authority before a planning
           or building permit will be issued.

           During the consultation period that the local construction authority must undertake, interested
           third parties are able to put forward objections (or support) that should be considered by the
           authority before deciding whether a planning permit or building permit should be granted. In
           addition, even after a permit has been obtained, there will be a period within which third parties
           are entitled to challenge the validity of permits granted and this should be kept in mind by
           lawyers and agents acting for the developer, before any work on the permitted development
           begins. Once a building has been constructed or construction works completed, an application
           must be made to the construction authority to issue an occupancy consent. The construction
           authority examines whether construction has been carried out in accordance with the planning
           and building permits and with applicable building regulations and health, safety and
           environmental legislation. The occupancy consent issued by the relevant construction authority
           then approves a use of a building for a particular purpose.




15.       Insurance and Risk - What insurance will the parties effect and when does the insurance
          risk pass at the time of sale?

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           Before a sale is completed, insurance is generally the responsibility of the owner of the
           property. However, where such property is the subject of a lease, the terms of the lease can
           prescribe which party has responsibility to insure.

           The insuring party should have a fully comprehensive buildings insurance policy to protect the
           structure and fixtures and fittings of the property in the event of damage or destruction by any
           of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The
           policy may also cover additional special heads of cover such as subsidence, earthquake and, if
           available, terrorism.

           In certain areas of the Czech Republic, the policy usually also covers flood coverage but
           premiums and excesses are quite high, due to the number of claims made in recent years.

           Insurance policies (the insurance contracts containing the contractual terms between the
           insurance company and the insured) may either comprise a single policy for one particular
           property or a block policy designed to cover a portfolio of properties. Larger institutional
           investors may self-insure.

           In recent years, it has been possible to take out insurance if there is some specified defect in the
           title to the property. For an additional premium, the benefit of such policies may usually be
           claimed by subsequent owners of the property and tenants.

           Insurance policies (except title policies) are personal and not transferable on sale. On a sale,
           timing of the transfer of risk is normally prescribed by the transfer agreement as being the date
           of filing the application to the Cadastral Register to register the transfer.

16.       Environmental - What are the common environmental issues?

           Real estate may be contaminated as a result of current and former uses. Primary legal
           responsibility follows the “polluter pays” principle: the person who spilled, released or
           discharged a substance will normally be liable for any ill-effects it causes. However,
           environment laws may also operate to make future owners and occupiers liable for
           contamination already present at the real estate when they acquire it. This can occur if:

          •          the substance is causing, or there is still potential for it to cause, actual harm to
                     humans, to real estate, to personal property, to protected ecosystems or pollution of
                     groundwater or surface waters, as each owner is obliged to maintain its property in
                     such a state so as not it cause any loss and damage to any third person or protected
                     ecosystem or surface waters and

          •          either the new owner knows about the presence of the substance but fails to take
                     adequate steps to limit the harm it causes, or no person more directly responsible for
                     causing or knowingly permitting the substance to be present at the real estate can be
                     found (for example, because a more directly responsible company has since been
                     wound up)

           If development is proposed, then planning permission may be issued only after an
           environmental impact assessment of the construction on the environment is submitted to the
           building authority and the planning permission may set conditions under which the
           development may be carried out to prevent potential contamination.

           Acquisition due diligence may involve the appointment of environmental consultants to
           consider documentary information and to carry out a site visit (Phase I). If considered

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           necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to
           identify potential problems early so that there can be negotiation on price, the need for and
           scope of any remediation and/or the need to put in place protection in respect of any existing
           contamination related losses that may arise in the future. Such protection may take a number of
           forms, including obligations to remediate any contamination discovered post-acquisition,
           indemnities in respect of first party loss or third party claims to cover any of these risks.




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                                                        PART D

                                               FINANCE AND TAXES

17.       Pricing/Valuation - What sets the price/valuation of real estate?

           Pricing of real estate investments is a combination of the aggregate rent being paid by
           occupational tenants of the property and the value that investment buyers consider that a
           property of the specific type and location is worth at the time of valuation taking that income
           into account.

           The rent for a particular property is likely to be assessed by multiplying the area of the property
           by the market rental value per square metre. The market rental value will take into account
           factors such as the location of the property, its type and condition, and the length of the lease
           term. There is no fixed code of measurement and international developers and investors active
           in the market tend to adopt the codes of their home countries.

           In the case of retail units, it is common for the rent of the property to have an element based on
           the turnover produced in the unit.

           Again, there is no fixed methodology for assessing the value of the property for investment
           purposes and the international developers and investors active in the market tend to use the
           methodology used in their home countries. Exchange rate risk is taken into account in valuation
           of leases, with leases, where the rent is quoted in Euro, even though payable in Czech Crowns,
           attracting a higher valuation.

           Investment properties are commonly referred to as being sold on a particular yield, meaning the
           investment return that will be gained from the capital sum which it is necessary to pay to buy
           the property. For example, where a property with an aggregate rent of EUR 100,000 is sold for
           EUR 2,000,000, it will have a yield of 5%.

18.       Financing - How is a real estate acquisition financed?

           The principal ways in which real estate acquisition is financed are:

          •          Through the buyer’s own cash resources or general corporate banking facilities

          •          By using the capital value of the property to raise specific finance secured on the
                     property

           A typical security package will involve the grant of a mortgage over the real estate itself
           together with supporting pledges over the shares of the borrower, bank accounts, insurance
           policies, rental income from the property and the like. Floating charges used in common law
           jurisdictions are not recognised under Czech law. However, Czech law does have a concept of a
           pledge of an enterprise which in fact is similar to a floating charge, but it is not frequently used.

           On 1 January 2008, a new Insolvency Act came into effect in the Czech Republic. Under the
           Act, if insolvency proceedings are commenced in the form of the bankruptcy of a borrower, an
           insolvency administrator is appointed by a court. A secured lender, who has security over a
           particular asset, may require that up to 100 % of the proceeds of the sale of such asset, less the
           costs of sale (no more than 5% of such proceeds) and administrative costs (no more than 4% of
           the proceeds), be paid to it. Set-off of receivables and liabilities from and to a bankrupt entity
           is permitted in some cases after the decision on insolvency is issued by the court. Set-off of
           receivables and liabilities from and to a bankrupt entity is permitted following the bankruptcy

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           decision, provided that the statutory conditions for such a set-off were met before the decision
           on the method of dealing with the bankruptcy (i.e. prior to the declaration of bankruptcy, re-
           organisation or discharge from debts) is made. Final statement of profit and loss arising from
           the settlement of the transaction on the capital market is permitted to be set-off.

           Lenders typically require floating interest rate borrowings to be hedged under separate interest
           rate hedging arrangements so that the interest cost is effectively fixed.

           Raising finance by bond/debenture stock issue is unusual in the Czech Republic.

19.       Security over real estate - How is security over real estate created and protected?

           A fixed security interest over land or building is generally created under a document called a
           mortgage. A pledge over moveable assets, a pool of assets or over an enterprise, must be
           registered in the Pledge Register held by the Notary Chamber. In the case of land, buildings,
           apartments or other real estate property to which the title is registered at the Cadastral Registry,
           all mortgages must be registered in the Cadastral Registry by making the appropriate
           application to it. For non-registrable real estate such as minor building works, mortgages must
           be registered on the Pledge Register or the unregistered real estate must be handed over to the
           lender.

           In the case of investment property, some lenders require all rental income (excluding service
           charge receipts) to be assigned by means of security and paid into a specific account charged to
           the lender and will restrict withdrawals from that account to the making of payments in respect
           of the financing costs and repayment of the principal sum secured on the property.

20.       Taxes and Costs - What are they and who pays them?

           Generally, please refer to our CMS transaction costs guide as to the nature and amount of the
           taxes and costs.

           The main tax on acquisitions is real estate transfer tax (RETT) at the flat rate of 3% of the
           higher of the purchase price or the value of the property determined by a court appointed
           expert. RETT must be paid by the seller by the end of the third month following the month of
           completion of an acquisition. Calculation of the RETT must be included in a RETT Tax Return
           which must be submitted to the appropriate tax office. The seller is primarily liable to pay
           RETT, but the buyer guarantees payment if the seller fails to pay. It is therefore usual for an
           amount equal to RETT to be placed in escrow and only released to the seller when it produces
           evidence that the RETT has been paid. Failure to pay RETT within the prescribed time is
           subject to significant penalties and interest.

           General value added tax (VAT) on the transfer of buildings is currently at the rate of 19%.

           The transfer of the following buildings is VAT exempt: (i) those which are transferred 3 years
           after the first occupancy permit was issued and (ii) those which are transferred 3 years after
           the commencement of the first use of the respective building. Generally, the transfer of land is
           VAT exempt, unless the land is “building land” (i.e. undeveloped land with the benefit of a
           building permit) when the applicable rate of VAT is 19%.

           If real estate has been acquired through a share purchase, there will be no VAT on the transfer
           of shares.

           During due diligence for an acquisition, the buyer will also pay the costs of conducting
           searches. The buyer will also pay for any valuations and surveys of the physical state of the

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           property and any environmental audits or desktop studies. The seller will pay for the valuation
           by the court appointed expert.

           It is not uncommon on commercial acquisitions for seller and the buyer to have each appointed
           its own broker, to whom they will pay any commission due.

           Generally each party pays its own expenses. The buyer will usually be responsible for the
           payment of the Cadastral Registry fees associated with registration of the transfer to the buyer.




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                                                PART A

                                   PARTIES AND INTERESTS


   1.         Parties - Who can own real estate?

              Any legal “person” may own real estate. This will include individuals, companies,
              entities established by statute and certain charitable bodies.

              Bodies which are not legal persons, such as unincorporated associations or
              partnerships cannot own real estate directly. However, legal persons acting as
              trustees can own real estate on behalf of such bodies; as a rule of law, a maximum
              of four trustees can own any particular interest in real estate at any one time.

              Owners of commercial real estate include private developers, insurance
              companies, pension funds, banks and other financial institutions, private or public
              property companies, charities, trusts, the government and local authorities.

              There are no restrictions preventing foreign nationals or companies from owning
              real estate.


   2.         Property - What property interests are currently sold?

              Property in England and Wales is classed as either freehold or leasehold.
              Freehold is the best class of title and is as near to absolute ownership as is
              possible at law. There are no restrictions in England and Wales on how long
              leases can be. Freehold or leasehold title will be acquired depending on the
              circumstances of the acquisition transaction.

              Freehold is a real right (a right in rem.). Technically, a leasehold is a personal right
              (right in personam) though in practice leasehold has many of the attributes of
              freehold. Legislation has recently been passed for the creation of a derivative
              freehold estate known as commonhold, which will also create a real right, similar
              to the North American condominium interest. Title to freehold land and most
              leases must be registered at the Land Registry on completion of a purchase.

              The most common lengths of institutionally acceptable leases tend to be 10, 15 or
              25 year terms and provide for the payment of a market rent. They are called
              institutional leases, FRI leases or rack rent leases. Long leasehold interests tend to
              be for 99, 125, 150 or 999 year terms; such leases are normally granted on
              payment of a premium with only low or nominal rents payable.

              Property interests which exist in England and Wales include:

              •         Freehold interests - the best type of ownership and now expanded to
                        incorporate commonhold

              •         Leases

              •         Licences – contractual arrangements not creating any estate in land



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              •         Options and pre-emptions – rights to buy or first refusal

              •         Easements – such as rights of way or for the use of services

              •         Wayleaves – contractual rights to use land for limited purposes such as
                        to site telecommunications equipment

              Unless the property is to be sold “as seen” the parties must make it clear whether
              the fixtures and fittings at the property are to be removed prior to the sale or are
              to form part of the purchase. If items are fixed to the property, the presumption
              is that they form part of it and belong to the freehold owner of the property.

              Ownership extends to buildings on or beneath the land and the airspace above it,
              unless interests are described horizontally rather than vertically. Reference to
              “land” generally includes the buildings and structures on that land – similarly
              “property” includes both land and buildings unless limitations are created.


   3.         Ownership - What types of ownership are there?

              Legal ownership of property in England and Wales is classed as either freehold
              (including commonhold) or leasehold.

              Normally title to either interest will be registered at the Land Registry which
              confers three different classes of title:

              •         Title Absolute - this is the best quality ownership and can apply to
                        freehold and leasehold interests

              •         Good Leasehold title – this is granted where a lease is registered without
                        the underlying freehold title being presented to the Land Registry

              •         Possessory title - this occurs where there is no paper evidence of title,
                        but the Land Registry recognise that a person by virtue of occupation for
                        the relevant period prescribed by statute has the best claim of which they
                        are aware

              All land in the UK is ultimately owned by the Crown and passes back to the
              Crown if there is no owner. For example, where being a company is wound up
              without its land being transferred to a third party, the land will automatically pass
              to the Crown as bona vacantia (vacated property).

              Land may also be held on trust by a legal owner for a beneficiary. Also, where
              more than one person has ownership they will hold their interests in one of two
              ways:

              •         Tenants in common – where their respective interests are distinct
                        without the right of survivorship enjoyed by joint tenants




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              •         Joint tenants – where if a person dies his interest will pass automatically
                        to the survivors – this is known as the right of survivorship. Such trusts
                        are generally used for domestic purposes where a dwelling is owned
                        jointly

              It is also possible to acquire rights over land (such as a right of way) by exercising
              the right for a relevant period, normally twenty years.

   4.         Matters burdening or benefiting real estate - What matters can affect real
              estate?

              Common matters affecting real estate include:-

                       Matter                            Effect                            Example

               Easements               Rights which burden one piece of land        A right of way; a
                                       and benefit another. They are not            right to deposit
                                       personal but attach to the land itself.      rubbish; a right to
                                       They do not permit the owner of the          light; a right to use
                                       benefited land to remove anything from       pipes and cables
                                       the burdened land

               Covenants               Express or implied promises which can        Positive: a covenant
                                       be positive or restrictive. Positive         to repair a fence.
                                       covenants are personal and may not
                                       burden the land after the person who         Restrictive: a
                                       gives the covenant no longer owns the        covenant not to use
                                       property. Restrictive covenants              the land for a
                                       “continue to run with the land” and          particular purpose
                                       burden that land after a change in
                                       ownership

               Wayleaves               Contractual rights for a temporary           A right to run a
                                       period or temporary purpose,                 telephone or
                                       exercisable by one party over the land       electricity cable or
                                       of another, normally given to                erect
                                       companies supplying utility services         telecommunications
                                                                                    equipment

               Overriding interests    Special limited categories of rights,      A lease under 7 years
                                       powers and encumbrances in favour of
                                       a third party over another’s registered
                                       land, which burden the land even
                                       though not specified on the title register

               Land charges            Land charges generally affect land with      An agreement giving
                                       unregistered title and include               another person the
                                       agreements for sale, restrictive             right to buy the land
                                       covenants, and equitable charges. To
                                       burden subsequent owners of the land




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                       Matter                            Effect                           Example

                                       they must be registered at the Land
                                       Charges Register

               Adverse possession      Where one party makes a claim to a           Occupation of land
                                       piece of land that is contrary to            for more than 10 (or
                                       another’s assertion of ownership.            in some cases 12)
                                       Ownership claimed by adverse                 years
                                       possession needs to satisfy certain legal
                                       requirements before being accepted as
                                       valid

               Prescriptive rights     Where a legal right over land belonging      A right of way
                                       to another person is acquired by long        exercised for more
                                       usage                                        than 20 years


   5.         Occupation of real estate - Who may occupy real estate?

              Real estate is usually occupied by one of the following categories of person:

              •         Owners – those persons with a freehold interest in the property

              •         Tenants – those persons with a lease of the property or part of it. It is
                        possible for any number of leases to be created in relation to the same
                        property, so creating a chain of interests. Normally, however, a
                        restriction will be contained in the first lease created limiting the number
                        of subsidiary leases that may be created out of it. Tenants of business
                        premises usually have statutory rights to renew their leases when the
                        contractual term ends

              •         Persons claiming ownership by adverse possession – where they have
                        occupied the property for a long period of time without having any legal
                        rights to do so, but without challenge by the owner of any freehold or
                        leasehold interest

              •         Franchisees, holders of concessions and licensees – contractual
                        permissions to occupy rather than interests in the property itself.
                        Normally, the rights are personal to the person to whom they are granted
                        and are not capable of being transferred to a third party

              •         Holders of a wayleave – a contractual right of occupation usually given
                        to companies supply utility services. Holders of wayleaves often have
                        statutory rights to remain in occupation even if the wayleave agreement
                        terminates

              Please also see our CMS Lease Guide

   6.         Brokers - What is the broker's role?




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              Brokers in the UK, also referred to as surveyors or agents, generally fall into five
              categories:

              Investment
              Valuation
              Buildings
              Management
              Rent Review

              They are employed by any party to any transaction involving real estate. Their
              role may include:

              •         acting for a seller to find a buyer for a sale property, including marketing
                        the property for sale

              •         acting for a landlord to find a tenant for a leasehold property, including
                        marketing the property

              •         acting for a buyer to find a property to buy

              •         acting for a tenant to find a property to lease

              •         acting for any party to a transaction drafting and negotiating heads of
                        terms

              •         preparing heads of terms for documenting and liaising with lawyers

              •         valuing a client’s existing and target properties

              •         day to day management of property owned by clients, including
                        managing maintenance programmes and landlord and tenant work

              •         project management of development of new buildings or refurbishments
                        and

              •         negotiating rent reviews of existing properties

              Brokers available in the market range from those employed by major international
              organisations to specialised advisers providing advice on a more restricted basis.

   7.         Employees - What employment issues affect real estate acquisitions?

              Typical employment issues which may be relevant to real estate transactions
              include the transfer of undertakings, redundancies and changing terms and
              conditions of employment.

              Transfer of undertakings – TUPE

              The Transfer of Undertakings (Protection of Employment) Regulations 2006
              (“TUPE”) are likely to be the most significant employment issue. TUPE applies




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              when an undertaking or business (or part of one) is transferred from one party to
              another or where there is a service provision change (either an outsourcing,
              change of provider or in-sourcing). It may therefore apply when there is the sale
              or transfer of a business or lease of a property or the outsourcing of the
              management of a property to a third party. For example, this might occur in the
              sale of a shopping centre having its own management and security staff.

              The broad effects of TUPE are that:

              •         with effect from completion of the transfer, the buyer or new service
                        provider assumes responsibility for employees working in the business or
                        services transferred

              •         accrued continuity of employment is preserved

              •         dismissal for a reason connected to the transfer is automatically unfair -
                        unless for an “economic, technical or organisational reason entailing
                        changes in the workforce”

              •         employees transfer with their existing terms and conditions intact,
                        except, at present, in relation to occupational pension scheme rights

              •         if the buyer/ new provider changes terms and conditions by reason of
                        the transfer, these changes generally are ineffective, even where the
                        employee’s agreement is obtained

              •         employees’ elected representatives must be informed and, where
                        appropriate, consulted about the transfer

              •         if the seller recognises a trade union, the buyer will be bound to
                        recognise that union until detailed de-recognition procedures are
                        completed and

              •         any attempt to circumvent the effect of TUPE is void

              Although the legal effects of TUPE cannot be avoided, it is possible to apportion
              TUPE liabilities by agreement between the seller and the buyer (or outgoing and
              incoming service provider). Normally the seller (or outgoing service provider) will
              agree to be responsible for all claims and liabilities relating to employees up to the
              date of transfer, and the buyer (or incoming service provider) will take on all post-
              transfer employment liabilities.

              Redundancies

              Redundancies may arise on the closure of a business or part of a business or
              where there is a reduction in the number of employees required, for example on
              the merger of two businesses or a TUPE transfer. Care should be taken to ensure
              that the redundancies are carried out in a procedurally fair manner, with particular
              regard to any applicable collective consultation requirements.




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              Terms and conditions of employment

              An employer may decide to change or harmonise terms and conditions of
              employment on the acquisition of a new business. This can be a difficult process,
              especially where there has been a TUPE transfer (see above).




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                                               PART B

                                   PROCEDURE AND TERMS

   8.         Procedure - What are the steps in a sale and purchase transaction?

              Transactions formally start when proposed heads of terms are drafted, negotiated
              and agreed by the brokers for the seller and the buyer. The heads of terms (or
              memorandum of understanding) set out the principal terms agreed between the
              parties and are generally expressed to be “subject to contract” and not legally
              binding. They form the basis of the documents to be drafted by the lawyers.

              Once the heads of terms have been finalised, they are sent to the parties’ lawyers.
              The seller’s lawyers will usually collate all information relating to the property and
              send it to the buyer’s lawyers together with a draft sale and purchase agreement
              (contract). The form of the sale agreement will vary according to whether the
              property being sold is under construction or already built and the extent to which
              leases to tenants have already been granted.

              The buyer’s lawyers consider and suggest amendments to the draft sale agreement
              and at the same time will undertake general due diligence investigations (see
              section 10).

              Once the sale agreement is in an agreed form, the seller’s and buyer’s lawyers will
              “exchange” agreements signed separately by the seller and the buyer. Normally
              exchange is carried out over the telephone by the respective lawyers for the seller
              and the buyer in accordance with the procedures set out by the Law Society.

              After exchange of agreements, the buyer’s lawyers will raise “requisitions on title”
              of the seller’s lawyers to check that the previous replies given to any enquiries
              made of the seller’s lawyers are still correct and to agree procedures for legal
              completion (or closing).

              The buyer’s lawyers will also conduct pre-completion searches, including a
              protective search at the Land Registry, and, in the case of unregistered land, a
              search of the register of companies (if the seller is a company) to ensure that there
              are no financial encumbrances affecting the property and a search of the Land
              Charges Registry.

              If the seller is a foreign registered company, generally the buyer will require an
              opinion letter from an approved lawyer practising in the same jurisdiction
              confirming that the company is properly incorporated, has power to sell and has
              carried out appropriate authorisation procedures.

              Legal completion of the sale and purchase transaction may occur in person at a
              completion meeting or by telephone between the parties’ lawyers. Completion
              may take place at the same time as exchange, depending on the acquisition
              timetable. Where the purchase is made with borrowed finance a charge over the
              property will be completed at the same time. The lender of the finance may
              instruct its own lawyers to carry out due diligence procedures on its behalf and
              negotiate security documentation.




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              Following completion, the buyer’s lawyers need to deal with registration of the
              transfer documents (and any charging documents) at the Land Registry and
              payment of stamp duty land tax (SDLT), which is assessed on the price paid for
              the property.



   9.         Other common contract terms - What other provisions does a real estate
              sale contract commonly contain?

              An agreement for the sale and purchase of land must be in writing, must contain
              or clearly refer to all main terms and conditions, and must be in a form in which
              either one part is signed by both the seller and the buyer or, and this is the usual
              case, must be in two identical parts, each signed by one party and then exchanged.

              It is common for the sale and purchase agreement to provide for a deposit of
              between 5-10% of the purchase price on exchange of agreements, where there is
              to be a gap between exchange and completion. The seller’s lawyers usually hold
              deposits, either as agents or stakeholders. If held as an agent, it means that the
              lawyers can deal with the monies on their client’s instructions alone, normally
              involving the deposit being sent to the client. If they hold it as stakeholder, they
              have to take concurring instructions from both the seller and the buyer before
              being able to deal with the money. It is therefore preferable for a buyer to require
              that the money is held by a stakeholder.

              Because the buyer has the opportunity of conducting full title investigation or due
              diligence before exchanging agreements, the buyer is usually prohibited from
              making any objection to any matter of title after the date of exchange.

              Where timing is crucial to the agreement, there may be a provision stating
              expressly that “time is of the essence”. This means that any breach of the time
              limits in the agreement will be deemed to be a repudiatory breach, subject to a
              claim for damages. Normally, time is not of the essence and may only be made so
              by one party to the agreement serving notice on the others to make time of the
              essence.

              Where there are matters of title affecting the property, such as restrictive
              covenants, the seller may require reciprocal obligations from the buyer and an
              indemnity in respect of any liability the seller may still have following completion
              of the transaction.

              Real estate contracts commonly incorporate standard terms published by the Law
              Society, in the case of commercial property usually being the current version of
              the Standard Commercial Property Conditions. Where incorporated, the
              conditions will apply unless the contract expressly provides otherwise.

              Provisions relating to value added tax will be included where relevant to ensure
              that the agreed tax position is preserved between exchange and completion.

              Contracts for sale of property subject to occupational interests such as leases will
              include clauses to cover ongoing management matters, and provide for




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              apportionment of occupational income and outgoings on completion of the
              transfer of ownership in the property.

              If the property being sold is in the course of construction, the contract for sale
              will incorporate provisions dealing with the obligations of the seller to construct
              in accordance with an agreed specification and to provide to the buyer separate
              deeds of warranty from the building contractor and persons such as the architect
              in order to safeguard the buyer against defective design or workmanship.



   10.        Due Diligence - What investigations does the buyer normally make?

              Pre-exchange of agreements

              The prudent buyer is likely to commission a survey of the building and in
              appropriate cases, soil and geological investigations, plant and machinery tests,
              and environmental investigations. There are three limbs to the pre-exchange due
              diligence by the buyer’s lawyers.

              Firstly, title to the property will be investigated. The buyer’s lawyers will consider
              the entries on the Land Register and where relevant historic title documents.
              Where title to the property is not registered at the Land Registry, the buyer’s
              lawyer will consider the unregistered deeds to satisfy himself that the seller has a
              good and sufficient title to the property.

              By submitting a plan of the property to the Land Registry, the buyer’s lawyers will
              receive confirmation of whether or not the title is registered. Additional details of
              the registered interests then need to be obtained from the Land Registry.

              Where the property is leasehold, or subject to leasehold or other occupational
              interests, the terms of the relevant occupational documents need to be considered
              carefully to ensure they are not contrary to the buyer’s intentions for the property.
              The buyer’s lawyers will also need to check whether these documents require the
              consent of any third party to be given to the transaction.

              Secondly, the buyer’s lawyers will commence their own due diligence, which will
              include the conducting of various searches to check the position regarding
              municipal and zoning consents, environmental matters, utilities serving the
              property, financial encumbrances etc. Where the seller is a company, the buyer’s
              lawyers will also conduct searches against the seller’s name at the Companies
              Registration Office to ascertain whether the company is solvent and therefore able
              to dispose of its assets freely. Where the search result refers to security, the
              buyer’s lawyers will ask for confirmation that such matters do not encumber the
              property and that no third party consents are required for the transaction to
              proceed.

              Thirdly, the buyer’s lawyers will raise pre-contract enquiries (“preliminary
              enquiries”) of the seller’s lawyers to obtain information regarding a large number
              of practical mattes which may affect the property and ask any relevant questions
              in relation to the title to the property. Whilst a seller must not knowingly or




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              negligently mislead a buyer the general rule is “caveat emptor” (buyer beware).
              The seller generally gives replies, which may be actionable if wrong or misleading.
              During the due diligence process the buyer may often arrange that a survey is
              carried out at the property.

              Pre-completion

              After exchange of agreements and before completion the buyer’s solicitors will
              raise requisitions. These ask the seller to confirm that replies to pre-exchange
              enquiries remain correct and to divulge any further information that has arisen
              since exchange. The requisitions also deal with completion formalities such as the
              seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-
              completion searches including a priority search of the Land Registry or Land
              Charges Registry.

              Reporting to the client

              Before exchange of agreements the buyer’s lawyers usually report their due
              diligence findings to their client, raising any matter of particular importance or
              concern.

              Occasionally, and normally only where the buyer is acquiring property as a result
              of the acquisition of a company, instead of due diligence being carried out by the
              buyer’s lawyers, the seller’s lawyers provide a certificate of title addressed to the
              buyer and any lender to the buyer. This may occur where the sale has been
              planned for some time and the parties wish the transaction to proceed quickly.

   11.        Terms implied by law - What provisions are implied by Statute, Code or
              otherwise?

              Some of the most significant are as follows:

              Buyer Beware (Caveat Emptor)

              The overriding point of principle under common law is “caveat emptor” - let the
              buyer beware. The buyer must satisfy itself in all respects as to the nature of the
              property it is acquiring. However, this does not absolve the seller from the
              obligation to provide truthful replies to enquiries raised by the buyer’s lawyers.

              Title guarantee

              The use of certain specified words (for example “with full title guarantee”) in a
              transfer of property imports various statutory obligations on the part of the seller
              in relation to the quality of the title being sold. The seller is also under a general
              obligation to be truthful in relation to matters affecting his title to the property.

              Unregistered interests

              Where a registrable interest is not registered against a property’s title number at
              the Land Registry, a buyer will take the property without being subject to it.




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              Misdescription and misrepresentation

              There are both statutory and common law rules which protect against clear
              misrepresentations or misdescriptions of fact made by the seller to the buyer
              which have the effect of inducing the buyer to enter into a transfer of land. In
              such cases, damages may be payable to the buyer or the buyer may be entitled to
              withdraw from the transaction.

              Unfair terms

              Agreements for sale that include exemption clauses, which seek to allocate risk,
              are subject to the Unfair Contract Terms Act 1977. The Act operates to restrict
              or render void the effect of clauses that unreasonably attempt to exclude liability.

              Standard conditions

              Contracts for the sale and purchase of land invariably incorporate by reference
              Standard Conditions of Sale published by the Law Society, which cover a variety
              of largely technical matters and which are the subject of appropriate variation by
              the express wording of the contract.

   12.        Registration and Notarisation of real estate - What are the basic
              requirements?

              The United Kingdom has a central land register. The Land Registry is run
              through regional district land registries which are responsible for specific areas of
              the country. Registration of land is now compulsory throughout England and
              Wales and to the extent that land is unregistered, once it has been sold or charged
              it must be the subject of an application for first registration. Large areas of land
              still remain unregistered, although an application for voluntary registration may be
              made by an owner at any time.

              When a party acquires a registrable interest in land, it must apply for registration
              of that interest at the appropriate district land registry. Only when the registration
              is complete can the party properly prove its right of ownership.

              To protect a buyer pending registration, the buyer’s lawyers carry out a protective
              search of the Land Registry prior to completion. This search gives the buyer a
              short period (generally 60 days) of “priority” during which time the Land Registry
              will not make any other changes to the relevant title pending registration of the
              buyer’s interest.

              The Land Registry has the benefit of a state backed guarantee of accuracy. It is
              the definitive record of who owns what land, the nature of the interest and any
              registrable matters affecting that land. The title register for a particular property
              comprises the following parts, namely:

              •         the Property register, which gives a description of the property together
                        with any rights benefiting the property




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              •         the Proprietorship register, which gives details of the registered owner of
                        the property and the price paid for the property by the current owner
                        and

              •         the Charges register, which lists all registrable matters that encumber the
                        property such as rights benefiting other property, covenants, financial
                        charges, contracts and registrable leases

              The Registers may also contain, where appropriate, special entries that restrict the
              registered owner’s ability to deal with its title without obtaining the consent of
              another person.

              Where title to the property is unregistered, the buyer’s search at the Land Charges
              Registry will provide a priority period similar to that for a search of the title
              register at the Land Registry. Again, this will protect the buyer from having a
              third party register an interest against the property for a limited period of time.

              There is no requirement for notarisation of title in England and Wales. Contracts
              for the disposal and acquisition of interests in real estate are simply signed by or
              on behalf of the parties. Instruments effecting the disposition of the interest itself
              have to comply with certain formalities relating to execution and are known as
              deeds.


   13.        Disputes - How are they dealt with and resolved?

              English law permits considerable freedom of contract and the parties must give
              careful thought to which law they want to govern the contract, in which
              jurisdiction they would prefer that any disputes are resolved and what method of
              dispute resolution they would prefer. Methods of dispute resolution could
              include court proceedings, arbitration (whether domestic or international),
              reference to an independent expert or a mediation process. This freedom of
              contract is not absolute, however, and can in certain circumstances be
              circumvented if statute (or more rarely, the common law) requires.

              The choices should be stated expressly in the contract. If it can be avoided, these
              matters should not be left to the courts to decide, since the uncertainty of law and
              jurisdiction shopping will be costly to all parties and can mean that any dispute is
              likely to take a very long time to resolve. The parties can agree to leave any or all
              of these matters fluid to be resolved at the time any dispute arises, but this can
              create its own problems.

              Different types of dispute are often resolved in different ways. For example, rent
              reviews are often dealt with by arbitration only; disputes of fact (or under
              particular clauses or in respect of particular aspects of the contract) are often dealt
              with by expert determination. Disputes of law should preferably be referred to
              court, or to an arbitrator who is an appropriately qualified lawyer, otherwise the
              results of arbitration/mediation by a non lawyer could be eccentric or
              unpredictable.




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              When choosing a method of resolving disputes, the parties will have regard to
              various issues, including the following:

              •         The domicile/nationality and governing law of the contracting parties
                        and any relevant statutory limitations may inhibit such choice or the
                        effectiveness of such a choice

              •         Can awards be enforced in the relevant jurisdictions? For example, is
                        there an international treaty that will allow enforcement of an award in a
                        particular jurisdiction?. If such a treaty does exist, does it recognise
                        arbitration awards and agreements arising out of a mediation process?
                        Many jurisdictions will not enforce awards that have not arisen through
                        the consideration and final judgment of a court/judge

              •         If any remedy that could be sought is an interest in land, rather than
                        payment of money, a consideration is whether the particular system of
                        law, jurisdiction or method of dispute resolution will permit such an
                        award. Under English law, an arbitrator would not usually have the
                        power to order the transfer of land from one party to another in a title
                        dispute

              •         Obtaining the decision of an expert may be faster and cheaper than
                        obtaining one from an arbitrator

              If the parties are not satisfied by the decision of the independent person, different
              remedies and courses of action apply depending upon whether that person acted
              as an expert or as an arbitrator.




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                                               PART C

                        PERMITS INSURANCE AND ENVIRONMENT

   14.        Permits - What permits are required for the use and occupation of real
              estate and are they personal?

              Applications to obtain planning permission to “develop” land must be made to
              the local government authority which has the responsibility for controlling the use
              and development of land in its area. Local government authorities have statutory
              time periods within which a decision must be made as to whether or not planning
              permission should be issued. There are various statutory rights in relation to
              appeals, which can be made if an application is refused or not determined, and
              rights of challenge regarding the validity of any permission granted. For
              developments that are likely to cause significant environmental impacts, an
              Environmental Statement will need to be submitted with the application for
              planning permission, explaining the likely environmental impacts of the
              development.

              Generally, planning permission will be required for the construction of a “new
              build” property, work that is proposed for refurbishment of an existing building,
              and where an existing use (for example office space) is to be changed to another
              distinct use (for example retail or licensed premises). Planning permission, when
              granted, benefits the land (although there are occasions when it can be personal)
              and will contain conditions which will regulate the impact of the development, for
              instance controlling hours of opening for a licensed premises or requiring
              landscaping surrounding a car park. Under the Planning legislation the terms
              “develop” and “development” have a much wider meaning than the construction
              or replacing of buildings. Minor building works or simple changes of use may
              amount to “development” requiring planning permission.

              A different type of permit (called a “listed building consent”) is required when it is
              proposed to do work to historically or architecturally important buildings.
              Normally, planning permission will also be required, but listed building consent
              may be required even where planning permission is not (for example where works
              are not “development” but still affect the importance of the building as a heritage
              asset.

              Larger districts or areas of buildings (called “conservation areas”) that have
              architectural or historical importance may also be subject to a separate regime of
              control that requires conservation area consent to be obtained before work is
              carried out that would damage the character and appearance of the area that the
              local government authority wishes to preserve and enhance.

              During the consultation period that the local government authority must
              undertake when considering a development, third party groups are able to put
              forward objections (or support) that should be considered by the authority before
              deciding whether or not a permission should be granted. In addition, even after a
              permission has been obtained, there will be a 3 month period within which a third
              party group is entitled to challenge the validity of granting the permit and this




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              should be kept in mind by lawyers and agents acting for the developer, before any
              work undertaking the development begins.

              In addition to a planning permission, the building must also have approvals
              confirming that construction has taken place in accordance with applicable
              building regulations and health and safety legislation. Certain types of building
              may also have other kinds of certificate issued by independent bodies in relation
              to building or construction matters generally, such as BREEAM or NHBC
              certification.

              In relation to operations and activities on the property, various environment
              related permits may be required. This will depend upon the nature of such
              activities and operations. Most commercial activities will require a trade effluent
              consent or agreement with the local sewage undertaker. Where prescribed
              industrial or commercial activities are undertaken, environmental permits may be
              required from the Environment Agency or the local authority.

   15.        Insurance and Risk - What insurance will the parties effect and when does
              the insurance risk pass at the time of sale?

              Before a sale is contemplated, insurance is generally the responsibility of the
              owner of the freehold interest in a property. However, where such property is the
              subject of a lease or the property is a leasehold interest, the terms of the lease will
              prescribe which party has responsibility to insure. It is common for owners of
              long leasehold interests to insure rather than the landlord/freehold owner.
              Whatever the length of the lease, the tenant will generally insure the contents of
              the property belonging to the tenant and in some cases certain parts of the
              property for which the tenant is contractually responsible, such a plate glass.

              The insuring party should have a fully comprehensive buildings insurance policy
              to protect the structure and fixtures and fittings of the property in the event of
              damage or destruction by any of a comprehensive list of insured risks, such as
              storm, lightning, fire and water damage. The policy may also cover additional
              special heads of cover such as subsidence, heave, earthquake and, if available,
              terrorism.

              Generally it is the buildings, and not the land, which are insured for the
              reinstatement cost rather than the reinstatement value.

              Insurance policies (the insurance contracts containing the contractual terms
              between the insurance company and the insured) may either comprise a single
              policy for one particular property or a block policy designed to cover a portfolio
              of properties. Larger institutional investors may self-insure.

              Occupying owners generally have separate policies to cover the contents of the
              property, especially if the property includes costly plant and machinery. They will
              ordinarily have public liability insurance to cover liability to third parties arising
              from the property. These public liability policies will exclude most pollution and
              contamination risks (except those caused by a sudden and accidental event).




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              Whilst not common, it is possible to purchase specialist cover for pollution and
              contamination risks.

              Where the property is subject to an old restrictive covenant and the property
              owner does not know whether it is still enforceable, a special restrictive covenant
              indemnity insurance policy may be taken out to insure against enforcement of the
              covenant by third parties. Similar policies can be taken out if there is some
              specified defect in the title to the property. The benefit of such insurances may
              usually be claimed by subsequent owners of the property and tenants.

              Insurance policies (except restrictive covenant and title policies) are personal and
              not transferable on sale. Where a sale is taking place, timing of the transfer of risk
              is normally prescribed by the sale agreement. Agreements for sale of leasehold
              land will still be governed by the insurance terms of the lease. It is common
              market practice for the parties to agree that the seller will continue to insure
              occupied property until completion.

   16.        Environmental - What are the common environmental issues?

              Considerable change is occurring. Environment related sustainability issues are
              rapidly rising up the agenda. Currently, the most prevalent of these is the extent of
              greenhouse gas emissions attributable to the use of buildings (estimated at c50%
              in the UK and c40 % in the EU) and the potential impact of climate change on
              buildings. Current law is widely seen as ineffective. Considerable new legislation,
              policy and voluntary commercial measures are being implemented. There is a
              consensus that these are likely to have potentially far reaching impacts on
              development and retrofit, although there is no consensus yet on whether there
              will be a significant impact on investment values of new and/or existing building
              stock.

              Traditionally, the prime environment consideration has been potential soil and
              groundwater contamination as a result of current and former uses. Applicable
              environment law is a mix of common law and statutory law. Strictly, it is not
              unlawful for land to be contaminated and there is no absolute obligation to
              remediate contamination. Generally, legal obligations will attach if the
              contamination is causing, or has the potential to cause, harm or damage at
              particular levels (and these differ depending upon the applicable law). In principle,
              legal responsibility follows the “polluter pays” principle (i.e. the person who
              spilled, released or discharged the offending substance will normally be liable) but
              there are important qualifications to this. Environment laws may operate to make
              future owners and occupiers liable for contamination already present at the real
              estate when they acquire it. For instance, this may occur if the new owner fails to
              remediate harmful contamination of which it is aware or should be aware, if the
              original polluter can no longer be found or, by statute or contract, the risk is
              transferred by one party to another.

              Acquisition due diligence may involve the appointment of environment
              consultants to consider documentary information and to carry out a site visit
              (Phase I). If considered necessary, further, intrusive investigations (Phase II) may
              then be undertaken. It is important to identify potential problems early so that




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              there can be negotiation on terms and/or price and the need for and scope of any
              remediation. Negotiation of terms may take many forms, including contractual
              allocation of risks, obligations to remediate (contamination discovered pre or
              post-acquisition), indemnities in respect of first party loss or third party claims, or
              purchasing specialist historic liabilities environment insurance to cover any of
              these risks. If development is proposed, then planning permission may be made
              conditional upon the proper investigation and remediation, if necessary, of
              potential historic contamination.

              If planned development is of a type considered potentially detrimental to the
              environment, the application for planning permission may need to be supported
              by an assessment of the development’s likely future environmental impact.

              The presence of nuisance weeds (such as Japanese Knotweed) or protected
              species (such as badgers or newts) are due diligence and potential planning issues.
              They may impede on-site activities, have cost implications and impact on the
              duration of development.

              Those who have control of places of work have a duty to assess the risk of
              asbestos being present in the fabric of the building and to manage the human
              health risks posed by any asbestos found. Buildings built before 1999 are
              presumed to contain asbestos unless there is good evidence (such as building
              plans) to the contrary.




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                                                    PART D

                                          FINANCE AND TAXES

   17.        Pricing/Valuation - What sets the price/valuation of real estate?

              Pricing of real estate investments is a combination of the aggregate rent being paid
              by occupational tenants of the property and the value that investment buyers
              consider that a property of the specific type and location is worth at the time of
              valuation taking that income into account.

              The rent for a particular property is likely to be assessed by multiplying the area of
              the property by the market rental value per square metre (although in the UK
              square feet are still used as an alternative measurement). The market rental value
              will take into account factors such as the location of the property, its type and
              condition, and the length of the lease term. The area of the property will be
              calculated by reference to the RICS Code of Measuring Practice, which uses
              generally accepted methods of calculation by reference to several core definitions,
              the most common of which are Gross Internal Area (used, for example, in
              relation to warehouses and industrial buildings) and Net Internal Area (used, for
              example, in relation to offices and shops).

              In the case of retail shops, it is common for the rent of the property to have
              differential values according to the positioning of the floor space – that nearest to
              the frontage is the most valuable and will be described as “Zone A”. The rental
              values of the various areas will be added together to provide an overall rental
              value for the property.

              The value of the property for investment purposes will generally be assessed by
              reference to the methodology laid down in the RICS Appraisal and Valuation
              Standards manual, universally known as the “Red Book” as a result of the colour
              of its cover. This governs the way in which a valuer will calculate the value, on
              the basis of a list of accepted assumptions according to the statements of practice.
              These apply to the specific use for which the valuation is made and in the case of
              investment property the valuation will be of “Market Value” as defined.

              Investment properties are commonly referred to as being sold on a particular
              yield, meaning the investment return that will be gained from the capital sum
              which it is necessary to pay to buy the property. For example, where a property
              with an aggregate rent of £100,000 is sold for £2,000,000, it will have a yield of
              5%. Conversely, the interest can be said to have been sold at a YP (years’
              purchase) of 20.


   18.        Financing - How is a real estate acquisition financed?

              The principal ways in which real estate acquisition is financed are:-

              •         Through the purchaser’s own cash resources or general corporate
                        banking facilities




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              •         By using the capital value of the property to raise specific finance
                        secured on the property

             A typical security package will involve entering into a mortgage debenture, which
             includes the grant of a mortgage (also known as a legal charge) over the real estate
             itself together with a supporting floating charge over all of the other assets of the
             purchaser where the purchaser is a company. Floating charges cannot be created
             by individuals.

             Prior to the Enterprise Act 2002 coming into force, where the security which a
             secured lender had from a company over the whole or substantially the whole of
             its assets included a floating charge, the lender could appoint an administrative
             receiver of the company to enforce its security if the borrower were to default. By
             doing so the secured lender could block the appointment of an administrator and
             so prevent the company from going into administration. Administration is the
             UK equivalent of Chapter XI insolvency in the United States and provides a
             moratorium in respect of the enforcement of any security, or any legal
             proceedings and is intended to allow the company breathing space whilst it
             restructures its debt.

             The provisions of the Enterprise Act 2002 now operate to limit the appointment
             of an administrative receiver save in respect of floating charges created prior to a
             specified date (15 September 2003) and in certain key exceptions such as
             PFI/PPP (public private partnership), project finance, capital markets, utilities,
             social housing and financial markets. However, a secured lender who has security
             which includes a floating charge from the company over the whole or substantially
             the whole of its assets will be able to appoint its own administrator and block the
             appointment of an administrator on an application by the directors or the
             company.

             It was thought that a lender may prefer to appoint an administrative receiver
             (rather than an administrator) where this is possible because, as the lender’s
             appointee, an administrative receiver will place more emphasis on realising the
             company’s assets to recoup the lender’s money. An administrator’s primary
             purpose, on the other hand, is to rescue the business as a going concern and to
             have regard to the interests of the creditors as a whole.

             It is still possible for a secured lender to appoint what is known as a fixed charge
             receiver to manage and sell the mortgaged property, although such a person
             cannot be appointed (or can be required to vacate office) where the company goes
             into administration.

             In the recent period, where lenders have been enforcing their security, it has been
             unusual for them to appoint an administrative receiver even where they have been
             entitled to do so, and more usually an administrator or fixed charge receiver has
             been appointed.

             Lenders typically require floating interest rate borrowings to be hedged under
             separate interest rate hedging arrangements so that the interest cost is effectively
             fixed.




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              •         Raising finance by bond/debenture stock issue

             Here the interest rate is usually fixed by reference to the nearest equivalent
             government stock plus a spread or margin.

             The required security package is likely to be equivalent to that in relation to
             secured bank debt.


   19.        Security over real estate - How is security over real estate created and
              protected?

              A fixed security interest over land is generally created under a document called a
              “mortgage” or “legal charge”. A “mortgage debenture” or “debenture” which
              incorporates a full range of fixed and floating charges over all of the assets of the
              borrowing company may be required as an alternative.

              All financial security, including legal charges, mortgages and debentures in the
              case of companies, must be registered with the Registrar of Companies within 21
              days of legal completion. In the case of land to which the title is registered at the
              Land Registry, all charges must be registered in the charges register of the relevant
              title by making the appropriate application to the Land Registry. For unregistered
              land, certain types of charge already entered into may be registered as land charges
              at the Land Charges Registry. The creation of a new legal charge gives rise to a
              requirement for the land to be registered at the Land Registry.

              In the case of the acquisition of a leasehold interest, it is important for the lender
              to check whether the consent of the landlord is required to the creation of the
              mortgage/legal charge and if so to obtain this prior to the creation of the security
              and to give notice of the security to the landlord as required under the terms of
              the lease.

              In the case of investment property, some lenders require all rental income
              (excluding service charge receipts) to be paid into a specific account charged to
              the lender and will restrict withdrawals from that account to the making of
              payments in respect of the financing costs and repayment of the principal sum
              secured on the property.

              In the case of a property where a managing agent collects the rents on behalf of
              the owner, it is usual for notice of the mortgage/legal charge to be given to the
              managing agent, for the managing agent to enter into a duty of care arrangement
              with the lender in relation to the collection of rent and to agree to collect the rent
              and pay it into a specific rent collection account charged to the lender. The
              managing agent usually administers the service charge and the collection and
              payment of any applicable VAT.


   20.        Taxes and Costs - What are they and who pays them?

              Generally, please refer to our CMS transaction costs guide as to the nature and
              amount of the taxes and costs.




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              The main tax on acquisitions is stamp duty land tax (SDLT) at a top rate of 4% of
              the purchase price. This is calculated as a percentage of the acquisition price and
              must be paid by the buyer within 30 days of completion of the acquisition.
              Failure to pay within the prescribed time is subject to significant penalties and
              interest. SDLT must be paid before the Land Registry will process the buyer’s
              application for registration. If the interest being sold is the creation of a new
              lease, extra duty will be payable according to the amount of rent payable under the
              terms of the lease.

              Value added tax (VAT) may also be payable, where the property is the subject of a
              valid option to tax. The buyer may exercise the option immediately prior to or
              upon completion. An advantage of opting to charge VAT on property is that the
              parties may be able to recover any VAT on professional fees associated with the
              transaction.

              The exception to the rule that VAT is payable on the sale of an opted property is
              where the transaction constitutes a “transfer as a going concern”, where the
              property is let and operated as a business unit. Subject to satisfying certain
              conditions, this will usually mean that no VAT is paid on the sale of a property
              which is subject to leases granted to occupiers.

              During the due diligence for the acquisition, the buyer will also pay the costs of
              conducting searches, including in particular of the local authority (which includes
              zoning matters, building regulations and general municipal consents, notices, etc),
              and, if relevant, companies providing utilities, the local waterways boards, the
              Environment Agency, railway operators, and coal authority. The buyer will also
              pay for any valuations and surveys of the physical state of the property and any
              environmental audits or desktop studies.

              The seller will pay the commission of any land agent or broker employed to find a
              purchaser.

              Occasionally, the negotiated heads of terms for a transaction will provide for one
              or other party to pay the other’s costs. Generally each party pays its own
              expenses. If the property is leasehold, the seller is usually responsible for paying
              the costs of obtaining any consent required from any landlord in order to sell.

              Finally, the buyer will be responsible for the payment of the Land Registry fees
              associated with registration of the transfer to the buyer. As no notarisation is
              required, no notary fees are payable.




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                                              PART A

                                  PARTIES AND INTERESTS

1.      Parties – Who can own real estate ?

        In France any “legal person” may own real estate. The Civil Code art. 1594 states that
        “All those to whom legislation does not forbid to do so may buy or sell”.

        This includes individuals, companies, private legal entities such as companies, registered
        associations or associations classified as being of public interest and public legal entities
        such as state and local authorities and public corporations. Non- registered associations
        are not allowed to own real estate as although they exist in law they do not have legal
        capacity.

        The main institutional investors include : real estate investment trusts (Société Civile de
        Placement Immobilier SCPI), property leasing companies, real estate development
        companies run on a lease-purchase basis (Sociétés de Crédit-bail) and real estate
        investment companies (Société d’Investissement Immobilières Côtées SIIC).

        Foreign individual investors are permitted to directly own real estate. Foreign corporate
        investors may also directly own real estate provided that their legal personality is
        recognised in France.

2.      Property – What property interests are currently sold?

        An investor may not only purchase the land itself or a completed building, but also other
        real property rights governed by French law. Such rights offer the investor a right to build
        while the proprietary rights remain in the hands of the owner of the land.

        They usually take the form of long term leases, with a duration ranging from 18 up to 99
        years like the bail emphythéotique and the bail à construction. Under such leases the
        tenant may (bail emphythéotique) or is obliged to (bail à construction) erect buildings
        which will ultimately revert to the landlord. They offer a genuine real property right,
        which can be mortgaged, sold and transferred.

        Property interests currently sold may therefore be either the land and buildings, long term
        leases or shares of companies such as sociétés d’attribution representing a part of the
        underlying assets, (each shareholder has a right to receive a part of the property when the
        company is wound up), or even rights to build acquired through bulk sales and forward
        sale.

3.      Ownership – What types of ownership are there?

        Different types of ownership may be distinguished in France such as freehold ownership,
        (including joint-ownership), co-ownership (copropriété) and volume ownership.

        The most common type of ownership of land or buildings is freehold ownership. The
        freehold ownership of land includes anything above or below the property plus the
        buildings. Such owner is entitled to mortgage its property, to grant easements and leases


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        on it and to sell it at any time. Under French law, ownership can be held in common
        (tenancy in common), each joint owner then having a freehold right. The freehold
        ownership may also be jointly owned by several people in a so-called joint ownership
        (indivision), which may be for a fixed period (the maximum term is 5 years, renewable) or
        not (the ownership may be terminated at any time).

        Co-ownership (copropriété) is applicable for a building with at least two co-owners. The
        building is divided into private areas, on which each co-owner may enjoy full rights, and
        common areas (land, structure and common parts of the building), on which each co-
        owner has a joint right. A property manager (Syndic) has to be appointed by the co-
        owners and his functions are determined in accordance with law.

        With volume ownership, there is no distinction between the private and the common
        parts of the building. The property is divided vertically as well as horizontally in three
        dimensional units. Different tranches of the land may be allocated different owners, who
        each have a proprietary interest in their respective “volumes”. This type of ownership
        offers the owner of each volume the right to build within it.

        It should also be mentioned that according to French law, property rights can be either
        full/bare property (pleine/nue-propriété), which usually only gives rights and obligations
        in relation to the capital, and usufruct, which gives rights and obligations in relation to the
        income.

4.      Matters burdening or benefiting real estate – What matters can affect real estate?

        Common matters affecting real estate include :

        Easements and encumbrances (servitudes et charges)

        Rights which burden a plot of land and benefit another may be created to comply with
        local or general planning policy. They are not personal but attached to the land itself.
        They do not disappear with a change of ownership.

        In France there are several types of easements, depending on the parties or the right itself:

        •    Administrative easements arising from statutory or regulatory provisions

        •    Conventional easements, registered at the Land Registry, arising from a contract

        •    Legal easements arising from civil law

        Mortgages (hypothèques)

        Any property in France may be mortgaged. The mortgage must be executed in the form
        of a deed signed before a notary and has to be registered at the Land Registry in order to
        be enforceable against third parties. The same property may be burdened by several
        mortgages.




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        Mortgages can be created by contract, statute and civil law or by court order.

        Pre-emption rights (droits de préemption)

        A pre-emption right may affect real estate and the sale of a property. It results from local
        and general planning regulations or from a contract, published at the Land Registry in
        order to be enforceable against third parties.

        There are four types of pre-emptive rights in favour of public authorities: the urban pre-
        emptive right (droit de préemption urbain, DPU), pre-emptive rights in a deferred
        development zone (droit de préemption dans le zones d’aménagement différé, ZAD),
        pre-emptive rights in sensitive natural areas (droit de préemption dans les espaces naturels
        sensibles) and pre-emptive rights in favour of municipal districts in the case of transfer of
        rights on business and commercial leases or in the case of transfer of land on which
        shops from 300 to 1000 square meters are to be built (droit de préemption des
        communes sur les fonds artisanaux, les fonds de commerce, les baux commerciaux et les
        terrains faisant l’objet de projets d’aménagement commercial) . When transferring
        properties subject to such pre-emptive rights, the owner must observe the formality of
        the “Declaration of intent to alienate” prior to the sale and submit a declaration indicating
        the price of the proposed transfer to local authorities.

        Private individuals, such as residential tenants or farmers, may be granted a right of pre-
        emption exercisable when the owner wishes to dispose of the building or the land.

        Lender fixed charge (privilège de prêteur de deniers)

        When the property acquisition has been financed by a loan (often a bank loan), a lender
        fixed charge may be registered to guarantee the payment of the funds borrowed to pay
        the price of the real estate.

        Expropriation for public purpose (i.e compulsory purchase)/ condemnation for
        public use

        A property may be subject to expropriation for public purpose. The owner is compelled
        to sell his property provided that public authorities give him indemnities in return, which
        cover his loss. Prior to the expropriation, a public investigation is undertaken in order to
        justify the expropriation.

        Restriction on use of real estate

        If the property is situated in a municipal district of 200,000 or more inhabitants or in the
        Hauts-de-Seine, Seine Saint-Denis and Val-de-Marne departments (art. L.631-7 of the
        Housing Code) or in a municipal district in which the regulation on change of use is
        applicable (art. L.631-9 of the Housing Code), the property’s use cannot be changed from
        a residential use to another use without the prior authorisation of the Prefecture (without
        the authorisation of the mayor of the municipal district from 1 January 2009 (art. L.631-7-
        1 of the Construction and Housing Code, modified by the Law 2008-776 of 4 August
        2008, known as loi LME.


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5.      Occupation of real estate – Who may occupy real estate?

        Real estate is usually occupied by one of the following categories of person:

            •      Owners – those persons having one of the types of ownership mentioned in
                   section 3

            •      Tenants – those persons with a lease of the property or part of it such as a
                   residential lease, commercial lease or long term lease. Depending on the
                   provisions of the contract, it is possible for the tenant to sublet the premises.
                   Under specific conditions, tenants of commercial or residential premises have
                   statutory rights to renew their leases when the contractual term ends

            •      Persons claiming ownership by adverse possession – where they have occupied
                   the property for a long period of time without having any legal rights to do so, but
                   without challenge by the owner

            •      Holders of concessions and any other contractual permissions including a right to
                   occupy the property

            Please also see our CMS Lease Guide

6.      Brokers – What is the broker’s role?

        An estate agent may be appointed to find a contracting party to purchase or rent the
        property of others. He is mandated to buy, sell, rent or exchange. He is an intermediary
        for such operations, and receives payment in the form of commission.

        The broker's profession is strictly regulated by the law of 2 January 1970 (Law 70-9
        controlling practice requirements for activities regarding some real estate operations, also
        known as loi Hoguet). The broker has to comply with the provisions of the law and may
        be subject to civil and criminal penalties. To practice, he must receive a professional
        “Estate Agent’s card” delivered by the Prefecture and meet the following conditions:

        •       have proof of his professional ability

        •       provide a sufficient financial guarantee

        •       have a certificate of insurance for civil responsibility and

        •       have a police record proving he has no incapacity to practice

        The estate agent's main purpose is to represent the parties. He is entrusted with powers to
        carry out his appointment on behalf of his client. He puts potential buyers in contact with
        sellers, or potential tenants in contact with landlords. He can draw up sale agreements. He
        may handle funds for his clients if given precise powers. His professional licence
        mentions specifically the scope of his activity:



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        •    transactions relating to real estate business (transactions sur immeubles et fonds de
             commerce) – basically the purchase, sale and letting of buildings, lands and
             commercial property

        •    real estate management (gestion immobilière)

        Where the estate agent also acts as an advisor, he has a duty to provide advice to his
        clients on applicable regulations, the feasibility of the project, and a number of other
        matters, such as:

        •      the administrative state of the property (land for construction, building constraints,
               etc.)

        •      the information given to the parties (lease situation, validity of present leases, etc.)

        •      the existence of any defects in the property (parasites, etc.), within the limits of his
               professional responsibility and

        •      the creditworthiness of the buyer

        The estate agent is entitled to receive the agreed commission only when the contract has
        definitely been concluded. Consequently, if the contract is subject to a condition
        precedent, the commission is payable when the condition has been met.

7.      Employees – What employment issues affect real estate acquisitions?

        The national law provisions (Article L.1224-1 of the French Labour Code, former L.122-
        12) incorporating the EC provisions (Directive 2001-23 of March 12, 2001) state that the
        employment contracts of the transferor’s employees are automatically continued by the
        transferee in the event of a transfer of an autonomous economic entity which would
        affect staff.

        In practice, such economic entity is traditionally defined by the French Courts as a unit
        composed of persons and tangible and intangible assets, having an economic activity with
        a defined goal.

        For this reason, the transfer of tangible assets is important as real estate can constitute an
        element, especially in conjunction with other elements, making it possible to characterise
        the existence of an autonomous economic entity whose transfer can involve the
        automatic transfer of employment contracts.

        A real estate acquisition project in France consequently entails consideration of various
        issues by the investor such as:

        •    the nature of the activity which is carried on within the real estate in question and the
             conditions of its organisation

        •    the transferee’s methods of managing the real estate (for example the existence of a
             management section with dedicated employees) and




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        •    the nature of the assets whose acquisition is considered at the time of the project

        The answers to these questions enable verification of whether or not there is an
        autonomous economic entity that would entail the transfer of the employment contracts.

        If the operation involves the transfer of employment contracts, the investor must pay
        particular attention to:

        •      the type of employees whose contracts can be transferred (in certain cases, a prior
               administrative authorisation may be needed for the transfer of the employment
               contract in question)

        •      the collective or individual benefits which the employees may enjoy, in particular
               with regard to mutual insurance, provident funds, etc. and

        •      collective agreements entered into with workers

        The transfer of employment contracts, when it is imposed by the provisions of national
        law or EC legislation, has the result of qualifying the investor as the employer under
        French law.

        For this reason, the investor should ensure that he is properly registered with :

        •      the national social security scheme

        •      the unemployment insurance fund and

        •      the supplementary pension scheme

        Under French law, the continuation of employment contracts where there is a transfer of
        an autonomous entity is a matter of public policy. Consequently, the transferor cannot
        accept any obligation to terminate just before completion the employment contracts of
        the employees of the entity to be transferred, even on economic grounds.




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                                                   PART B

                                      PROCEDURE AND TERMS

8.      Procedure – What are the steps in a sale and purchase transaction?

        The first step in a transaction starts with the so-called pre-contractual period, allowing the
        parties to discuss the main conditions of the transaction. This period is not regulated by
        the Civil Code but often organised through contracts.

        In order to provide the purchaser with complete information regarding the building,
        investigations are carried out including technical and legal due diligence in relation to the
        property. This information enables the purchaser to determine the price and the nature of
        any obligations to be requested from the seller.

        The prospective purchaser may make an offer for the property (Offre d’achat).
        Alternatively, a vendor may make an offer (Offre de vente). Great care must be taken to
        avoid a binding contract at that stage. A purchaser can find himself bound under contract
        to purchase (or sell) if the purported offer accurately identifies the subject matter of the
        proposed contract and with price payable and the other party then accepts such an offer.

        Most of the time, the parties will enter into a preliminary contract, in preparation for the
        notarised deed of sale, the form of which is generally either a unilateral promise to sell
        (promesse unilatérale de vente) or a bilateral promise to sell (compromis de vente i.e.
        promesse synallagmatique de vente).

        In the unilateral promise, the seller, referred to as promisor, undertakes to sell the
        property to the buyer, referred to as the beneficiary of the promise to sell, on the date
        when the buyer expresses the intention to buy the property. The beneficiary holds an
        option he can exercise for a certain period of time. The beneficiary pays a deposit
        (indemnité d’immobilisation, generally 10% of the purchase price) which remains in a
        special account at the notary’s office until completion takes place or the purchase is
        cancelled. When he exercises this option to buy, the sale is completed. Failing that, the
        seller is released from his promise and can sell the building to another party, when the
        beneficiary will have to pay the promisor compensation amounting to the deposit. This
        type of preliminary contract is drafted by a notary or drawn up as a private agreement and
        in both cases the validity of the contract is subject to its registration with the tax
        administration within 10 days of the beneficiary’s acceptance.

        The bilateral sale agreement is a reciprocal undertaking to sell and to buy, binding the
        parties. This preliminary contract generally includes clauses containing conditions
        precedent. The sale will be completed once those conditions are fulfilled. This preliminary
        contract is always drawn up as a private agreement.

        The final stage in the completion of a sale and purchase transaction is the signing of the
        registered deed. The purchase deed may be drafted by one notary who is a public officer,
        but each party may decide to have his own notary. In some cases, the seller and the buyer
        may directly sign the final notarised deed of sale without signing a preliminary contract.


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        Legal formalities with authorities and agencies such as the land registry (conservation des
        hypothèques) and the tax authority have then to be completed in order for the sale to be
        enforceable against third parties. The published and registered deed is an acte authentique
        and can then only be overridden by a judge.

9.      Other common contract terms – What other provisions does a real estate sale
        contract commonly contain ?

        As mentioned in section 8, the parties generally enter into a preliminary contract,
        unilateral promise or bilateral promise to sell, prior to the signature of the agreement
        before a notary. Depending on the formula selected, the parties will have more or less
        wide-ranging rights.

        The purchaser will often hold an option right enabling him to acquire the building if he
        wishes to do so. The contract will mention the deadline and the form in which the option
        must be exercised.

        Generally, the contract will contain an assignment clause under which the benefit of the
        contract may be transferred unless otherwise agreed. In the case of a unilateral promise to
        sell, this entitlement will last until such time as the option is taken up. In practice,
        unilateral promises contain a substitution clause, whereby the beneficiary can have
        himself replaced by a third party who may be an individual or a legal entity.

        It is common for the sale and purchase agreement to provide for a deposit of between 5-
        10% of the purchase price on exchange of agreement, depending on the price of the
        property and the duration of the option to purchase in a promise to sell. The contract
        generally mentions that this deposit remains in a special account at the bank or the
        notary’s office.

        It is usually stipulated that if an option is taken up, the option fee will be offset against
        the sale price of the building. If the option is not taken up, this fee will accrue to the
        promisor. This remunerates the seller for granting the purchaser first refusal on the
        property.

        The contract will generally provide for conditions precedent under which, for example, a
        pre-emption right will be exercisable, or an administrative authorisation (planning
        permission) or finance needs to be obtained prior to the signature of the final deed. To be
        valid, all conditions precedent must have been satisfied or if any condition exists for the
        benefit of one party, that party must have agreed to waive it in the absence of satisfaction.

        Generally, full payment of the price is made when the transfer of ownership is completed.

        If the property being sold is in the course of construction (Vente en l’Etat Futur
        d’Achèvement or VEFA, Article L.261-3 of the Construction and Housing Code and
        1601-3 of the Civil Code), the contract for sale will incorporate provisions dealing with
        the obligations of the seller to construct in accordance with an agreed specification and
        building permit, and provide to the buyer separate deeds of warranty from the building
        contractor and professional team in order to safeguard the buyer against defective design
        or workmanship. If the contractor is the seller himself, he will usually provide the buyer
        with legal and contractual warranties.



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10.     Due diligence – What investigations does the buyer normally make?

        Before the acquisition of any property or of a company owning a property, before the
        signature of the preliminary contract the buyer will carry out due diligence investigations.
        These will concern the legal as well as the technical condition of the property.

        From a technical point of view, the matters normally covered are:

        • the structure of the building

        • soil and geological investigations

        • compliance with any applicable regulations (such as labour regulation, public premises,
          asbestos, termites and environment)

        • an environmental audit and

        • compliance with article L631-7 of the Construction and Housing Code, if applicable
          (change of use of premises)

        The following legal matters will also be checked, namely:

        • the title of property, origin of ownership over the last 30 years

        • matters burdening or benefiting the property

        • the type of ownership and related documents

        • administrative authorisations (planning permissions, etc)

        • building and operating insurance policies

        • the rental situation

        • any current legal disputes and

        • works and maintenance on the building

        Generally, a town planning certificate is obtained at contract stage in order to provide the
        purchaser with information concerning any applicable planning restrictions and
        confirming the ability to build, rebuild or extend on the land and whether any particular
        zoning regulations apply to it.

11.     Terms implied by law – What provisions are implied by Statute, Code or
        otherwise?




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        An agreement for the sale and purchase of land must be in writing and must be drafted by
        the notary in the form of an authenticated deed and be registered at the Land Registry
        (conservation des hypothèques) in order to be valid against third parties.

        The Code provides for various conditions applicable to sales of property, although these
        can be contracted out of and varied. In a similar way to the standard conditions of sale in
        relation to English conveyancing, the parties to a French property acquisition are able to
        vary most of the code provisions.

        Certain things must be stated for the purpose of registration. In addition to the provisions
        specific to the sale, the deed must contain various stipulations referring to :

        •     the names of the parties, whose identities must be checked. The contract must state
              the companies’ names as well as legal form, registered office and registration number

        •     the designation of the property and of the rights transferred, including a list of
              priority ranking or mortgages, contractual easements, town planning obligations, co-
              ownership regulations and rental status

        •     the price at which the sale is to be or may be determined. It must be specified
              whether or not the price is paid in front of the notary and the origin of the sums of
              money involved. A description of the building must also be given. If the property
              sold is held in joint ownership, the undertaking must state the exact surface area of
              the plot of land sold, failing which it may be declared null and void and

        •     any special conditions of sale and any charges attached to the building. Appendices
              are often required, for example relating to the building’s condition, the risks of lead
              exposure issued within the past year (in the case of residential property built before
              1948 and located in a zone with a lead exposure risk), the presence or absence of
              asbestos in certain developed buildings and the energy consumption diagnosis
              (diagnosis de performance énergétique or DPE) required by Article L.134-1 of the
              Construction and Housing Code.

        Some measures have been enacted to protect private buyers of new or existing housing
        who are not real estate professionals. The beneficiary of an undertaking to sell concluded
        by private agreement is allowed to withdraw his consent within a seven day period. If the
        undertaking is notarised, the draft deed only becomes firm and final at the end of this
        seven day period.

12.     Registration and Notarisation of real estate – What are the basic requirements?

        Within the context of a property purchase, even if the sale may legally exist before the
        drafting of the notarised deed, the final deed must be drafted by a notary in order to
        ensure that the transaction is carried out legally and accurately, in accordance with the
        proper procedures. The notary is technically independent so far as both parties are
        concerned unless each of the parties is assisted by its own notary. The notary is generally
        responsible for ensuring that the contract will be effective, for verifying title to the real
        estate, for informing the parties of any mortgages or liens and for the legal and tax



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        consequences of the executed documents. It is advisable that such points be checked by a
        lawyer at the preliminary contract stage.

        The notarised deed gives the purchaser a full proof of ownership of the property which
        can only be disputed by a legal action in front of a judge. Any French property/real estate
        transaction has to comply with the acte authentique rules and obligations to be valid. All
        real estate transfers, mortgages and liens must be executed in the form of a notarised
        deed.

        The purchase deed is only enforceable against third parties after its
        publication/registration (publicité foncière) at the Land Registry (conservation des
        hypothèques). The sale is then protected against third party claims, including those made
        by persons not stated in the deed. The registration does not in itself create the right of
        any party over the property, but is necessary in order to enforce the transfer against third
        parties.

        All recorded documents become part of a real estate file (fichier immobilier) which
        indicates ownership of and claims against real property. Authenticated copies of all
        notarised deeds are kept at the Land Registry. Most of the time, any person can obtain an
        abstract of the real estate file for a particular piece of property.

13.     Disputes – How are they dealt with and resolved?

        According to Article 3 of the French Civil Code, “Statutes relating to public policy and
        safety are binding on all those living in the territory. Immovables are governed by French
        law even when owned by foreigners”.

        French Law permits freedom of contract and the parties may choose the method of
        dispute resolution they prefer, which should be expressly stated in the contract. Methods
        of dispute resolution could include court proceedings, arbitration (whether domestic or
        international) or reference to an alternative dispute resolution process. Nevertheless, this
        freedom of contract is not absolute and civil law and statute may require a certain method
        of dispute resolution especially in real estate matters.

        France has a civil law system, as opposed to a common-law system, and the procedure
        before the French Courts is essentially carried out by the parties filing written
        submissions through their lawyers.

        The lower district Court of first instance is called the Tribunal d'Instance (TI), and the
        higher district Court of first instance is called the Tribunal de Grande Instance (TGI).
        Which court first hears a case depends upon the amount of the claim. There is also a
        separate Commercial Court of first instance known as the Tribunal de Commerce.
        Appeals against decisions of the above are heard by the regional Court of Appeal and
        further appeals (solely on points of law) are dealt with by the Cour de Cassation in Paris,
        France's supreme civil court. An injunction can be obtained requiring a party to do, or
        refrain from doing, some act, either before or during the litigation. Injunctions are
        obtained under French law through instigating summary proceedings (Procédure de
        référé). They can be requested in the following circumstances: urgent matters, danger of


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        irreparable harm, obviously illegal acts, etc. As a general rule, the unsuccessful party
        following trial will be responsible for the court costs (dépens) unless the court orders
        otherwise. The dépens includes a fee for pleading in court, but although it does not
        include the lawyers’ or barristers’ fees, the court may order the unsuccessful party to bear
        the legal costs of the successful party. The French legal system encourages parties to
        resolve their disputes otherwise than in the courts. Recently, the scope of arbitration
        within French law has been extended.

        Different types of dispute are often resolved in different ways. For example, rent reviews
        are dealt with by court proceedings only and disputes of fact may be dealt with by expert
        determination.

        When choosing a method of resolving disputes, the parties will have to take into
        consideration:

        • the domicile/nationality and governing law of the contracting parties and applicable
          limitations

        • whether or not awards be enforced in the relevant jurisdictions and

        • if compensation can be given in the form of an interest in land, rather than payment of
          money




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                                                  PART C

                                PERMITS INSURANCE AND ENVIRONMENT

14.     Permits – What permits are required for the use and occupation of real estate and
        are they personal?

        Planning permission authorises construction according to urban regulations (locality, use,
        aspect, arrangement of the building). Planning permissions are necessary to carry out the
        construction of brand new buildings as well as for any works carried out on existing
        buildings. The application for such permission includes the identity of the applicant,
        location of land, type of works and intended use of the building. The file is filed with the
        town-hall and must contain a master plan of the land, an overall plan of construction and
        plans of the façade. The planning permission must be posted on the site for the duration
        of the building work and in the town hall in order for it to be enforceable against third
        parties. It must remain there for the entire period in which people are allowed to object to
        the planning permission. The building permit is not personal and may be transferred to
        any new owner at the same time as any transfer of the land.

        An authorisation to parcel out land (permis d’aménager) is required for any division of
        land for building purposes resulting in the creation of more than two plots, or aiming at
        creating more than two plots over a period of up to ten years (Article R.421-19 of the
        Town Planning Code). The validity of this authorisation is limited to 2 years, during
        which time the work on the parceling must start (Article R.424-17 of the Town Planning
        Code).

        A specific authorisation must be obtained from the Commission Départmentale
        d’Aménagement Commercial (CDAC) for the construction of supermarkets, shopping
        centres and cinemas depending on the factors such as the surface area and the number of
        seats. Any party applying for planning permission for such an operation must apply for
        this authorisation beforehand.

        The use of premises in cities having a population greater than 200,000, or in the Hauts-
        de-Seine, Seine Saint-Denis and Val-de-Marne departments, may not be changed from a
        residential use to another use without prior authorisation of the préfet (without prior
        authorisation of the mayor of the municipal district from 1 January 2009, article L.631-7-1
        of the Construction and Housing Code, modified by the Law 2008-776 of 4 August 2008,
        known as loi LME). This authorisation is personal and may not be assigned. If residential
        premises are transformed into office premises or commercial premises, the authorisation
        is issued on the condition that the beneficiary makes compensation for the creation of
        office/commercial buildings by creating new residential premises (this operation is called
        transfert de commercialité). Moreover, professional or administrative premises may not
        be used for another purpose without prior authorisation of the préfet unless their new
        purpose is residential. The préfet may issue a certificate confirming that the premises may
        be used as commercial premises or offices.

        Concerning industrial buildings, a list of classified installations for environmental
        protection (ICPE) has been established to list activities which may interfere with or be



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        dangerous to the surrounding areas, public health and safety, or the environment. This
        list distinguishes installations requiring authorisation from the préfet from those only
        requiring a declaration. If needed, the authorisation is valid for a three-year period.

        Other authorisations are also required for the use of woodland sites, industrial
        decentralisation, classified buildings, and property restoration.

        In situations where demolition is involved, a specific demolition permit will need to be
        obtained.

        Within the Paris region, a special licence is required for commercial offices or industrial
        developments when new construction occurs or when existing premises are to be
        renovated or extended.

15.     Insurance and Risk – What insurance will the parties effect and when does the
        insurance risk pass at the time of sale

        Insurance is generally the responsibility of the owner of the property. When a lease has
        been granted on the property, the terms of the lease will prescribe which party has
        responsibility to insure and pay for such insurance.

        The tenant will generally insure the contents of the property belonging to the landlord
        and in some cases certain parts of the property for which the tenant is contractually
        responsible. It is common that tenants of long leasehold interests (bail emphytéotique or
        bail à construction) insure the property they build. The tenant is often asked by the owner
        to present a certificate of insurance. The owner will insure the building but it is common
        to ask the tenant to pay the insurance premiums. Lease contracts often contain a
        reciprocal waiver of recourse clause.

        The insuring party must enter into a comprehensive buildings insurance policy to protect
        the structure and fixtures and fittings of the property in the event of damage or
        destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire
        and water damage.

        Generally buildings are insured for the reinstatement cost rather than the reinstatement
        value. Property owners may take out a single insurance policy for one particular property
        or a block policy covering a portfolio of properties. Insurance policies are transferable
        with the property unless the parties agree otherwise. Where a sale is taking place, timing
        of the transfer of risk is normally prescribed by the sale agreement.

        As accidents occurring in the course of construction works have major financial
        consequences, French law makes it compulsory to take out insurance against building-
        related risks arising in the course of construction, consisting of a structural damage policy
        and a ten year liability policy. The first, which must be taken out by the owner of the
        building, covers repair works to be made in case of damage to the structure, for which
        builders are automatically liable under the ten-year warranty (assurance dommages-
        ouvrage, Article L.111-30 of the Construction and Housing Code). This insurance policy
        benefits subsequent owners of the structure. The second policy (assurance responsabilité
        civil, Article L.111-28 of the Construction and Housing Code), which must be taken out


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        by the builder, covers his ten year professional liability. Other types of liability (such as
        any arising under a two year performance obligation (garantie biennale), any one year
        completion guarantee (garantie de parfait achèvement) or legal contractual liability) are
        not usually insured.

16.     Environmental – What are the common environmental issues?

        When selling an industrial site or a site with a potential pollution problem, the seller has
        to supply a building in compliance with contract specifications. Legislation governing
        installations classified for environmental protection (ICPE) enables the Prefecture to
        order operators to rehabilitate the contaminated site, and, in some cases, the owner may
        be requested to do such works. The scope of this obligation depends upon the risk to the
        environment and the public health, due to the exploitation of the classified installation
        and also on the future use of the site. The seller has a duty of disclosure and must provide
        the purchaser with all information concerning potential or actual contamination of the
        site (article L. 514-20 of the Environmental Code). If the purchaser is not properly
        informed, he may seek the cancellation of the sale or a reduction in the price.

        Since 1 June 2006, when selling or renting a building located in areas covered by a plan
        for the prevention of technological risks or foreseeable natural disasters, whether such
        plan is prescribed or approved, or in the areas exposed to a seismic risk (as defined by a
        Decree), the seller or the landlord must provide a natural and technological risk status
        report (état des risques naturels et technologiques, E.R.N.T) on the basis of information
        communicated by the préfet in each department. If the seller or the landlord fails to
        provide such a report, the purchaser or the tenant may seek the cancellation of the sale or
        a price/rent reduction (Article L.125-5 of the Environmental Code).

        The carrying out of an environmental audit is recommended in order to analyse the risks
        relating to pollution.

        Specific risks and diseases related to real estate have been recently identified by French
        Law in order to protect properties against termites, and their occupants against asbestos
        and lead poisoning. For example, property owners must conduct a search for asbestos
        and create and update an asbestos technical file, in order to find out if their premises
        contain asbestos. Such works can be very expensive and can lead to the vacation of the
        building. In the case of residential property, the vendor must also provide specific reports
        related to lead poisoning or termites. These regulations are applicable if the property is
        situated in a risk area and if the property is a residential one irrespective of the type of
        ownership.

        Other risks have also been identified under French law. For example, a report on the
        presence of pyralene is also required in certain specified cases and reports are required on
        the security and conformity of internal gas installations in connection with residential
        properties.




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                                                  PART D

                                        FINANCE AND TAXES

17.     Pricing/Valuation – What sets the price / valuation of real estate ?

        The purpose of the valuation is to determine the building's market value (valeur vénale).
        The market value is the average price that can be obtained for a property to be sold, at
        the date of the valuation, be it a flat (apartment), house, plot of land, block of flats
        (apartment building), leisure centre, industrial or commercial premises, an office, hotel,
        clinic, castle etc . The valuation is intended both for private individuals and for companies
        who own a property.

        Every property needs to be valued when settling wills, deeds of gift, divorce, division of
        property, tax investigation or adjustment, company purchases, company mergers, wealth
        tax declarations, etc. Experts are valuation professionals in the property field such as
        notaries and property experts, members of the French Institute for Property Valuation,
        chartered surveyors and court-appointed valuers. Valuation fees are mainly based on the
        amount of time estimated to carry out the valuation and not the value of the property to
        be valued.

        Each valuation is performed after inspecting the property. When pricing a property, the
        professional will take several factors into consideration such as location of property, its
        type and condition, surface area, date of construction, legal and tax situation, applicable
        planning regulations, occupation of the property and comparison with similar
        transactions. The valuation report contains a description of the work done, the location
        and surroundings of the property, its legal status, its town-planning status, a description
        of the property, general assessment, the market sector, comparison points used, estimate
        and the conclusion.

        The property expert may use several methods to carry out a property valuation, such as
        the comparison or analogy method, the revenue method, the method called “property
        developer evaluation”, the “professional” method and the “cash flow” method.

        The most common method of valuation in France is the comparison or analogy method,
        where the valuer will consider similar transactions made in the same area in relation to
        buildings with similar characteristics.

        The income method is based on the actual income received (annual rental income) on
        which a particular yield is applied depending on the location and characteristics of the
        property. The analysis of the lease contract enables a determination of the potential
        income and the detailed provisions of the contract concerning such factors as duration
        and covenant strength are also taken into consideration.

18.     Financing: How is a real estate acquisition financed?

        The principal ways in which a real estate acquisition is financed are through the
        purchaser’s own cash resources or general corporate banking facilities.



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        There are no specific regulatory requirements for foreign banks wishing to lend and take
        security in France, but banking transactions may generally only be carried out in France
        by authorised foreign banks, of which there is a list published by the Banque de France.

        The loan will be secured on the property by a mortgage or a charge in favour of the
        lender. As in every civil law jurisdiction, security used to be specific to an asset and to a
        debt (different from full fixed and floating charges as in the UK) but the introduction in
        2006 of the “rechargeable mortgage” (hypothèque rechargeable, Article 2422 of the Civil
        Code) permitted more than one debt to be secured on a specific asset.

        The mortgage or charge will invariably be governed by French law when the property in
        question is situated in France, irrespective of the law which governs the accompanying
        loan documentation. A charge in favour of the lender (privilège du prêteur de deniers) is
        similar in nature to a mortgage but may only be granted at the same time as the loan
        facility is entered into. In order to be valid, the main terms of the loan must be recorded
        simultaneously with the acquisition of the property.

        Finance can also be raised by real estate finance leasing (Crédit-bail), in circumstances
        where a finance company purchases an industrial or commercial building in order to rent
        it to a lessee, for a given period of 12 to 15 years generally at the end of which time the
        lessee will benefit from a call option at a reduced price.

19.     Security over real estate - How is security over real estate created and protected?

        Security granted over real property usually relates to the building being financed for
        acquisition purposes. This security gives the lender the benefit of rights over the building.

        French law establishes several types of statutory charges applicable to real estate, called
        special real estate charges (privilèges spéciaux). These charges have priority from the date
        of the act giving rise to the charge over any subsequently arising real-estate charge or
        subsequently recorded mortgages. The charges may be registered at the Land Registry
        (conservation des hypothèques). The Civil Code also provides for a seller’s charge
        (privilège du vendeur d'immeuble) arising from any sale or transfer of real estate for the
        benefit of a vendor in order to secure payment of the purchase price by the purchaser and
        a charge in favour of the lender (privilège du prêteur de deniers) arising from a loan made
        at the same time of the sale in the form of a notarised deed and registered simultaneously.

        A mortgage (hypothèque) can be created at any time by contract whilst the mortgagor is
        the owner of the relevant property. This usually constitutes effective and enforceable
        security for a loan. The mortgage must be executed in the form of a deed signed before a
        notary and has to be registered at the Land Registry in order to be enforceable against
        third parties. This will invariably be governed by French Law when the property is in
        France, as with most French Law-governed documents, and especially those requiring
        notarisation. The documents will need to be in French although foreign parties may have
        a translation. The same property may be burdened by several mortgages. A recorded
        mortgage has priority, as of the date of registration, over any subsequently arising real
        estate charge or subsequently recorded mortgage. A mortgage is effective only as long as
        the underlying debt is valid; after satisfaction or cancellation of the debt, the mortgage is
        no longer effective.


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        Whenever the mortgaged property is sold or transferred, it can be purged of mortgages
        and other charges at the initiative of the purchaser who notifies the secured creditors and
        proposes to repay the recorded mortgage up to the amount of the purchase price.

        The antichrèse is a form of security pursuant to which a creditor is given possession and
        enjoyment of real estate in order to guarantee the obligations due to the creditor. Its use is
        very uncommon.

20.     Taxes and costs – What are they and who pays them?

        Generally, please refer to our CMS transaction costs guide as to the nature and amount
        of the taxes and costs

        The acquisition of real estate is generally subject to registration fees calculated on the
        purchase price increased by additional costs and compensation paid to the seller.
        Registration duties are due on the date of sale and payable by the purchaser.

        The purchase of the following types of property is subject to value added tax (19.60% as a
        rule), which will be payable by the purchaser, namely:

        •     a building which has been completed less than 5 years before the sale

        •     a building in the course of construction to be finished in the 4 year period which
              follows the date of acquisition

        •     land to be built upon in the 4 year period which follows the date of acquisition and

        •     a building to be demolished or entirely renovated in the 4 year period which follows
              the date of acquisition

        French tax authorities may challenge the purchase price and substitute the price paid with
        the actual market value of the property sold, if higher.

        In addition to the transfer duties, the land registrar’s fees of 0.10% and legal fees will
        apply.

        Legal fees and registration taxes amount to approximately 7.5% of the purchase price
        including any geometrist’s costs that might have been incurred for establishing boundaries
        and preparing plans for the final deed. These fees are paid to the notary on the day of
        signature of the deed together with the balance of the purchase price. Notary fees are also
        to be paid, which amount to 0.825 % of the purchase price.

        The seller pays the agent’s commission, unless the parties have agreed otherwise.

        Some other related costs, such as loan and mortgage costs, will also need to be taken into
        account.



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                                                PART A

                                   PARTIES AND INTERESTS


   1.         Parties - Who can own real estate?

              Any "person" with legal capacity may own real estate. This includes legal persons
              under private law (e.g. stock corporations or limited liability companies) as well as
              legal persons under public law (e.g. local authorities). Associations with legal ca-
              pacity or non-profit-organisations may also purchase real estate.

              Unlike the above mentioned legal persons, a civil law partnership (Gesellschaft
              bürgerlichen Rechts (GbR)) and its partners are not recorded in a public register.
              Also a change of partners cannot be verified. Therefore, when buying real estate
              property as a GbR, all partners must be entered into the land register.

              Commercial real estate is often owned by insurance companies, banks, investment
              companies or real estate holding companies.

              There are no statutory restrictions on foreign persons or companies acquiring real
              estate in Germany, provided that they have legal capacity.


   2.         Property - What property interests are currently sold?

              In Germany, it is principally only possible to sell title to land or to create limited
              rights in rem (beschränkte dingliche Rechte).

              German law recognises several forms of interest in property. These are:

                  •    ownership (including condominium ownership)

                  •    limited rights in rem such as

                       • heritable building right (Erbbaurecht)

                       • easements (Dienstbarkeiten)

                       • realty charge (Reallast)

                       • mortgage (Hypothek)

                       • land charge (Grundschuld)

                       • annuity (rent) charge (Rentenschuld).

              Real estate may be held by means of sole ownership (Alleineigentum), joint own-
              ership (Gesamthandseigentum) or co-ownership (Miteigentum).




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              In the case of real estate which is leasehold, only the land may be acquired. How-
              ever, the buyer of leased real estate enters into the rights and obligations con-
              tained in the lease agreement in lieu of the lessor, i.e. as soon as the buyer is regis-
              tered in the land register it automatically assumes the status of a lessor (§ 566 (1)
              German Civil Code (BGB)) if all conditions are met.

              The buildings on the land and all other fixed components and items such as crops
              are regarded as essential parts of the land and cannot be separated from it. Conse-
              quently, a separate legal transfer of either land or building is neither necessary, nor
              possible. Unless the parties have agreed otherwise, the sale also includes the ap-
              purtenances (Zubehör), i.e. the movable items on the site that serve the commer-
              cial purpose of the land, such as construction materials or supplies of heating oil.

              Condominium ownership is a special kind of right in rem. It consists of individual
              ownership (Sondereigentum) of a flat / apartment in connection with ownership
              of undivided shares (ideelles Miteigentum) and jointly-owned land or communal
              areas (Gemeinschaftsflächen). It is possible to sell the individual property in con-
              junction with a share of the jointly owned property. Any issue arising which con-
              cerns the jointly owned property must be decided on jointly by majority or
              unanimous decision of all co-owners.

              Another special kind of right in rem is the heritable building right
              (Erbbaurecht)This is a temporary right to have a building on another person’s land.
              A transfer of title to land is not necessary (see question 3).


   3.         Ownership - What types of ownership are there?

              German law differentiates between the following types of ownership:

              • Sole ownership (Alleineigentum) – the sole owner is the only person author-
                ised to control and dispose of the land

              • Co-ownership (Miteigentum) – more than one person owns an undivided
                share of the land. Each co-owner can dispose of its share

              • Joint Ownership (Gesamthandseigentum) – land which forms part of jointly
                held assets, e.g. by a civil law partnership or an association without legal capac-
                ity. Each joint owner is entitled to a share of the joint property but is not enti-
                tled to dispose of its share independently

              • Rights which are similar to full ownership of real property – by analogy these
                rights are subject to the provisions on full ownership, provided that there are
                no special regulations. Heritable building rights are particularly important and
                are generally created for a period of up to 99 years. During that period, the
                holder of a heritable building right may build on the land and use it. Com-
                monly, a recurrent charge or rent (Erbbauzins) is stipulated in the contract.

              Any transfer of title to land has to be entered into the land register (Grundbuch).
              Prior to this, the real estate transfer tax and other financial duties relating to the
              property have to be paid. To assure these payments, the tax authorities



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              responsible for the respective area have a right of appropriation. Only if the tax
              authorities waive this right can the transfer of title to land be executed.

              A distinctive feature of German law is the notice procedure (§ 927 German Civil
              Code (BGB)). Under certain circumstances, the owner of a piece of land may lose
              its title to property. In particular, the land must have been in proprietary posses-
              sion of another party for over 30 years and the real owner must be either missing
              or dead, or alternatively, not listed in the land register.


   4.         Matters burdening or benefiting real estate - What matters can affect real
              estate?

              Common matters affecting real estate include:

                      Matter                        Effect                           Example

               Easement              This right burdens one piece of         A right of way; a right to
               (Grunddienstbar-      land and benefits another. It is not    use pipes and cables;
               keit)                 personal but attaches to the land       way-leaves; ban on dig-
                                     itself.                                 ging next to cables

                                     This right only refers to tolerance
                                     and omission.

               Limited personal      This right is granted not to the        An obligation not to
               servitude             owner of a specific piece of land       carry out a certain type
               (beschränkt           but to a specific person.               of business on the land;
               persönliche                                                   right of abode; ten-
               Dienstbarkeit)        This right only refers to tolerance     ant's / lessee’s limited
                                     and omission.                           personal servitude: an
                                                                             effective means of pro-
                                                                             tection against the ter-
                                                                             mination of a long-term
                                                                             lease agreement, e.g. by a
                                                                             buyer in a public auction

               Right of usufruct     An inalienable and non-heritable        The right to the fruits of
               (Nießbrauch)          right to use the land.                  the property e.g. crops
                                                                             or proceeds of rent

               Ground rent           This right is typically characterised   Payment of a pension;
               (Reallast)            by recurring obligations (payments      provision of food or en-
                                     in kind or services) which are due      ergy / water; right to co-
                                     on the land. If these are not ful-      possess the property,
                                     filled, the entitled party may en-      etc.
                                     force their right over the property.




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                      Matter                      Effect                           Example

               Property charges,   Security and realisation rights          Uncertified / certified
               i.e. land charge    where a certain amount of money          land charges, annuity
               and mortgage        is payable to the beneficiary of the     charge (see question 19).
               (Grundschuld und    encumbrance. Two kinds exist:
               Hypothek)

                                   (1) A mortgage is dependent on the
                                   underlying secured obligation out
                                   of a loan agreement (Hypothek)

                                   (2) Land charges (Grundschulden)
                                   both certified and uncertified –
                                   which are not dependent on the
                                   existence of a specific claim out of
                                   a loan agreement and are signifi-
                                   cantly more widespread.

               Pre-emptive right   If the owner sells the land, the         Occurs frequently in the
               (Vorkaufsrecht)     beneficiary of a pre-emptive right is    case of a property bur-
                                   authorised to demand a transfer of       dened with heritable
                                   title to land on the conditions          building rights; pre-
                                   agreed in the sale contract with the     emptive right in favour
                                   third party. In addition to contrac-     of the local authority by
                                   tually agreed pre-emptive rights,        virtue of a statute.
                                   there are also statutory rights in
                                   favour of the local authority which
                                   are not recorded in the land regis-
                                   ter.

               Right to repur-     This right enables a party selling       Occurs frequently with
               chase               land to buy it back from the buyer       the sale of publicly
               (Rückkaufsrecht)    under certain circumstances.             owned land to property
                                                                            developers. If the land
                                                                            cannot be developed as
                                                                            planned, the local au-
                                                                            thority has the right to
                                                                            buy it back.

               Priority notice     The priority notice is a provisional     Priority notice protect-
               (Vormerkung)        means of security. Once the prior-       ing a claim for transfer
                                   ity notice has been entered into the     of title to unencumbered
                                   land register, protection of the right   land (Auflassungs-
                                   in question is secured and any           vormerkung).
                                   rights subsequently entered cannot
                                   be considered valid if they invali-
                                   date or impair this claim.




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              The entry in the land register is decisive, even if it is incorrect, i.e. if rights are reg-
              istered or cancelled by mistake. Under certain circumstances the law protects a
              buyer in good faith as to the title of the seller being registered but not being the
              owner. The buyer cannot be in good faith if an objection is entered into the land
              register.


   5.         Occupation of real estate - Who may occupy real estate?

              Real estate is usually occupied by one of the following categories of individuals:

              • Property owner – unless a third party has been granted an exclusive utilisation
                right (either by an utilisation right in rem or by permission to use the property
                by way of a lease agreement)

              • Tenant (Pächter) / lessee (Mieter) – due to the lease agreement the ten-
                ant / lessee is entitled to possession. Under certain circumstances the ten-
                ant / lessee may restrict its utilisation right in part or in whole by (permitted)
                sub-letting. Commercial lease agreements frequently contain an extension op-
                tion for the period after expiry of the original lease term. However, a lease
                contract originally concluded for a term of more than 30 years is subject to a
                special termination right (§ 544 German Civil Code (BGB))

              • Parties with entitlement in rem are also entitled to possession (e.g. heritable
                building right, right of usufruct, right to abode)

              • Beneficiary of a right of way – the beneficiary may enter the property within
                the agreed limits.

   Please also see our CMS Lease Guide.


   6.         Brokers - What is the broker's role?

              Unlike their counterparts in some other countries, the activities of estate brokers
              in Germany are primarily restricted to real estate brokerage.

              A broker may be instructed by any of the parties in a real estate transaction. Gen-
              erally, the broker's tasks include:

              •   acting for a landlord to find a tenant for a property, which includes marketing
                  the property

              •   acting for a tenant to find a property to lease

              •   acting for a buyer as to find a property to purchase, or acting for a seller to
                  find a buyer

              •   project management of development of new buildings or refurbishment

              • researching rents of comparable commercial and / or residential property and
                other market research



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              •   in some cases evaluating a client's existing and target properties

              In Germany, real estate brokers are not permitted to draft contracts or negotiate
              preliminary agreements or letters of intent / heads of terms as the law forbids
              non-lawyers to give legal advice. However, the new legal service act (Rechtsdien-
              stleistungsgesetz), coming into effect on 1 July 2008, implements an authorisation
              for non-lawyers to provide supplementary legal services linked to their original
              services which extends the competences of real estate brokers in a limited way.

              Unless prohibited by contract, a real estate broker may act both for the
              seller / landlord and for the buyer / tenant and demand full commission from
              both parties. However, acting for both parties would mean a breach of the agree-
              ment, if this leads to a conflict of interest. In practice, real estate brokers inform
              the parties at an early stage that they are acting for both.


   7.         Employees - What employment issues affect real estate acquisitions?

              In terms of real estate acquisitions, the following two employment issues have to
              be taken into consideration:

              Transfer of business

              The transfer of a business or part of a business is subject to special provisions un-
              der German law (§ 613 a (1) German Civil Code (BGB)). Frequently, employment
              relationships between the seller and third parties are so closely linked to the prop-
              erty that the transaction constitutes a sale of a business or part of a business. This
              often applies to the employment of caretakers and cleaning staff. Under these cir-
              cumstances, the buyer takes over all the rights and obligations of the employment
              contracts existing at the time of the transfer.

              Where the transaction constitutes a transfer of a business as described above, the
              seller (the former employer) and buyer will be jointly and individually liable for
              obligations arising under the existing employment contracts. These employment
              contracts may not be terminated on the grounds of the transfer of business or
              changed to the disadvantage of the employee within one year after the transfer. In
              this connection it is important that the employees concerned are informed about
              the business transfer at an early stage. The employees can object to the transfer of
              their employment within one month after receipt of the notification. By doing so,
              they continue being employed by the seller but run the risk of being made redun-
              dant if the seller is unable to provide a similar employment.

              Employer-owned accommodation

              When the transaction concerns property which includes accommodation let to the
              employees in connection with their employment, the landlord can terminate the
              lease agreement at short notice and without stating reasons, once the employment
              has been terminated. However, this only applies where the accommodation is
              furnished mainly by the landlord and the employee inhabiting it does not live
              there with its family. Agreements made on different terms are invalid as far as they
              are to the disadvantage of the tenant.




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                                                     PART B

                                        PROCEDURE AND TERMS


   8.         Procedure - What are the steps in a sale and purchase transaction?

              A letter of intent or head of terms is not required in every sale or purchase trans-
              action. These non-binding declarations of intent are used with large transactions,
              such as the sale of a real estate portfolio with a bidding procedure.

              It has become common practice for a seller or buyer to carry out a due
              diligence process. The due diligence identifies problematic issues relating to the
              property and points out remedies (see question 10).

              Usually, one party sends the other party a draft contract tailored to the specific
              property. Since a contract for the sale of land must be notarised, it is also possible
              to have the contract drafted by the notary. Lawyers are normally engaged to ad-
              vise the parties and to draft the contract.

              If the parties have reached an agreement on the specifics of the contract, it has to
              be notarised. It is important to note that associated agreements must also be nota-
              rised if they are of significance to the conclusion of the contract, e.g. if a construc-
              tion or lease agreement is coupled with a real estate sale. Otherwise, the whole
              contract is void. A binding offer of one party also requires notarisation. An offer
              or a contract concerning real estate, not concluded in that form, only becomes en-
              tirely valid if the transfer of title to land has been declared by the parties and en-
              tered into the land register.


              Two essential criteria are required to be fulfilled for transfer of title to land (§ 873
              German Civil Code (BGB)):

              • Conveyance of property (Auflassung) – this is the compulsory agreement be-
                tween the buyer and the seller on the transfer of ownership which has to be
                notarised. Commonly, it is already included in the contract for the sale of land
                and does therefore not require separate notarisation

              • Entry into land register – the entry into the land register completes the legal
                purchase and has a constituent effect, i.e. the title is not transferred before the
                buyer's status as owner is entered into the land register. Some time, usually
                several weeks or months, may pass between the date on which the contract is
                notarised and the completion of the legal purchase (entry into the land regis-
                ter).


   9.         Other common contract terms - What other provisions does a real estate
              sale contract commonly contain?

              Contractual provisions normally govern:




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              • Definition of the object of purchase (land description, appurtenances, fixtures
                and fittings, encumbrances, etc.)

              • Exclusion of liability (e.g. soil contamination, hidden defects)

              • Protection of the seller

                  The parties instruct the notary not to file the application for the transfer of ti-
                  tle to land until the seller or the bank have confirmed the receipt of the pur-
                  chase price. As far as the payment of the purchase price is concerned, the
                  buyer submits itself to immediate execution on its entire assets. This means
                  that the seller is able to access the assets of the buyer, thereby avoiding lengthy
                  legal proceedings. Alternatively, payment can be deposited into an escrow ac-
                  count which is administered by the notary as trustee. However, this generates
                  additional costs.

              • Protection of the buyer

                  A very important contractual term is the priority notice (Auflassungsvor-
                  merkung). It protects the buyer's claim to a correctly ranked entry in the land
                  register. The purchase price usually does not become due until the priority no-
                  tice has been entered in a correctly ranked order.

              • Transfer of possession

                  At the date on which possession is to be transferred, the risk of accidental
                  loss, deterioration not caused by either party, ability to use, compliance with
                  encumbrances, and all duties to ensure that the land or premises are safe for
                  persons or vehicles, are passed on to the buyer. It is advisable for the contract
                  to make a specific provision for the transfer of possession. There should be a
                  clear distinction between the recurring public charges and the allocation of in-
                  frastructure development costs and other levies.

              • Authorisation regarding execution of the contract

                  At the notary's office, the parties give authority to the notary's staff regarding
                  all declarations that are necessary to enter the legal transactions listed in the
                  contract into the land register. In general, this authorisation expires once the
                  title has been entered into the land register.

              • Advice of the notary

                  The notary must advise the parties on all contract-related issues that might
                  imperil the execution of the contract. A special clause of the contract
                  contains this advice.


   10.        Due Diligence - What investigations does the buyer normally make?

              The common law principle of “caveat emptor” does not exist under German law.
              In principle, the seller is liable for the object to be free from quality and legal de-




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              fects and to be usable for typical purposes unless the contract specifies that it is to
              meet certain requirements.

              Claims on the buyer’s part made on the grounds that the condition / quality is not
              as stated in the contract are excluded only if the buyer was aware of the defect
              when signing the contract. If the reason for its lack of awareness was due to gross
              negligence, he may only assert claims for defects if the seller fraudulently con-
              cealed them or had given a guaranty that the object would have a specified condi-
              tion / quality. Gross negligence depends on whether the buyer was under an obli-
              gation to examine the property prior to and at the conclusion of the contract.

              As far as real estate transactions are concerned, case law has acknowledged that it
              is common practice for a buyer to carry out a diligent inspection of the land
              and / or buildings. The buyer should at least examine the land and the buildings
              for any obvious defects (technical due diligence).

              In practice, the scope of the inspection to be carried out by the buyer is based on
              the extent to which the seller excludes liability for defects. The greater the exclu-
              sion of liability, the more detailed the buyer's inspection is likely to be so as to
              properly gauge the risk of defects.

              When the buyer carries out a due diligence review, he uses a comprehensive
              checklist tailored to the requirements of the specific transaction (location of the
              property, condition of the development, use). In addition to an examination of the
              legal situation regarding the planning and building permits, an inspection of the
              following should also be carried out: encumbrances entered into the land register,
              public easements, and the actual condition of the site (in particular inherited envi-
              ronmental liabilities and contamination of the building). Concerning the building,
              the buyer should examine the condition of the building (backlog of repairs) as well
              as the lease and other contracts regarding the use of the building.


   11.        Terms implied by law - What provisions are implied by Statute, Code or
              otherwise?

              The German Civil Code (BGB) comprehensively regulates the law of purchase.
              Strictly speaking, therefore, all the parties have to do is to specify the subject of
              the contract and to reach express agreement on aspects of the transaction which
              differ from those provided by statute. However, there are certain mandatory pro-
              visions which the parties may not exclude by contract. The most important are the
              following:

              Exclusion of liability in the event of fraudulent intent

              The seller may not exclude or limit its liability where it has guaranteed the condi-
              tion of the property or fraudulently concealed the existence of a defect. Conse-
              quently, where liability is completely excluded the seller must specify all circum-
              stances which, according to usual business practice, constitute a defect of land or
              buildings. Failure to do this may render the liability exclusion clause invalid.

              Liability for defects




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              In so far as liability for defects has not been excluded, the buyer has the following
              rights (§ 437 German Civil Code (BGB)):

              • Subsequent remedy – eliminating a defect or providing a substitute

              • Withdrawal – concurrent return of consideration received (or equivalent), i.e.
                return of the land against repayment of the purchase price

              • Price reduction – compensation for the difference in value by withholding, or
                if the purchase price has already been paid, by repaying part of the purchase
                price

              • Compensation – in addition to the above remedies, if the seller is in breach of
                its duties, the buyer may demand compensation or reimbursement of
                expenses

              Protection of confidence by acquisition in good faith

              For the benefit of the buyer, the content of the land register is deemed to be cor-
              rect. For this reason, title to land can be acquired from a party registered as owner
              in the land register, even if this party is in fact not the legal owner. Likewise, land
              can be purchased unencumbered, even if the encumbrances have merely been
              cancelled inadvertently. However, the buyer cannot refer to good faith if it has
              positive knowledge of the fact that the land register is incorrect. This protection
              of good faith does not apply to rights which cannot be registered, such as the
              existence or non-existence of a lease agreement.

              Automatic passage of non-registrable rights

              In most of the German federal states (Bundesländer) public easements (Baulas-
              ten) have to be recorded in a special register (Baulastenverzeichnis). The public
              easement is a formal obligation to be supervised by the building authorities, stat-
              ing, for example, that the landowner will not build on a certain area of the land.
              This obligation then becomes an encumbrance which is not to be entered into the
              land register and which applies to any legal successor of the property.

              General terms and conditions of business

              Limitations regarding the content of general terms and conditions of business are
              regulated by law (§§ 305 et seq. German Civil Code (BGB)). Land transactions
              generally include some standard clauses not specific to a particular transaction. A
              clause used as general business term or condition is deemed invalid if it causes a
              breach of good faith or unfairly discriminates a contracting party. Whether this is
              the case or not must be decided on the merits of the individual case.


   12.        Registration and notarisation of real estate - What are the basic
              requirements?

              The ownership status of real estate is recorded in the land register, which is an of-
              ficial register kept by the land registries at the local courts. The land register con-
              tains the reference list (Bestandsverzeichnis) and sections I, II and III. The refer-



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              ence list contains a detailed description of the real estate and should correspond
              with the data in the cadastral plan, i.e. plan indicating the location and size / area
              of the land which is kept by the real estate offices (Liegen-schaftsämter). Section I
              lists the name of the owner. Section II includes any encumbrances and / or re-
              strictions (servitudes, rights of usufruct), while section III refers to mortgages,
              land and annuity charges. Any person verifying a
              legitimate interest may inspect the land register. In principle, there is an irrefutable
              presumption that the content of the land register is correct, i.e. the facts entered
              are deemed to be correct.

              The land registry procedure is based on a number of statutory principles, the most
              important being:

              • Applications – the land registry only acts on an application. Ex officio entries
                are comparatively rare

              • Approval – any land register entry concerning a change in the legal rights must
                have the approval of the respective party. Such a party is anyone in whose fa-
                vour a right is entered in the land register and whose right is affected by the
                desired amendment

              • Prior entry – according to the principle of material priority the rights in land
                are ranked in the chronological sequence in which they were entered in the
                land register. The chronological sequence of the entries refers to the date of
                the corresponding application for entry

              A priority notice may be entered into the land register to secure a certain
              ranking. This protects the claim to a legal position in rem. There are separate land
              registers for heritable building rights (Erbbaugrundbuch) and condominium prop-
              erty (Wohnungsgrundbuch). The land register for condominium property records
              the proportion of co-ownership in the land and the individual ownership (Sonder-
              eigentum) separately for each co-owner.

              Contracts for the sale of land must be notarised. Notarisation is also required for
              all collateral agreements which are so closely linked to the contract that neither
              can stand alone. Hence, collateral agreements, such as a purchase of movable ob-
              jects, an obligation to construct a building, or lease agreements must be notarised
              in their entirety if it is the will of the parties that the various agreements should be
              so closely interlinked that they "stand and fall" together.


   13.        Disputes - How are they dealt with and resolved?

              Under German law the parties have great latitude for dispute resolution.

              If the parties have not made any alternative provision for dispute resolution in the
              contract, disputes will be decided by a court of law. District courts (Landgerichte)
              are competent for dispute values of over EUR 5,000.00 whereas disputes up to
              EUR 5,000.00 are within the competence of the local courts (Amtsgerichte). The
              competent district court regularly depends on the place of residence of the defen-
              dant or, in the case of a legal person, the head office of the defendant’s company.
              If the action concerns the issue of ownership per se or a charge in rem, the matter



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              is referred to the competent court of the district in which the land is located (in
              rem jurisdiction). If the parties of the contract are entrepreneurs or legal persons
              under public law and if exclusive in rem jurisdiction does not apply, they may
              agree on a place of jurisdiction (Prorogation). In other circumstances an agree-
              ment on the place of jurisdiction can only be made if additional criteria are met.

              Alternatively, the parties may agree to settle any or some specified disputes by ar-
              bitration. In this case, all or the specified disputes are not settled in court but by
              an arbitration tribunal. The parties themselves decide on the composition of the
              arbitration tribunal. If they fail to reach an agreement, however, the arbitrator(s)
              may be determined by a third party, generally the head of the local chamber of in-
              dustry and commerce. The decision of the arbitration tribunal has the effect of a
              final and absolute judgment and the only available legal remedy is to file a petition
              to set the decision aside.

              Apart from litigation or arbitration mediation represents a further possibility to
              reach an out-of-court resolution. In practice, however, mediation is not
              common in connection with property transactions.

              When deciding which form of dispute resolution to adopt, the parties should con-
              sider:

              • the place of residence, the legal person (also any non-German company) and
                the choice of law specified in the contract which may restrict the
                options. Particular attention should be paid to the mandatory requirements of
                private international law and potential difficulties in enforcing a decision

              • the time factor – the length of time required for a final decision will depend
                upon the course of action adopted

              • legal fees and court fees – court proceedings are frequently time-consuming
                (particularly if more than one court has to adjudicate on the case) and expen-
                sive. It may cost less to have the dispute resolved by an arbitrator, especially if
                the alternative is likely to be protracted litigation through several courts with
                the involvement of experts that may take several years




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                                               PART C

                       PERMITS, INSURANCE AND ENVIRONMENT

   14.        Permits - What permits are required for the use and occupation of real es-
              tate and are they personal?

              Which permits are required for the use or occupation of real estate depends upon
              whether or not the land is developed.

              Undeveloped land

              Whether and how a piece of land can be developed is governed by public
              planning law. All land can be classified into one of the three development catego-
              ries:

              • Designated development area (§ 30 German Statutory Code on Building –
                Baugesetzbuch (BauGB))

                  If a piece of land falls within the scope of a local development plan, which
                  contains a minimum of specifications on the type and extent of the develop-
                  ment, on the areas which may be developed, and on the local public access ar-
                  eas, the construction project is permitted. This only applies if the project
                  complies with these specifications and the development infrastructure is as-
                  sured.

              • Developed areas without a local development plan (§ 34 BauGB)

                  Development is permitted inside continuous built-up areas for which a local
                  development plan does not exist. However, this only applies if the type and
                  extent of the project, the construction method, and the area which is to be
                  built upon fit into the surrounding area and development infrastructure.
                  Where the character of the area falls within one defined by the Federal Land
                  Utilisation Ordinance (Baunutzungsverordnung (BauNVO)), the proposed
                  development has to meet the criteria required. This ordinance defines the
                  typical categories of land and permits certain types of use in various categories
                  (e.g. residential, commercial, mixed areas etc.).

              • Non-developed area (§ 35 BauGB)

                  If the land is not located within a continuous built-up area and if there is no
                  local development plan, a construction project is only permitted provided that
                  it does not conflict with public interests, that the development infrastructure is
                  assured, and that the construction project is a privileged project within the
                  meaning of § 35 BauGB. Privileged projects are certain types of building pro-
                  jects which generally should be located outside developed areas, such as agri-
                  cultural plants, power plants, etc.

              Given the approval of the responsible local authority, a commercial real estate
              project may be realised by way of a project-specific local development plan. The
              contracts dealing with large-scale projects in particular must ensure the possibility
              of realising the project according to all public law requirements and contain



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              provisions to cover the possibility that the project cannot be realised as
              anticipated.

              Once the plans for a project have been drawn up, a building permit (Baugenehmi-
              gung) is applied for. The requirements for a permit vary according to the Building
              Law of each German federal state (Landesbauordnung). A building permit is nec-
              essary for the erection, demolition, or change in material or use of a building. In
              order to obtain a building permit, an application must first be submitted. It may
              be filed by the owner of the land or third parties if such agreement was reached
              with the owner beforehand.

              If the construction project complies with the local development plans and if it
              does not infringe any public-law requirements, the local authority will issue the
              building permit, possibly attaching additional requirements (in particular relating
              to fire protection, building safety, etc.). The neighbours adjacent to the site will be
              notified of the construction project and given an opportunity to comment. The
              neighbours may file objections regarding the building permit and, under certain
              circumstances, hinder the progress of construction work by taking legal steps.
              However, this is only possible if the building permit infringes regulations specifi-
              cally designed to protect the interests of neighbours, such as the distance between
              buildings and boundaries.

              If the land is intended for commercial purposes, further permits may be neces-
              sary. Of particular practical importance is the permit under the Federal Emission
              Control Act (Bundesimmissionsschutzgesetz).

              Certain projects, such as industrial buildings and shopping malls, additionally re-
              quire an environmental impact assessment before the building permit can be is-
              sued.

              German law distinguishes between rights attached to the land (Realkonzession)
              and rights attached to a specific individual. Where the right is attached to the land,
              it automatically applies to any new owner. Whether the permit is granted as a right
              attached to land depends on the specific type of permit. The building permit is is-
              sued for a specific piece of land and also applies to the new owner of the land. A
              new application is not necessary. In case the permit only applies to a specific indi-
              vidual, a new owner must re-apply for it.

              Developed land

              Regarding developed land, the buyer should ensure that the required permits have
              been obtained and, in particular, that any additional requirements have been ob-
              served. If certain conditions are met, existing buildings may enjoy legal protection
              (Bestandsschutz) even if the building permit is subsequently modified or with-
              drawn, and where this is the case the local authorities cannot force the owner to
              demolish the building.

              Older buildings may be declared historical monuments by the Historical Monu-
              ments Preservation Authority (Denkmalschutzbehörde) according to the Monu-
              ments Preservation Code (Denkmalschutzgesetz). There are stringent require-
              ments for intended alterations to the listed buildings. In urban areas, the local au-




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              thorities may pass preservation and restoration regulations for certain designated
              areas. Construction work on such buildings is subject to a special permission.


   15.        Insurance and risk - What insurance will the parties effect and when does
              the insurance risk pass at the time of sale?

              There is no mandatory insurance for land and / or buildings. The owner bears the
              risk of deterioration or accidental loss of its property. In general, this risk is cov-
              ered by a property insurance policy in the form of an all-risks insurance policy
              which covers the risk of loss and destruction. In addition, there is a third-party in-
              surance policy for house and land owners and water pollution insurance including
              clean-up and demolition costs on a sliding-replacement costs basis. In the case of
              leased property, the insurance premium may be charged to the tenant provided
              there is a contractual clause to that effect.

              If an insurance policy is concluded for a piece of land, the insurance along with
              the title to land passes to the new owner when the land is sold (§ 69 Insurance
              Policy Act – Versicherungsvertragsgesetz). The new owner is entitled to either
              continue the policy or to terminate it within one month after having been entered
              as the new owner into the land register. The insurer is also entitled to choose to
              terminate the policy within one month after having been informed by the seller.
              The insurer must be informed about the change in ownership without undue de-
              lay. Failure to do so may lead to loss of insurance cover.

              If companies own more than one piece of land, they can insure the entire portfo-
              lio under one block policy. In this case, the insurance policies stipulate that if one
              piece of land is sold the insurance for that particular piece expires and the new
              owner has to be informed about the expiry. The new owner must effect a new in-
              surance, to retain full coverage, ideally before the property is transferred.

              As far as the transferability of insurance policies is concerned, a distinction is
              made between property and third-party insurance. Whilst in principle property in-
              surance policies are transferred to the new owner (see above), third-party policies
              generally refer to one person, i.e. a new policy has to be concluded.


   16.        Environmental - What are the common environmental issues?

              Protection of the environment is a very important issue in Germany. According to
              the German Constitution (Grundgesetz (GG)), the state is responsible for the
              protection of the “natural basis of life” (Art. 20 a GG). The following points are
              relevant for contracts:

              Low-energy construction methods

              Every new building must comply with the Energy Saving Act (Energieeinspa-
              rungsgesetz) in conjunction with the new Energy Saving Regulation (Energiee-
              insparverordnung (EnEV)) which became effective on 1 October 2007. The
              EnEV stipulates specific standards concerning the conservation of energy through
              heat insulation and low water consumption which must be observed by property
              developers. Under certain circumstances, existing buildings must be upgraded.



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              This concerns, in particular, buildings with old boilers and buildings which are
              refaced.

              A new requirement stipulated in the EnEV is the Energy Pass (Energieausweis).
              This pass documents the energy needs of a building. It has to be shown to every
              buyer / tenant of an already existing residential building as guidance in advance of
              any contractual agreements. As of 1 July 2008 this applies to residential buildings
              constructed in 1965 or earlier, and as of 1 January 2009 to all existing residential
              buildings. The Energy Pass is also required for non-residential buildings from 1
              July 2009.

              Waste law

              Waste management is an integral part of environmental protection. The main aims
              are firstly to avoid waste and secondly to recycle materials or convert them into
              energy. These two alternatives have clear priority over disposal. Production plants
              must comply with the extensive waste prevention regulations.

              Soil protection

              The issue of “inherited environmental liabilities” arises in virtually all property
              sales.

              Liability for inherited environmental obligations is mainly governed by the Federal
              Soil Conservation Act (Bundesbodenschutzgesetz). Not only must contamination
              be avoided but also precautionary measures must be taken. Soil which has been
              contaminated must be cleaned up. With property transactions, the clean-up issue
              is extremely sensitive since several responsible parties might exist where property
              has frequently changing owners. The principle whereby the party which caused
              the contamination is obliged to remedy the damage does not apply unreservedly in
              this case. The competent authority follows the principle of finding the most effec-
              tive means to avert danger and may decide between a number of potential candi-
              dates (§ 4 BBodSchG). The responsible party may be:

              • the causing party (as far as it can be clearly identified) or its legal successor
                (e.g. the successor in title or a company which has come into existence as a re-
                sult of a merger)

              • the owner of the land registered in the land register or the party having actual
                control (a tenant) even if the party has neither caused nor even been aware of
                the soil contamination

              • a party which is liable for a legal person for commercial or corporate reasons
                (e.g. liable partner / shareholder, under certain circumstances also a director
                or liquidator)

              • a former owner of the land if transfer of title took place after 1 March 1999.
                This liability has serious implications for the seller since it may still be held li-
                able by local authorities many years after the sale. Thus, as a rule, the seller will
                seek an indemnity from the buyer to protect itself against such liability.




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              Where more than one party from the above groups is liable, the party against
              whom the local authority directs the claim does not always have to bear the costs
              of clean-up itself. Under § 24 (2) Federal Soil Conservation Act (Bundesboden-
              schutzgesetz), the party liable may seek recourse from the other parties. The ex-
              tent of the duty to render such recourse depends upon the extent to which the
              danger or the loss was caused primarily by one party. Unless otherwise agreed in
              the contract, a passive offender will generally be able to demand full compensa-
              tion from the party that caused the contamination. In a landmark decision, the
              Federal Constitutional Court has ruled that in individual cases the liability of the
              passive offender may also be restricted to the purchase price received for the land.
              This would be the case if the owner's other assets were not related to the
              contaminated site.

              Since there are a large number of inherited environmental liabilities in Germany
              such as abandoned or disused houses, industrial landfills, ammunition from the
              First and Second World Wars, unofficial dumps, former production sites with soil
              contamination, tank storage and waste water pipes, the risk of inherited environ-
              mental liabilities is frequently an important and sensitive issue in negotiations for
              property transactions. This risk makes a thorough due-diligence review an abso-
              lute necessity. Generally, an initial assessment of the risk can be made by research-
              ing the history of the site (past use of the site, existence of ammunition). If re-
              search suggests there may be inherited environmental liabilities, the next step is to
              make exploratory investigations by taking soil samples. Should they reveal a soil
              contamination, the parties must agree by way of contract on the obligations of
              remedying the contamination and bearing the costs. Similar problems arise with
              asbestos and PCB (polychlorinated biphenyls) contamination in older buildings. It
              may be necessary to ascertain the extent of the contamination by analysing the air
              in the buildings' rooms.

              Contracts for the sale of land generally contain detailed provisions on environ-
              mental liability. This allows the risk in the specific case in question to be assessed
              and to be allocated between the parties concerned.

              Nature preservation

              If the property provides a habitat for rare species of animals or plants it may be
              subject to nature preservation requirements. The property developer may, for ex-
              ample, be barred from building in certain areas or be required to create similar
              preservation areas at another location in substitution.




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                                                    PART D

                                          FINANCE AND TAXES

   17.        Pricing / Valuation - What sets the price / valuation of real estate?

              The purchase price of real estate primarily depends on whether or not the
              property is leased, an undeveloped site, or developed real property. There are
              different methods of valuing real estate depending on the use the property is
              designed for. The market value of real estate can be determined by professional
              property valuers. There are various valuation methods.

              Leased property can be valued according to the “gross rental method” (Er-
              tragswertverfahren). In Germany, this method is defined by statute (§§ 78 et seq.
              Evaluation Statute (Bewertungsgesetz)) and the revenue from rent is incorporated
              into the valuation method. However, more recently the international “discounted
              cash flow method” (Ertragswertmethode) has become more widespread. This
              method establishes the value of real estate by discounting the expected income
              and expenditure, which must be determined regularly. This covers necessary fu-
              ture repairs and maintenance work and the expected loan costs that must be taken
              into account. The purchase price for property with a long-term lease is commonly
              calculated by multiplying the net annual rent with a certain factor, usually between
              11 and 17.

              The market value for land the owner itself intends to use is generally determined
              by the “property value method” (Sachwertverfahren). The calculation is based on
              the usual building costs of all buildings on the land taking into account their
              remaining economic life, building defects and damages, as well as other circum-
              stances affecting the value of the land itself. This calculation of market value can
              also be carried out by an expert committee of the local authority (Gutachterauss-
              chuss). The expert committee can also provide land values as a guide for
              evaluation of the site.

   18.        Financing - How is a real estate acquisition financed?

              There are several options for financing real estate acquisitions:

              • Buyer's own capital or reserves

              • Bank loans - banks generally insist that the buyer is able to provide a certain
                amount of the total sum from its own capital plus land charges as collateral for
                the loan (see also section 19)

              • Credit derivatives - for transactions involving large individual properties or
                real estate portfolios, a common alternative to a conventional bank loan is cer-
                tification in the form of credit derivatives. The use of capital market products
                may provide a cost effective means of financing. In principle, it involves a
                structural transfer of loans, bonds, receivables or credit derivatives to a special
                purpose vehicle which then issues tranches of securities drawn from the port-
                folio. The special purpose vehicle refinances the purchase of the land through
                this issue of securities. Both the buyer and the financing bank, and in some
                cases, also the seller, are stakeholders in this special purpose vehicle. “Syn-



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                  thetic transactions” represent a further option for financing real estate acquisi-
                  tions. The item sold is not the asset itself but only certain risks. Depending on
                  the specific terms of the transaction it may be possible to reap tax benefits by
                  avoiding land transfer tax (Grunderwerbsteuer).


   19.        Security over real estate - How is security over real estate created and pro-
              tected?

              The classic means of providing security for purchase price financing is to encum-
              ber the land with property charges. If a borrower does not fulfil its obligations
              under the loan, the lender may satisfy the debt by realising the property charge,
              for example by auctioning the land. There are three types of property charges:

              • Land charge (Grundschuld) – the most frequent form of property charge in
                real estate financing, because in contrast to the mortgage, the land charge is
                abstract (not accessory), i.e. it is not coupled with the existence of a specific
                claim. Cost adjustments, re-scheduling, assignments and charges can therefore
                be made more readily and at less expense

              • Mortgage (Hypothek) – accessory property charge on land as security for a
                loan. Due to the accessory character the value of the mortgage is identical to
                the value of the claim. Common forms of mortgage are the conventional (cer-
                tificated and uncertified) mortgage (Verkehrshypothek), the security mortgage
                (Sicherungshypothek) and the fixed liability mortgage (Höchstbetragshy-
                pothek). In practice, the significance of the mortgage as a means of finance
                has dropped considerably

              • Annuity charges (Rentenschuld) – encumbrances whereby a certain amount is
                due to the beneficiary at regular intervals. As a form of credit security, annuity
                charges have very little relevance nowadays.

              Since property charges are merely a form of security, the borrower must conclude
              a security agreement with the financing bank. This must state the conditions un-
              der which the bank is obliged to approve cancellation or reduction of the property
              charge.

              Regarding the financing of leased real estate, the financing bank often demands
              the assignment of claims as security, such as a claim to payment of rent.

              Depending on the buyer's credit rating, the bank may claim additional security
              such as a bank guaranty or a comfort letter from a company with a higher credit
              rating. The conditions of the loan may also stipulate that the company must not
              allow its equity level to fall below a certain level during the term of the loan.




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   20.        Taxes and Costs - What are they and who pays them?

              For general information on the type and level of transaction taxes and costs,
              please see our CMS transaction costs guide .

              The purchase of real estate generates land transfer taxes of currently 3.5 % (4.5 %
              in Berlin) of the purchase price. Legally, the buyer is obliged to pay the respective
              amount.

              Value Added Tax (VAT) is due only if the buyer is an entrepreneur and if the real
              estate is directly related to its company. However, the seller can waive its right to
              VAT exemption. The issue of VAT options becomes complex in the case of real
              estate which combines residential and commercial property. Residential areas are
              not covered by the VAT exemption. For the purpose of calculating the tax bur-
              den, the residential area must be calculated as a percentage of the whole. Accord-
              ing to the current legal tax situation, the buyer must pay VAT (at present 19 %) to
              the tax authorities or it can offset using an input tax refund claim. In order to as-
              sert the input tax refund claim, the seller must issue an invoice to the buyer which
              complies with the VAT requirements. The real estate contract itself does not have
              to specify VAT.

              If a real estate agent is involved in the property purchase, the instructing party
              must pay the agent's fees. In exceptional circumstances the agent may charge both
              the buyer and the seller.

              The notarisation costs of the transaction and the land-register entry costs are
              normally borne by the buyer. However, in the contract they can be stipulated dif-
              ferently. In practice, the seller is occasionally willing to assume the notarisation
              costs if it is allowed to select the notary.

              Unless otherwise agreed, fees for lawyers, valuers and other consultants are borne
              by each party individually. The same applies to the costs associated with due dili-
              gence work such as inspecting official registers, copies and extracts from detailed
              local development plans, permit charges, etc.




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                                                   PART A

                                       PARTIES AND INTERESTS

1.        Parties - Who can own real estate?

          Any legal “person” may own real estate. This will include individuals, companies, entities
          established by statute and certain charitable bodies.

          Owners of commercial real estate include private developers, insurance companies, banks and
          other financial institutions, private or public property companies, charities, the government and
          local authorities.

          There are certain restrictions preventing foreign nationals and foreign companies from owning
          real estate. Foreign entities and natural persons are prohibited from acquiring ownership of
          nature preservation areas, although they may acquire ownership title to real property which does
          not qualify as arable land with the permission of the head of the regional administrative office
          (except in the case of inheritance when such permission is not required). The granting or denial
          of such permission is not capable of being appealed.

          No licence is required if a foreign individual or company establishes a Hungarian company,
          which it then uses to acquire real property.

          Foreign entities registered in the European Union or citizens of European Union Member States
          may acquire ownership title to real property not qualifying as arable land on the same conditions
          as Hungarian citizens (i.e. without permission).

          Foreign legal and natural persons may not acquire ownership title to arable land. This rule does
          not apply to citizens of a Member State who wish to settle in Hungary as independent
          agricultural entrepreneurs and have lived in Hungary continuously and legally for at least three
          years and perform an agricultural activity.

2.        Property - What property interests are currently sold?

          Property in Hungary is classified as either freehold or leasehold. Freehold is the best class of
          title and is as near to absolute ownership as is possible at law.

          Freehold is a real right (a right in rem). Technically, leasehold is a personal right (right in
          personam) and does not have the attributes of freehold.

          Property interests which are currently sold in Hungary include:

           • Freehold interests – title of ownership (the best type of ownership)

           • Leases - these are usually concluded for relatively short term (3-5 years) and are personal
             rights. Therefore it occurs only relatively rarely that the lease right is sold with the consent of
             the landlord (if the property is owned by the municipality, the relevant act and the
             municipality’s decree regulates the conditions upon which the municipality is to consent the
             transfer of the lease right, therefore such transfers occur much more often )

           • Options and pre-emption rights – rights to buy or first refusal (these right can not be
             transferred but, in case the beneficiary is a Hungarian legal entity, it may appoint a third party
             for the exercise of these rights, such appointments are often paid for by such third parties)




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          The concept of root of title is not relevant in Hungarian law. Title to a property may, as a
          general rule, only be validly obtained from the current owner. All immovable properties (i.e.
          real estate such as land and buildings) and their respective owners are registered at the relevant
          Land Registry.

          Title does not, therefore, emanate from the sovereign government. It should be noted that, even
          if there is some defect in the chain of transfers of ownership in respect of a property (for
          example, if one of the previous sellers is discovered not to have been the owner of the property),
          such defect may be cured by a lapse of time. Pursuant to Section 121 of Act IV of 1959 on the
          Civil Code (as amended), subject to certain conditions, a person who continuously possesses a
          property as its own for fifteen years becomes the owner of such property. Therefore, if the
          defect occurred more than fifteen years ago, the present owner may claim that, irrespective of
          the previous defective transfer, he has obtained title to the property by continuous (adverse)
          possession. It should also be noted that pursuant to Section 63 (2) of Act CXLI of 1997 on
          Land Registration (as amended) if a buyer obtains the property in good faith for value after
          three years from the date of registration of the seller’s title, the buyer’s title may not be deleted
          from the Land Registry even if it becomes apparent that the seller's title had been registered on
          the basis of an invalid document.

          Ownership extends to buildings on or beneath the land and the airspace above it, but does not
          include “treasures of the earth” or natural resources. A builder may own the freehold title of the
          building constructed on third party land and a land use right for the land beneath the building if
          a court decision or a written agreement with the freehold owner of the land orders as such. This
          is the only case when the ownership of the building and the land beneath could be separated.
          Reference to "land" generally includes the buildings and structures situated upon it, similarly
          "property" includes both land and buildings unless limitations are created.

3.        Ownership - What types of ownership are there?

          Legal ownership of property in Hungary is classed as freehold. Hungarian law does not
          acknowledge any other form of in rem ownership. All other rights will only incorporate parts of
          a freehold title and/or be personal rights. Some rights can be registered at the Land Registry,
          whilst others, such as leases, cannot be registered.

          Leaseholds are typically for a definite period of time, usually for a short term. Indefinite
          leaseholds are usually concluded for municipality owned property and for residential properties.
          The lease agreement must always be in written form.

          A person who has continuously had possession of real estate for 15 years acquires ownership
          (and freehold title) through adverse possession. If an adverse possessor fails to register his title
          in the Land Registry, he will not be entitled to claim acquisition of ownership against any
          person who acquired a freehold title to the property for payment of a consideration, relying
          upon the Land Registry.

          Under the Civil Code, the types of interests in real estate, which are registerable at the Land
          Registry, include the following:

           •      Ownership right (similar to the common law concept of freehold) - an absolute right
                  which includes the right to possess the property; the right to use the property and collect
                  the proceeds from the property; the right to transfer possession or use of the property; the
                  right to encumber or transfer title to the property and the right for the ownership to be
                  protected




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           •       Beneficial usage right (or usufruct right) - the limited right to occupy and use a property
                   owned by another and to collect the proceeds from such property. This right cannot be
                   transferred by the beneficiary; however, another person may be permitted by the
                   beneficiary to exercise this right including the case when the beneficiary lets the property
                   to a tenant. This right must be for a definite term ending, at the latest, at the time of the
                   beneficiary’s death

           •       Right of use- a limited right to use a property owned by another which may be
                   established for a definite period of time. The rules of beneficiary usage right apply,
                   except that:

                           •    the holder of a use right can only use the property not exceeding his own
                                needs and those of his relatives living in the same household and

                           •    the holder of a use right cannot permit another person to use the property

           •       Land use right – the beneficiary of a land use right may construct a building on third
                   party land and become the owner of the superstructure only. He is entitled to use the land
                   beneath the building and collect the proceeds whilst the building stands and at the same
                   time is obliged to bear the burdens of the land. If the ownership of the building is
                   transferred, the new owner has the same right. Pursuant to a Supreme Court case, this
                   right cannot be established upon public roads, squares and parks, which is a significant
                   issue for the owners of underground car parks constructed on public lands in the last few
                   years based on the land use right

           •       Easement - a limited right to use another person's real property by the possessor of
                   another real property to a specific extent. These purposes can include a right of passage
                   or building a cellar etc. As regards the granting of an easement, the regulations of the
                   establishment of beneficial usage right apply. The easement, if based on a contract,
                   should therefore be registered at the Land Registry

          Leases are mere contractual interests, which are not registerable with the Land Registry.

4.        Matters burdening or benefiting real estate - What matters can affect real estate?

          Common matters affecting real estate include:

                Matter                               Effect                              Example

               Easements             Under a typical easement, the              Easements may be created
                                     possessor of the so-called “dominant”      for passage, water supply
                                     plot of land may use access/have           or drainage, for creation of
                                     rights over the so-called “servient”       a basement, for installation
                                     plot for a specific purpose at any time    of pylons, for supporting
                                     or may demand the possessor of the         buildings or for other
                                     servient plot to refrain from              purposes advantageous to
                                     exercising certain rights arising out of   the possessor of the
                                     its title. There are also a number of      dominant plot. Easements
                                     easement rights based on law               based on law include, for
                                                                                example, access rights
                                                                                where the dominant plot is
                                                                                not connected to an
                                                                                adequate public road or, in


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              Matter                             Effect                              Example

                                                                            the case of agricultural
                                                                            lands, the right of delivery
                                                                            and drainage of water if
                                                                            other methods for the
                                                                            purpose of irrigation are
                                                                            impossible or extremely
                                                                            difficult/costly

            Adverse possession   If a person has continuous possession      Occupation of land to
                                 over a real estate for more than 15        which title is not registered
                                 years, they may acquire ownership          at the Land Registry for
                                 through adverse possession                 more than 15 years

            Mortgage             In respect of mortgages, the pledged       The property was acquired
                                 property remains in the possession of      with bank debt and the
                                 the mortgagor, who is entitled to use      mortgagee secures the
                                 and utilize the property; however, the     lender to claims. Usually
                                 mortgagor must maintain such               appears in association with
                                 pledged property in good condition.        prohibitions of transfer and
                                 In the event the mortgagor or a third      encumbrances
                                 person is endangering the condition
                                 of the pledged property, the
                                 beneficiary is entitled to demand that
                                 the endangering act be prohibited
                                 and that an order be issued to take
                                 the necessary measures to eliminate
                                 the danger. Real property may be
                                 pledged as security only in the form
                                 of a mortgage. A mortgage is
                                 considered valid only if contracted in
                                 writing and recorded in the Land
                                 Registry




            Prohibition of       It can be established by agreement or      (See mortgages above)
            transfer and         by law. If established by agreement,
            encumbrance          it may only be stipulated upon the
                                 transfer of title of the property in
                                 order to secure the rights of the seller
                                 or lenders. The right secured by the
                                 prohibition also has to be indicated
                                 in the Land Registry




            Right of use in      The owner of the real property is Conduit right established
            public interest      obliged    to    tolerate  agencies for the benefit of an
                                 authorised by law (e.g. utility, electricity or gas supplier
                                 telephone services) to use the real


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               Matter                                Effect                               Example

                                    property for a period of time, obtain
                                    right of use and restrain ownership
                                    rights to the extent that is necessary
                                    for the performance of their
                                    professional tasks. In these cases, the
                                    owner is entitled to compensation
                                    proportionate to the extent of the
                                    restraint

              Sale with title       The seller is entitled to retain the title   It is commonly included in
              retention             of ownership until the purchase price        contracts for the sale of
                                    is fully paid. During this time, neither     property and it in practice
                                    the buyer nor the seller can sell or         establishes prohibition of
                                    encumber the property                        transfer and encumbrance

              Pre-emption rights    Pre-emption rights may be based on           Pre-emption rights based
                                    law or on agreement; the pre-emption         on law include:
                                    right established by law precedes the        - in case of historically or
                                    latter and is not required to be             architecturally important
                                    registered at the land registry. If          (listed) buildings, certain
                                    based on agreement it has to be in           state agencies have pre-
                                    writing. If the pre-emption right is         emption right;
                                    registered in the Land Registry or if it     - the co-owners of
                                    is based on law, then the right is           common ownership have
                                    effective against everybody who              pre-emption rights on the
                                    acquires any right to the property. If       other parts of the common
                                    the sale-and-purchase agreement is           ownership;
                                    concluded in disregard of the pre-           - in case of arable land or
                                    emption right, then the agreement is         farms, the lessee of a
                                    not effective. Transfer of a pre-            leasehold,      the    local
                                    emption right is null and void by law,       neighbour, other local
                                    but a company may appoint a third            residents and the State of
                                    party to exercises such right.               Hungary, in this order;
                                                                                 - owners in a
                                                                                 condominium for          the
                                                                                 common areas if recorded
                                                                                 in the deed of foundation



5.        Occupation of real estate - Who may occupy real estate?

          Real estate is usually occupied by one of the following categories of person:

          •           Owners – those persons with a freehold interest in the property

          •           Tenants – those persons with a lease of the property or part of it. It is possible to
                      create subleases in relation to the same property, creating a chain of interests.
                      However, such subleasing is usually subject to the prior written consent of the owner
                      and the sublease automatically ceases when the head lease is terminated or expires



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          •          Persons claiming ownership by adverse possession – where they have occupied the
                     property for a long period of time (at least 15 years) without having any legal rights to
                     do so, but without challenge by the owner of any freehold or leasehold interest

          •          Beneficiary usage right (usufruct) - a contractual right of occupation given to persons
                     for a definite period of time. The beneficiary usage right ceases at the latest when the
                     usufructuary dies. Beneficiary usage right is established when registered in the Land
                     Registry. If beneficiary usage right is created by virtue of law, by a court decision or
                     administrative resolution and it is unregistered, then it is only enforceable against a
                     mala fide acquirer of the real property or against an acquirer who acquired the
                     property without consideration

          •          Right of use – is in general the same as the beneficiary usage right but with the
                     limitation that the beneficiary may only use it for its own and his/her family’s
                     purposes

          •          Right of use in public interest - the freehold title owner is obliged to tolerate agencies
                     authorised by law (i.e.: utility, telephone services, etc.) to use the real property for a
                     period of time, obtain right of use and restrain ownership rights to the extent that is
                     necessary for the performance of their professional tasks. In these cases, the owner is
                     entitled to compensation proportionate to the extent of restraint

          •          Land use right – based on the land use right the owner of a building constructed on a
                     plot owned by a third party may use the land beneath the building until the building
                     ceases to exist

          •          Easement – may be granted to and held by the possessor of real property over another
                     person's real property, to use such property to a specific extent or to demand the
                     possessor of the easement to refrain from what would otherwise be rightful conduct of
                     his entitlement. An easement is registered in the Land Registry according to the rules
                     of registering a beneficial usage right. The court is entitled to cancel or suspend an
                     easement if it is not necessary for the proper use of the real property of the holder of
                     the easement. An easement is terminated if the holder of the easement, despite the
                     possibility of being able to exercise the easement, does not exercise the right for ten
                     years or lets others prevent him from practicing the easement for ten years


          Please also see our CMS Lease Guide

6.        Brokers - What is the broker's role?

          Brokers in Hungary, also referred to as surveyors or agents, generally fall into 6 categories:

          Investment
          Valuation
          Consulting and analysis
          Buildings
          Management
          Rent Review

          They are employed by any party to any transaction involving real estate. Their role may include
          any of the following tasks:



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          •          Managing real estate sales projects: provision of marketing and realty functions,
                     representing the owner, constructor or investor of the real estate. Full-scale project
                     implementation from market research through marketing design to the preparation of
                     contracts to be established with buyers or lessors

          •          Finding real estate: finding appropriate real estate and determining optimum
                     conditions for leasing or sales, including managing the move-in process, negotiating
                     rent reviews of existing properties

          •          Appraisal services: accurate and objective appraisal of real estate portfolios, individual
                     estates and other assets (machinery, equipment, vehicles, stocks etc.) for marketing,
                     accounting, credit coverage or any other purposes. Perform appraisals appertaining to
                     corporate transactions or investment as well as other related tasks (e.g. asset balance
                     production)

          •          Consulting and analysis: project evaluation, market analyses, feasibility studies,
                     investment and portfolio management consulting in all areas of real estate trading (e.g.
                     office market, residential real estate market, industrial estates and warehouses,
                     commercial estates)

          •          Transaction documentation: acting for any party to a transaction drafting and
                     negotiating heads of terms, preparing heads of terms for documenting and liasing with
                     lawyers

          •          Management: day-to-day management of property owned by clients, including
                     managing maintenance programmes and landlord and tenant work, project
                     management of development of new buildings and refurbishments

          Brokers available in the market range from those employed by major international organisations
          to specialised advisers providing advice on a more restricted basis.

7.        Employees - What employment issues affect real estate acquisitions?

          The main employment issues, which may arise in connection with the acquisition of real estate,
          include the transfer of undertakings and redundancies, as well as variations to employment
          contracts due to a change to the conditions of employment.

          Business transfer

          Pursuant to Act XXII of 1992 on the Labour Code, as amended, of the Republic of Hungary,
          employees are entitled to special protection if an undertaking or business (or an independent
          unit of the material and non-material assets of an employer) is transferred from one party to
          another. If the property being transferred can be classified as a “core asset” to the business of
          the company, then the sale of that property may trigger business transfer rules. For example,
          business transfer rules may be triggered as a result of the sale of an office building, mall or other
          type of real estate which has its own management and security or maintenance staff.

          The main effects of the business transfer rules regarding the protection of employees are as
          follows:

          •          the rights and obligations arising from an employment relationship automatically
                     transfer from the transferor (or legal predecessor) to the transferee (or legal successor).
                     The transferor and the transferee have joint and several liability in respect of those

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                     claims which are enforced within one year after the transfer of undertakings and which
                     are in connection with debts and damages incurred prior to the date of the transfer

          •          if an employee is dismissed (by redundancy based ordinary termination) by the
                     transferee within one year of the date of the transfer, the transferor is liable as a surety
                     for the employee's severance payments, if it has a majority control in the transferee

          •          an employee's seniority is deemed to be continuous

          •          the fact of the transfer of undertakings is not, by itself, an acceptable reason for the
                     ordinary termination of an employment relationship and

          •          the representatives of the recognised trade union or the works council or the
                     delegation of the employees must be informed in advance regarding the details of the
                     transfer and consulted on other planned measures that may affect the employees
                     covered by the transfer

          Variation of contract


          A business transfer does not necessitate the amendment of the affected employees' employment
          agreements. The employee's employment is deemed to be continuous with the same conditions.
          Nevertheless, it is advisable to inform the employees in writing about the succession and
          specifying at least the following matters:

          •          the person vested with employer's rights after the succession

          •          clarification as to whether the place of work has changed and general information on
                     work schedules and other modified elements, if any, which can be determined by the
                     employer in its own discretion

          •          the allowances of the employees

          •          confirmation that other conditions of the employment relationship remain unchanged



          Redundancy


          The business transfer is not, by itself, an acceptable reason for dismissing employees. However,
          in reality, this does not offer much protection to employees. Commentaries on the Labour Code
          suggest that dismissals associated with business transfers may be justified if they are for
          ‘operational reasons’. An operational reason is one that is related to an economic, technical or
          organisational issue with regard to an employer.




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                                                 PART B

                                     PROCEDURE AND TERMS

8.        Procedure - What are the steps in a sale and purchase transaction?

          Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by
          the brokers on behalf of the seller and the buyer or by the parties themselves. The heads of
          terms (or memorandum of understanding) set out the principal terms agreed between the parties
          and are generally expressed to be “subject to contract” and are not legally binding. They form
          the basis of the documents to be drafted by the lawyers. Due care needs to be used in signing
          such heads of terms or memorandum of understandings to avoid them being construed as a
          preliminary agreement enforceable as a binding commitment to enter into the final agreement.

          Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s
          lawyers will usually collate all information relating to the property and send it to the buyer’s
          lawyers together with a draft sale and purchase agreement (contract). The form of the sale and
          purchase agreement will vary according to whether the property being sold is under construction
          or already built and the extent to which leases to tenants have already been granted. The
          accompanying finance documents are also drafted at this time.

          The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the
          same time will undertake general due diligence investigations (see section 10).

          Once the sale agreement is in an agreed form, the parties will sign the agreement and the buyer's
          lawyer will countersign it and will then be regarded as legally completed.

          If any of the parties is a foreign registered company, generally the other party will require a
          company extract from the foreign party confirming that the company is properly incorporated,
          has power to sell and has carried out appropriate authorisation procedures.

          Completion may take place at the same time as signing, depending on the acquisition timetable.
          Where the purchase is made with borrowed finance, a charge over the property will be
          completed at the same time. The lender of the finance may instruct its own lawyers to carry out
          due diligence procedures on its behalf and negotiate security documentation.

          Following completion, the buyer’s lawyers need to deal with registration of the transfer
          documents (and any charging documents) at the Land Registry and payment of stamp duty
          which is assessed on the price paid for the property.

9.        Other common contract terms - What other provisions does a real estate sale contract
          commonly contain?

          An agreement for the sale and purchase of land must be in writing, must contain or clearly refer
          to all main terms and conditions and must be in a form in which both parties have signed and
          the buyer's lawyer has countersigned.

          It is common for the sale and purchase agreement to provide for a deposit (in Hungarian
          foglaló) of around 10% of the purchase price on exchange of agreements, where there is to be a
          gap between exchange and completion. The seller’s or buyer's lawyers usually hold the deposit
          as an escrow agent. In this case the parties enter into a separate escrow agreement in
          accordance with the terms and conditions set out in the sale and purchase agreement.




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          Because the buyer has the opportunity of conducting a full title investigation or due diligence
          before signing the agreement, the buyer is usually prohibited from subsequently making any
          objection to any matter of title that was disclosed in the due diligence documents.

          Where timing is crucial to the agreement, there may be a provision expressly stating the date
          after which the parties will be in breach and the agreement will be terminated. This means that
          any breach of the time limits in the agreement will be deemed to be a repudiatory breach,
          subject to a claim for damages. Normally, time is not of the essence and may only be made so
          by one party to the agreement serving notice on the others to make time of the essence.

          Where there are matters of title affecting the property, such as pending deletion of prohibition of
          transfer and encumbrance, the buyer may require reciprocal obligations from the seller and an
          indemnity in respect of any liability the seller may still have following completion of the
          transaction.

          Provisions relating to value added tax and transfer duty will usually be included to regulate the
          parties’ obligations.

          Contracts for sale of property subject to occupational interests, such as leases, will include
          clauses to cover ongoing management matters, and provide for the apportionment of
          occupational income and outgoings on completion of the transfer of ownership in the property.

          If the property being sold is in the course of construction, the contract for sale will incorporate
          provisions dealing with the obligations of the seller to construct in accordance with an agreed
          specification and to provide to the buyer separate deeds of warranty from the building
          contractor, and persons such as the architect, in order to safeguard the buyer against defective
          design or workmanship.

          Where there are conditions to be met for the completion of the contract, such as building
          permits, communal services, transformation of a plot, deletion of a restriction against sale and
          purchase, the parties set out liabilities and timelines for the fulfilment of such conditions.

10.       Due Diligence - What investigations does the buyer normally make?

          The prudent buyer will carry out a survey of the building and, if required, soil and geological
          investigations, plant and machinery tests and environmental investigations. The buyer shall also
          require appropriate information on the following related matters: charges, occupational tenants,
          lease agreement(s) and licences, insurance, building contracts, disputes and claims, easements
          and/or covenants.

          The buyer’s lawyers will consider the entries on the property sheets, the marginal notes and,
          where relevant, historic title documents. Where the property is leasehold, or subject to
          leasehold or other occupational interests, the terms of the relevant occupational documents need
          to be considered carefully to ensure that they are not contrary to the buyer’s intentions for the
          property.

          The buyer’s lawyers will commence their own due diligence, which will include the conducting
          of various searches to check the position regarding municipal and zoning consents,
          environmental matters, utilities serving the property, easements, boundaries of the property,
          financial encumbrances and valid site licences. Where the seller is a company, the buyer’s
          lawyers will also conduct searches against the seller’s name at the Court of Registration to
          ascertain whether the company is solvent and therefore able to dispose of its assets freely.
          Where the search result refers to security, the buyer’s lawyers will ask for confirmation that


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          such matters do not encumber the property and that no third party consents are required for the
          transaction to proceed.

          The buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of the seller’s
          lawyers to obtain information regarding a large number of practical matters, which may affect
          the property and ask any relevant questions in relation to the title to the property. The seller is
          under the general obligation to inform the buyer about the material features of the property
          being sold (including but not limited to all rights and encumbrances) and to deliver all relevant
          documents. In most cases the parties agree that the properties are sold as is, with no expressed
          or implied guarantee of quality or condition. A seller must not knowingly or negligently
          mislead a buyer and the seller’s replies to the due diligence questionnaire may be actionable if
          wrong or misleading.

11.       Terms implied by law - What provisions are implied by Statute, Code or otherwise?

          The Civil Code provides that the seller warrants that the property is free of claims,
          encumbrances and lawsuits and this is often repeated expressly in the sale and purchase
          agreement. If a third person has such a right over the property that restrains the buyer from the
          acquisition of freehold title, the buyer can rescind the agreement and claim damages. If the
          seller acted in good faith he only has to pay for damages arising from concluding the agreement.
          The seller always guarantees that the real property is free from mortgages, irrespective of
          whether the buyer knew about them or not.

          The seller warrants furthermore that the property complies with all attributes set out in the sale
          and purchase agreement or legal regulations at the time of contract. If the purchaser was aware
          of the defect of the property at the time of contract, the seller is not liable for such defects.
          These warranty rights may be exercised by the purchaser within 5 or 10 years as regulated by
          law in respect of the various elements of a building.

          If a pre-emption right (which must be in writing) is established for someone, then the owner of
          the property must ordinarily disclose any offer for the property to the owner of the pre-emption
          right. The pre-emption right can be established by contract or by law. If the owner of the pre-
          emption right accepts the offer, the agreement for sale becomes effective. If a general period of
          acceptance passes without any notification of acceptance or rejection from the owner of the pre-
          emption right, the owner of the property is free to sell the property under the same or better
          terms. If the pre-emption right is registered at the Land Registry, it takes effect against
          everybody who acquires any right to the property following the registration. Transfer of a pre-
          emption right is null and void by law. If the owner of such right is a company then the company
          may appoint the person who may exercise the pre-emption right. A pre-emption right
          established by law always takes precedence over a pre-emption right established by agreement.

          Rights of re-purchase can be included in the original sale and purchase agreement. The seller
          can exercise this right by declaring an intention to re-purchase. The period for the right of re-
          purchase can be set up to a maximum of five years; any provision setting a longer time period
          makes such a provision null and void. The basic re-purchase price is the original purchase price,
          but the original buyer may seek compensation for any added value, whilst the re-purchaser may
          seek to deduct any decrease in value.

          If the owner of real property grants an option, then the beneficiary may purchase the property by
          his unilateral declaration. An option agreement is valid only if in writing and provided that it
          also specifies the object of the transaction and the selling price. The "five year" rule is also
          applicable here. If, however, the option is granted for an indefinite period of time, it ceases after
          six months and any contravening provision is null and void.


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12.       Registration and Notarisation of real estate - What are the basic requirements?

          The land registries record the most important data and rights and encumbrances required to be
          registered relating to each property in Hungary. It is now possible to get access to the land
          registry data for all properties in Hungary by an online system to which most of the law firms
          and public notaries have access.

          Local Land Registries operate in every city (in Budapest there are three district land registries),
          county land registries operate in each of the nineteen counties of Hungary, and the Metropolitan
          Land Registry operates in Budapest. The local Land Registries deal with property issues at first
          instance and the county Land Registries deal with property matters at second instance.
          Pursuant to the Land Registration Act, a Land Registry should complete the registration of an
          entry (e.g. a transfer of title) in twenty two working days.

          It is in the interest of a property purchaser to lodge the transfer documents with the relevant
          Land Registry as soon as possible after signature (but in any event within the thirty day
          mandatory deadline for filing). The filing with the relevant Land Registry results in a so-called
          marginal note being put on the register of the property within twenty-four hours of filing. This
          marginal note – the indication of a pending application by its reference file number – establishes
          a priority date for the application. Therefore, subsequent submissions, as a rule, cannot by-pass
          a previous submission (clearly indicated by a lower figure for its reference file number).

          The property-related rights, and the holders of such, which may be recorded in real estate
          registers are:

           •      ownership rights, and, in respect of state-owned or municipality-owned real estate, asset
                  management rights

           •      permanent rights of use for members of housing co-operatives

           •      land use on the basis of agreement or court decision

           •      usufruct and the right of use

           •      easement rights

           •      permanent geodetic markings, land survey pilot areas, rights of use for the placement of
                  power supply equipment, cable rights, water and mining easement rights, and easement
                  rights and utilisation rights in the public interest as prescribed by law

           •      rights of first refusal and rights of re-purchase and option

           •      rights of support and life annuity

           •      mortgages (independent liens) and

           •      rights of execution

          There is no requirement for notarisation of title in Hungary. Contracts for the disposal and
          acquisition of interests in real estate are signed by or on behalf of the parties and countersigned
          by a lawyer. However, if any of the contracting parties is a citizen of a foreign country and
          wishes to sign the contract outside Hungary, authentication of the document is required. This
          means the formality by which the Hungarian diplomatic or consular agents certify the


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          authenticity of the signature, the capacity in which the person signing the document has acted
          and, where appropriate, the identity of the seal or stamp which is affixed to the document. Rules
          of authentication also apply to powers of attorney executed outside Hungary.

          In accordance with the Hague Convention (5 October 1961), each signatory state is to exempt
          from authentication documents to which the Convention applies and which have to be produced
          (i.e. used) in its territory. The contracting states designate, by reference to their official
          function, the authorities who are authorised to issue the certificate, called an “Apostille”. The
          Apostille certificate can be issued at the request of the person who has signed the document or
          that of the bearer.


13.       Disputes - How are they dealt with and resolved?

          The most common disputes relate to land boundaries, co-ownership, use rights within a
          condominium, lease disputes and inheritance.

          A lawsuit is especially time consuming when there is a dispute involving a claim to adverse
          possession of part of the land by a third party including the owner of a neighbouring plot. This
          is because, in such a case, the court must not render a judgment without the results of a plot
          division procedure performed by the land registry. The plot division procedure will determine
          whether the disputed land is allowed to be separated from the part of the land in respect of
          which adverse possession is not claimed or whether the disputed land could be merged with the
          parcel of the neighbour if it was the neighbour who used the land adversely.

          In general, the Civil Code entitles any of the co-owners to demand termination of co-ownership
          (or transformation of the co-ownership into a condominium). The co-ownership of a property
          may be terminated in the following ways, namely:

          •       by physical separation by division of the plot, if this is permissible by the land registry in
                  a plot division procedure

          •       if division is not permissible, the court may designate a co-owner to buy the interest of
                  the other co-owner (in theory even if against the intention of such designated buyer) for a
                  price established by the court based on an expert opinion on the market value

          •       failing such enforced purchase, the court may order the sale of the property by auction at
                  a pre-established minimum price or

          •       it may be possible to convert the jointly owned property into a condominium. In this
                  case, the court may choose this solution in a manner whereby the judgment includes the
                  founding document for the condominium.

          The court may not order such method of terminating co-ownership where all the owners object

          In other cases, the law permits considerable freedom of contracting and the parties can insert
          into the contract which law they want the contract to be governed by, in which jurisdiction they
          would prefer any dispute to be resolved and what method of dispute resolution they would
          prefer.

          Methods of dispute resolution could include court proceedings, arbitration (whether domestic or
          international) and/or reference to an independent expert or a mediation process. This freedom
          of contract is not absolute, however, and can in certain circumstances be regulated by statute,


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          e.g. Hungarian courts have exclusive jurisdiction in cases pertaining to in rem rights regarding
          real estate that is located in Hungary and also in proceedings concerning lease and usufruct
          agreements.

          The choices should be stated expressly in the contract. If it can be avoided, these matters should
          not be left to the courts to decide, since the uncertainty of law and jurisdiction shopping will be
          costly to all parties and can mean that any dispute is likely to take a very long time to resolve.




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                                                 PART C

                                PERMITS INSURANCE AND ENVIRONMENT

14.       Permits - What permits are required for the use and occupation of real estate and are they
          personal?

          There are no planning permissions under Hungarian law, but land and property is regulated by a
          zoning map and local building code, which are binding decrees of the local government. The
          national zoning requirements and building rules are regulated by national laws and
          governmental decrees.

          If a developer plans to develop an area for a different use to the one regulated by the relevant
          decrees, then it can initiate negotiations with the local government for changing the status of the
          area. The results of the negotiations are then recorded in an urban development agreement. In
          such agreements, it is common for the developer to grant some benefits to the local government,
          such as the construction of roads or other necessary infrastructure in consideration of which the
          municipality undertakes to initiate the procedure for the change of the zoning regulation.
          However, the local municipality cannot enter into a binding obligation to change the content of
          the zoning as it would limit the legislative power of the general assembly of the municipality,
          which would be in breach of the constitution.

          Regarding construction works, some require no permit, others require notification to a relevant
          building authority, and others require a permit of the building authority. Permits may be
          preliminary building permits or building permits. A preliminary building permit can be obtained
          in order to clarify certain requirements in connection with cultural heritage or ecological
          protection, for example, but it does not give a right to actually construct.

          The deadline for the issuance of building permits varies, but even for the most complicated
          construction it cannot exceed 45 working days. For simpler construction works, the deadline is
          between 8 and 22 working days.

          Developments that are likely to cause significant environmental impact require an
          environmental impact study to be submitted along with the application for a building permit,
          explaining the likely environmental impact of the development.

          Generally, a building permit will be required for the construction of a newly-built property. The
          refurbishment of an existing building requires notification if the roof or the load bearing
          structure of the building needs to be changed, whilst in other cases refurbishment usually has no
          administrative requirements. Stricter rules normally apply when the proposed work relates to
          historically or architecturally important (listed) buildings.

          As for occupancy, the procedure is also divided: in relation to simpler works a notification is
          sufficient, whilst for others a permit is required. The general deadline for issuing an occupancy
          permit is 22 working days.

          The system is a one-stop shop system under which the client (constructor, developer, builder,
          etc.) is in contact with only one authority (the building authority) which handles all aspects of
          the procedure including the contacting of other specialised authorities.

15.       Insurance and Risk - What insurance will the parties effect and when does the insurance
          risk pass at the time of sale?




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          Only persons who are interested in protecting a property or those who conclude contracts on
          behalf of an interested person are entitled to conclude property insurance contracts.

          Generally it is the building, and not the land, which is insured for the value of the reinstatement
          cost.

          The insuring party should have a fully comprehensive buildings insurance policy to protect the
          structure and fixtures and fittings of the property in the event of damage or destruction (by any
          of a comprehensive list of insured risks, such as storm, lightning, fire and water damage). The
          policy may also cover additional special heads of cover such as subsidence, heave, earthquake
          and, where available, terrorism.

          Insurance policies may either comprise a single policy for one particular property or a block
          policy designed to cover a portfolio of properties.

          Occupiers of a property (including tenants) usually have separate policies to cover the contents
          of the property belonging to them, especially if the property includes costly plant and machinery
          and, in some cases, certain parts of the property for which the occupier is contractually
          responsible. In case of leases the landlords being the owners of the property have property
          insurance in respect of the whole building.

          Insurance policies are usually not transferred on sale but the buyer concludes a completely new
          insurance contract. Where a sale is taking place, timing of the transfer of risk is normally
          prescribed by the sale agreement and is generally linked to the transfer of possession.


16.       Environmental - What are the common environmental issues?

          Real estate may be contaminated as a result of current and/or former uses. Primary legal
          responsibility follows the “polluter pays” principle: the person who spilled, released or
          discharged a substance will normally be liable for any ill-effects it causes. Nevertheless,
          Hungarian law always presumes that the current owner and the user of the property are jointly
          liable for pollution unless the owner names the responsible polluter. If the company causing
          environmental damage ceases to exist, its executive officers and voting members are jointly and
          severally liable without limitation until evidencing that they did not take part in the decision
          making. If someone took over such responsibility for pollution, that person will be responsible.
          The same is true if the sale and purchase agreement provides that the property is purchased "as
          is" and there is no other warranty or valid exclusion of liability for environmental pollution.

          During pre-purchase due diligence, the buyer's lawyers will check the Land Registry as to
          whether permanent environmental damage is registered and will also check with the competent
          environmental authority for any ongoing environmental cases. Pursuant to the Government
          Decree 219/2004 (V11.21) any person acquiring the property affected by contamination is
          required to clean up the property.

          If development is proposed, then planning permission may be made conditional upon the proper
          investigation and remediation, if necessary, of potential contamination. If the planned
          development is of a type considered potentially detrimental to the environment, the application
          for planning permission may need to be supported by an assessment of the development’s likely
          future environmental impact.

          The presence of protected species may impede development by increasing costs, particularly
          through delay.


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          Those who have control of places of work have a duty to assess the risk of asbestos being
          present in the fabric of the building and to manage the human health risks posed by any asbestos
          found.

          Acquisition due diligence may involve the appointment of environmental consultants to
          consider documentary information and to carry out a site visit (Phase I). If considered
          necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to
          identify potential problems early so that there can be negotiation on price, the need for and
          scope of any remediation and/or the need to put in place protection in respect of any existing
          contamination related losses that may arise in the future. Such protection may take a number of
          forms, including obligations to remediate any contamination discovered post-acquisition,
          indemnities in respect of first party loss or third party claims, or specialist historic liabilities
          environment insurance to cover any of these risks.




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                                                      PART D

                                             FINANCE AND TAXES

17.       Pricing/Valuation - What sets the price/valuation of real estate?

          There is no legal requirement for an accurate appraisal of a property's value or condition to be
          undertaken. However, extreme inaccuracies are covered by the Civil Code which prohibits
          contracts in which (i) at the time of signature, there is an "unreasonable and extensive
          difference" between the value of the thing sold and the consideration due, without either party
          having the intention of giving a gift or (ii) one contracting party has stipulated an unreasonably
          disproportionate advantage by exploiting the other party's situation.

          In the case of (i) above, the injured party is allowed to challenge the contract within one year of
          its signature.

          In the case of (ii) above, the contract is deemed to constitute usury and is potentially null and
          void. Unless otherwise provided by law, anybody is entitled to apply for the contract to be
          annulled without a time limit and no special procedure is required.

          Finally, both the various Tax Offices and the Stamp Duty Offices have a right to challenge and
          reassess the value of a property, if the value set out in a sale and purchase agreement (on the
          basis of which tax and stamp duty is calculated) appears unreasonably high or low.

          The main areas of activity of appraisers and property brokers are regulated by the Act No.
          LXXVIII of 1993 on the lease and sale of flats and premises.

          Both companies and individuals may only act as appraisers if they have a clean criminal record
          and have a certificate of professional expertise (for individuals) or they have at least one
          member/employee who has such a certificate (for companies). An individual may only carry out
          appraisals if they are entered in the Register of Estate Agents. The entry is automatic if the
          above two conditions are met.

          Currently, three methods of appraisal are used to determine the value and condition of the
          property, being the Cost Method, the Comparison Method and the Income Method:

          Cost Method

          The value determined by the Cost Method is the cost required to replace or reproduce the
          property at the time of the appraisal, following the deduction of the amortisation costs plus the
          market value of the plot. This method is used only if there is no other alternative to appraise the
          property.

          Comparison Method

          The value determined by using the Comparison Method is the figure established from data of
          other properties sold in the recent past. The comparison must always be performed with the
          property being appraised. This is the most commonly used method.

          Income Method

          The main focus of this approach is the income-producing capability of the property. This
          approach provides an objective estimation of the price that a cautious investor would pay for the


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          property on the basis of the net income producing capability. The Income Method applies to a
          property which has a measurable income or a relatively high value. .

          The State Supervising Authority of Financial Organisations (PSZÁF) also publishes certain
          appraisal methods which Hungarian banks in particular may request appraisers to follow.

18.       Financing - How is a real estate acquisition financed?

          Until 1 January 2010, the main feature of real estate financing in Hungary was that the financing
          was secured by the acquisition of shares (so-called “business quotas”) of the special purpose
          vehicle holding the real estate, as opposed to the acquisition of the real estate itself. This was
          because an overwhelming majority of Hungarian property acquisitions were done through
          corporate acquisitions. The properties were held in a special purpose vehicle set up in the form
          of a limited liability company (in Hungary: Kft.). The reason for this was that if real estate
          itself was transferred, then a 10% stamp duty was payable, whereas in the case of the transfer
          of a company (in which there was real estate), only a nominal court registration fee was
          payable.

          From 1 January 2010, the same stamp duty is payable in case of the transfer of real estate and
          the transfer of the business quota of a Company owning real estate. Complicated, tax driven
          structures involving cross-border merger of companies and the finance possibilities relating to
          them are currently under consideration by developers and bankers.

          Under the traditional acquisition method, the registration of a transfer of a business quota is
          done by the competent court of registration that will examine all the underlying transfer
          documents and therefore registration of the new owner may take some time. The courts of
          registration usually take approximately 15 days, but this is variable. Therefore, the usual
          problem with property financing in Hungary is that the financing bank is required to disburse
          the purchase price of the business quotas (property) at a time when the buyer of the property is
          not yet registered as the owner of the SPV and thereby it is not the legal owner of the property.
          As a consequence, the financing banks may set up an escrow mechanism, whereby the purchase
          price is paid out of the escrow as and when the registration of the buyer as the new owner of the
          SPV occurs. Another solution is for the purchase price for the property to be paid only when
          the registration of the transfer of the SPV's business quotas to the buyer has occurred. It may
          facilitate the process if the SPV’s articles of association are based on, or converted into, the
          statutory sample form. In this case the deadline for the Court of Registration to register the
          change of the transfer of the business quota is one working hour (in practice, it takes a little
          longer, but usually not longer than one working day).

          A typical security package will involve the granting of a mortgage of the real estate together
          with an option over real estate, an account pledge, and supporting floating charge over all the
          other assets of the SPV. The income stream generated by the property will be assigned and, in
          addition to that, also pledged for the benefit of the lender. It is usual to pledge the business
          quotas of the SPV and to create an option over such business quotas.

          It should be noted that options may only be registered for 5 years in Hungary - thereafter such
          options will expire. However, there is a mechanism whereby the expiring mortgages may be
          renewed.

          The SPV's should not be set up in the form of a company limited by shares (in Hungary: Nyrt.,
          or Zrt.) because this type of company falls within the scope of the financial assistance
          regulations and therefore the giving of security to the lender would be restricted.




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19.       Security over real estate - How is security over real estate created and protected?

          Under Hungarian law real property may be pledged as security only in the form of a mortgage.
          Mortgages may only be over the entire property that is registered in the real estate register or
          over the entire share of the mortgagor to a property being owned in common ownership.

          A mortgage is considered valid only if contracted in writing and recorded in the land registry.
          The mortgage agreement creating the mortgage, although not compulsory, is usually executed in
          the form of a notarial deed. The reason for this is to provide the mortgagee with easier
          enforcement against the mortgagor in the event of default.

          Upon the filing of a registration claim, the land registry should complete registration of the
          entry within 22 working days. Therefore, in practice, it is prudent for the mortgagee to submit
          the mortgage agreement to the relevant land registry as soon as possible after such agreement
          has been signed and from the date of such submission the land registry extract will contain a so-
          called “marginal note” showing that such document was lodged. Such marginal note is put on
          the register of the property within twenty-four hours of filing. This marginal note – the
          indication of a pending application by its reference file number – establishes a priority date for
          the application. Therefore, subsequent submissions, as a rule, cannot by-pass a previous
          submission.

          In respect of mortgages, the pledged property remains in the possession of the mortgagor, who
          is entitled to use and utilize the property. However, the mortgagor must maintain such pledged
          property in good condition. In the event that the mortgagor, or a third person, endangers the
          condition of the pledged property, the mortgagee is entitled to demand that the endangering act
          be prohibited and that an order be issued to take the necessary measures to eliminate the danger.
          If any deterioration in the condition of the pledged property jeopardizes the satisfaction of a
          claim, the mortgagee may demand replacement of the pledged property or security that
          corresponds to the degree of endangerment. Should the mortgagor fail to comply with request of
          the mortgagee within due time, the lien holder may enforce his right to satisfaction.


20.       Taxes and Costs - What are they and who pays them?

          In Hungary, there are various taxes associated with real estate, including personal income tax
          (PIT), corporate income tax (CIT), value added tax (VAT), transfer duty, wealth tax and certain
          local taxes. Whether a tax liability arises depends on a number of factors including the legal
          standing of the purchaser, the location of the real estate, the nature of the real estate. The most
          important aspects of these taxes are briefly summarised below.

          CIT is normally paid by companies and various other entities on any gains derived from the sale
          of real estate, at a current rate of 19%. As there is no specific capital gains tax in Hungary, gains
          from the sale of real estate are included in the general tax base of a company and are taxed as
          any other income. As of 1 January 2010, foreign corporate shareholders deriving capital gains
          from a “real estate company” are subject to CIT, provided that they are resident in a country in
          respect of which the relevant double tax treaty allows Hungary to tax the capital gains (or with
          which Hungary has no treaty). So far, Hungary has concluded double tax treaties with 65
          countries, of which 21 treaties (eg. those with Ireland, France) contain the so-called real estate
          clause allowing the taxation of capital gains from a “real estate company”. These are
          companies, the assets of which are predominantly comprised of real estate in Hungary. Note
          that the details of these rules contain a lot of pitfalls.




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          CIT is not only levied on domestic entities but also on permanent establishments of foreign
          entities. It should be noted in this respect that according to the Act on Corporate Income Tax
          and Dividend Tax, of the Republic of Hungary, the utilisation of real estate located in Hungary
          does in itself constitute a permanent establishment. Furthermore, the possibility to tax foreign
          companies on any such income is usually also provided for in Hungary's many treaties on the
          avoidance of double taxation. Consequently, any income derived from the utilisation of real
          estate located in Hungary is taxed at the normal rate of CIT (i.e. 19%) regardless of the seller's
          residence.

          If an individual transfers the ownership of his real estate then he has to pay PIT at a rate of 25%
          on the gains from the transfer of the property. When calculating the amount of such gains,
          certain costs and expenses may be deducted from the actual purchase price, most importantly all
          costs and expenses incurred in relation to the initial acquisition of the real estate. Please note
          that if the transfer of ownership takes place after the sixth year from acquisition, the amount of
          tax payable is gradually reduced in a manner such that no PIT is payable after the fifteenth year
          from acquisition. In the case of the sale of residential property, no PIT is payable after the fifth
          year from the date of purchase. In any case, it should be noted that income derived by
          individuals from the utilisation or the sale of real estate located in Hungary is generally taxable
          in Hungary, regardless of the residence and/or the nationality of the seller. As for the CIT rules
          already described, foreign individuals may be obliged to pay PIT on the capital gains derived
          from the sale of a Hungarian “real estate company”, depending on the provisions of the relevant
          treaty.

          Generally, the sale of property is VAT exempt. However, VAT is payable at 25% on the sale of
          building plots and of so-called “new buildings”. (Buildings qualify as “new” if their operating
          permit has not yet been issued or if less than two years have passed since the issue of such
          permit.) Further, in the case of the sale or letting of all other immovable property it is possible to
          opt for taxation. Opting for taxation has the benefit that input VAT incurred in respect of
          otherwise exempt activities could be deductible.

          In principle, the reverse charge mechanism is to be used whenever, in connection with the sale
          of immovable property, the option to tax has been exercised. Similarly, certain services
          connected to immovable property are listed as giving rise to domestic reverse charge.

          There is stamp duty (i.e. transfer tax) payable by the buyer on the purchase of a property. A 4%
          stamp duty rate is applied up to a market value of HUF 1 billion, and 2% for the excess, with an
          overall cap of HUF 200 million per property (ie. if the market value of the property exceeds
          HUF 9 billion, the excess value will not be subject to any further transfer tax), and certain
          exceptions and lower beneficial rates are available (for example, on the purchase of residential
          property, etc.).

          As of 1 January 2010 the direct or indirect acquisition of at least 75% of the shares of a
          company – whether Hungarian or foreign resident – owning real estate located in Hungary will
          also be subject to transfer tax along the above lines (i.e. the transfer tax is still calculated on a
          per-property basis).

          A two percent preferential rate of transfer duty is applicable to real estate traders, if the newly
          acquired property is being resold within two years. The two year re-sale period may, subject to
          certain conditions, be extended to four years upon request.

          As of 1 January 2010, residential properties and holiday houses situated in Hungary are subject
          to the wealth tax (regardless of being owned by companies or individuals). The tax base is the
          market value which will need to be self assessed. However, the Act on Wealth Tax also
          determines a deemed value adjusted by several items (eg. location, availability of a swimming

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          pool or a garage) to make it easier for the tax authority to collect the tax. One residential
          property per individual, having a market value of up to HUF 30 million is exempt from tax, if
          the owner actually lives there. A second residential property or holiday house (of the owner’s
          choice) worth less than HUF 15 million will also be exempt. The tax rate for real estate is
          progressive: 0.25% (yearly) of the market value up to HUF 30 million, 0.35% of the market
          value between HUF 30 and 50 million, and 0.5% on the excess.

          Local authorities are authorised to impose taxes on the owners of buildings and land located in
          their territories. Some municipalities have utilised this opportunity whilst others have not. The
          Act on Local Taxes, of the Republic of Hungary (the Local Taxes Act) only provides a
          framework of rules for these property-related taxes, with the details to be governed by separate
          decrees of the local municipalities.

          Pursuant to the Local Taxes Act, building tax and land tax are based either on the area of the
          property or on the value of the property, depending on the decision of the local municipality.
          Currently, building tax is subject to a maximum of HUF 1,241/m2 or 3% of the “calculated
          value” of the property (such calculated value being equal to 50% of the market value of the
          property). The land tax is subject to a maximum of HUF 275/m2 or 3% of the calculated value
          of the property. The maximum amounts of the above taxes (if determined in amounts and not as
          percentage) are subject to a yearly increase based on past inflation statistics. The amount of the
          local taxes paid in relation to residential property in the relevant tax year is creditable against
          the wealth tax, if payable.

          The value of the property sold would typically be regarded as part of the net sales revenue,
          therefore it forms part of local business tax base. Such tax base (i.e. the net sales revenue) may
          be decreased by the cost of materials, cost of goods sold and the value of intermediated services
          (including, to a limited extent, the value of subcontractor’s work). The rate of the local business
          tax is a maximum of 2% but is determined by each municipality.

          The above mentioned local taxes are imposed by the local municipalities and are normally
          borne by the owner of the property in respect of which the taxes are levied. As of 2010, the local
          business tax is collected and administered by the Hungarian (State) Tax Authority.




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                                               PART A

                                   PARTIES AND INTERESTS

   1.       Parties - Who can own real estate?

            Any legal “person” may own real estate. This will include individuals, companies
            and other legal entities established by statute.

            From 1997, unincorporated associations and charitable institutions can also freely
            own real estate (before that date real estate acquisitions by such entities were
            subject to government authorisation).

            Owners of commercial real estate include private developers, insurance companies,
            pension funds, banks and other financial institutions, private or public property
            companies, charities, trusts, the government and local authorities.

            There are no restrictions preventing EU nationals or companies from owning real
            estate. With regard to non-EU nationals, reciprocity conditions apply.

   2.      Property – What property interests are currently sold?

            Property interests which are usually sold in Italy include:

            •     Proprietà (full ownership) – the right to use and dispose of a property in a full
                  and exclusive manner, within the limits and in compliance with the provisions
                  of law. “Piena proprietà” is the term normally used to describe the title of the
                  person who has full ownership

            •     Nuda proprietà (residual ownership) – the right that remains to the owner of a
                  property over which a right of usufruct has been created in favour of another
                  person

            •     Diritto di Superficie (also known as proprietà superficiaria) (right of
                  superficies) – the right to construct and maintain a construction on land
                  belonging to another person. If the right of superficies was created for a
                  limited period of time, at the end of the term the owner of the land acquires
                  title to the building

            Other relevant rights in rem or contractual rights relating to property are as follows:

            •     Lease – a contractual right to use a property for a certain period of time and
                  for a specific purpose. Assignment of a lease by the tenant usually requires the
                  consent of the landlord

            •     Option and pre-emption - rights to buy or first refusal respectively. Unless
                  they originate from statutes (e.g. pre-emption right of the tenant), they are not
                  enforceable against third parties and do not entitle the holder of the relevant
                  right to obtain the revocation of acts of disposal of the property carried out in
                  violation of the option or right of pre-emption




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            •     Servitù (easements) – rights in rem, which include rights of way as well as
                  restrictions concerning use of land or activities permitted on the land (e.g. an
                  obligation not to build)

   3.      Ownership – What types of ownership are there?

            In Italy there is no distinction between classes of titles. However, there are different
            forms of ownership that can be summarised as follows:

            •     Proprietà (ownership) – the right to use and dispose of a property in a full and
                  exclusive manner, within the limits and in compliance with the provisions of
                  the law

            •     Comunione (joint/shared ownership) – the division of the right of ownership
                  between a number of people, with each person having rights and obligations in
                  respect of the others. As a consequence, each joint-owner must contribute to
                  the costs for maintenance and use of the property and other necessary
                  outgoings. Each participant can request to end the joint ownership. However,
                  the court can postpone the end of the joint ownership of the property, by a
                  maximum of 5 years, if the division would be detrimental to the interest of the
                  other joint-owners

            •     Multiproprietà (time-sharing) – a new interest, formally recognised and
                  introduced in 1998, the object of which can be a right in rem or the
                  contractual right to use a property

            Although the possessor of a property enjoys a certain degree of protection pursuant
            to Italian law, possession does not constitute title to a property. However,
            continued and uninterrupted possession of a property for a given number of years
            (10, 15 or 20, depending on the type of property and other circumstances
            concerning the possession) would entitle the possessor to claim ownership of such
            property. The actual title will have to be established and declared by a court of law.

   4.      Matters burdening or benefiting real estate – What matters can affect real
           estate?

            Common matters affecting real estate include:

           Matter               Effect                                Example

           Servitù              Rights which burden one piece of      A right of way; a right
           (easement)           land and benefit another. They are    to light; a right to use
                                not personal but attach to the land   or lay pipes and cables;
                                itself. Servitù may also consist of   a right to run a
                                restrictions as to the use of land.   telephone or electricity
                                                                      cable or erect telecoms
                                These rights can be either registered equipment; obligation
                                or unregistered, depending on how not to build on the
                                they were created                     land




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           Matter               Effect                                     Example

           Usufrutto            Usufruct is a right in rem enabling a
           (usufruct)           person to use another’s property
                                and to draw from the same all the
                                profit, utility and advantage which it
                                may produce, without altering the
                                substance or use of the property.
                                The holder of a usufruct may allow
                                use of the property by third parties
                                but is not entitled to dispose of the
                                property. Usufruct can be created
                                for the entire life of the beneficiary
                                but if the beneficiary is a legal entity
                                a statutory 30 year limit applies
           Right of use         The rights of use and habitation are
           or                   limited forms of usufruct where the
           habitation           beneficiary is allowed to use and
                                exploit a property (e.g. agricultural
                                land) or occupy a property (e.g. flat)
                                to satisfy his own needs and those
                                of his family
           Superficies   Right to construct and maintain a
           (right     of construction on land belonging to
           surface)      another person

           Vincoli        Restriction imposed on a property                Restrictions     for
           (restrictions) and/or its use by a public entity,               renovation of listed
                          often with a view to preserve the                buildings and pre-
                          property and/or to give a right of               emption right of the
                          pre-emption to the public entity                 state

           Usucapione           It includes the acquisition of title to    Occupation of a
           (acquisition         or legal rights over another person’s      property for more that
           by                   property or land by continued and          20 years; a right of way
           continued            uninterrupted possession for a             exercised for more
           possession)          given period of time (usually 20           than 20 years
                                years but also 10 or 15 years under
                                certain circumstances). Acquisition
                                of title or creation of the legal right
                                must be declared by a court



   5.     Occupation of real estate - Who may occupy real estate?

            Real estate is usually occupied by one of the following categories of persons:

            •     Owners – those persons with a full ownership of the property




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            •     Tenants – those persons with a lease of the property or part of it. A subtenant
                  may also occupy a property by means of an agreement with the tenant;
                  however, the consent by the landlord is usually required before the tenant can
                  sublet the property

            •     Holders of rights of usufruct, use or habitation – such rights are normally
                  acquired by either succession or as part of an arrangement within a family for a
                  family member to remain in an apartment, for example, for his life

            •     Holders of rights of superficies – the right to construct and maintain a
                  construction on another person’s land

            •     Holders of concessions – contractual permissions to occupy rather than
                  interests in the property itself. Normally, the rights are personal and are not
                  capable of being transferred to a third party without the consent of the owner
                  of the property. A concession is the typical form of right granted over state-
                  owned land (e.g. beach)

            •     Possessors – they may establish entitlement to property where they have
                  occupied or used the property for a long period of time as if they were legally
                  entitled to do so without being challenged by the rightful owner of the
                  property. Actual acquisition of title to or other interest in a property by a
                  possessor would require a court decision

            Please also see our CMS Lease Guide

   6.      Brokers - What is the broker's role?

            Pursuant to Article 1754 of the Italian Civil Code, a broker (mediatore) is the
            individual or organisation that brings two or more parties together for the
            conclusion of a deal, not acting solely in the interests of one of the parties.

            Pursuant to Italian law, only those brokers who are registered in the list of
            authorised brokers at local Chambers of Commerce (Ruolo degli Agenti d’Affari in
            Mediazione) can legitimately be qualified as brokers and as such are entitled to
            receive commissions on sales. Whoever operates as a de facto broker without being
            registered in the above lists of the Chambers of Commerce may be liable to pay
            fines and to return any sum received from the parties by way of commission.

            The role of the broker is usually not limited to acting as a mediator for the purpose
            of facilitating the conclusion of the transaction; in fact, a broker has a legal duty to
            disclose to the parties all the information obtained in relation to the transaction and
            this includes an implicit obligation to procure information that could have been
            obtained by applying ordinary diligence and care.

            Also, the broker may assist the parties with the drafting of the transactional
            documents (e.g. irrevocable proposals or preliminary agreement) though for larger
            deals transactional documents are usually drafted by lawyers.

            Services offered by brokers usually include:




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            •   property search detailing every aspect of the property

            •   property procurement, guiding buyers through the purchasing process

            •   acting for a seller to find a buyer for a sale property, including advertising of the
                property for sale

            •   acting for a landlord to find a tenant, including advertising of the property

            •   acting for a tenant to find a property to lease

            •   collection of documentation and liaising with lawyers and notary and

            •   valuation services

            Property management services do not strictly fall within the scope of brokers’
            services and usually major national or international organisations providing
            management services do so through ad hoc entities that do not also provide
            brokerage services.

            It should be noted that in certain cases brokers act only in the interests of one
            party, to whom they provide also consultancy and valuation services, on the basis
            of a specific mandate received from such party. In that case, the broker can no
            longer be qualified as an independent intermediary and the provisions of the Civil
            Code on brokers would not apply. Therefore, in such cases, the broker would be
            entitled to receive a commission only from the party that instructed him.

   7.      Employees - What employment issues affect real estate acquisitions?

            According to the Italian rules on the transfer of business, when a business (or part
            of one) is transferred from one party to another, the work relationships of the
            employees pertaining to such business or part thereof continue with the new owner
            of the business.

            The sale of a property may attract application of the above rules if the property
            transaction can be qualified as transfer of a business. This may be the case with
            regard to employees dedicated to management of a building or staff working on the
            premises (e.g. security staff or maintenance personnel).

            The application of the rules on transfer of a business would entail, inter alia, the
            following consequences, namely that:

            •     the buyer assumes responsibility for employees working in the business
                  transferred

            •     the rights of employees transferred, deriving from both their individual and
                  collective employment agreements, would be preserved (e.g. salary level, fringe
                  benefits, notice periods)




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            •     fully accrued rights of the employees towards the seller would be undertaken
                  by the buyer as a consequence of the transfer of a business

            •     the seller and the buyer are jointly liable for all the financial obligations of the
                  seller, existing at the time of the transfer, vis à vis the employees and

            •     information and consultation with the unions prior to the transfer may be
                  required, depending on the number of employees employed by the seller

            The transfer of business does not in itself constitute a justified reason for dismissal;
            the termination of employment is legal only when justified by reasons totally
            independent and autonomous from the transfer of a business i.e. economic,
            technical or organisational reasons entailing changes in the workforce (so called
            “ETO reasons”).




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                                                   PART B

                                      PROCEDURE AND TERMS

   8.      Procedure - What are the steps in a sale and purchase transaction?

            Transactions start with negotiations as to the proposed terms of the acquisition. It
            is not very frequent that heads of terms are drafted setting out the principal terms
            agreed between the parties, because, in Italy, such documents may be construed as
            creating formal binding agreements. Whilst it is possible for an informal
            “memorandum of understanding” to be executed (mainly to create confidentiality
            and/or exclusivity obligations as well as obligations to negotiate in good faith), the
            common first step in a transaction is an irrevocable purchase offer (proposta
            irrevocabile di acquisto) or more often a preliminary agreement (contratto
            preliminare).

            Irrevocable Purchase offer

            The irrevocable purchase offer obliges the buyer to pay a deposit on the property,
            states that the contract is to be completed by a specified date (upon the expiry of
            which, the offer ceases to be binding) and commits the buyer to purchase the
            property at the terms and conditions set out in the offer . By signing the purchase
            offer, the buyer becomes legally bound for the period of time stated in the
            proposal, but the seller is free to consider other offers.

            The purchase offer contains the main terms of the sale, including the price and
            financing of the purchase, and forms the basis of the final deed of sale to be drafted
            by the notary. It is only once the seller communicates to the buyer his acceptance in
            writing of the offer that the (preliminary) contract is concluded.

            Usually, a purchase proposal is drafted in such a way that it would create, once
            accepted by the seller, binding obligations to sell and purchase but would not cause
            the actual transfer of the property. By accepting the purchase offer, the seller would
            be bound to effect the transfer of the property to the buyer (by means of a
            notarised deed of sale) and the buyer would be obliged to buy the property and pay
            the agreed price.

            Preliminary Agreement for sale

            Often the first step consists of a preliminary agreement for sale (contratto
            preliminare di vendita) (sometimes also called, though improperly, compromesso)
            detailing the terms of the future sale, including warranties and representations. A
            preliminary agreement creates binding and enforceable obligations on the seller and
            the buyer to sell and buy the property respectively, but does not cause the actual
            transfer of the property.

            A preliminary agreement can be a privately executed agreement between the buyer
            and the seller, but for large commercial transactions or where the circumstances of
            the transaction suggest extra caution, the preliminary agreement can be notarised so
            as to allow its registration at the land registry office (Conservatoria dei Registri
            Immobiliari) and ensure that it can be enforced also against third parties to protect




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            the buyer against disposals of the property in favour of third parties and/or
            encumbrances that may be registered by third parties (e.g. enforcement or seizure
            orders).

            Upon execution, the buyer usually pays a deposit ranging from 10% to 30% of the
            purchase price. Unless otherwise indicated, in the event either party does not
            perform the sale, the other party has the right, at its option, to (i) request specific
            performance (i.e. force the sale) (ii) terminate the agreement and claim damages or
            (iii) retain the deposit (or request payment of an amount equal to two times the
            deposit, if the seller is in breach) and terminate the agreement.

            If one of the parties is a foreign registered company, the other party may require a
            foreign lawyer’s opinion confirming that the company is properly incorporated, has
            power to enter into the transaction and that the signatory has the power to bind the
            company.

            Where a property under construction is being sold to individuals, the developer
            must provide a bank or insurance guarantee to the purchaser to secure any advance
            payments made during the construction period in the event of insolvency or seizure
            of assets of the developer.

            Property Searches

            It is normal practice to carry out searches of the property title on two occasions -
            before the preliminary contract has been drawn up and then before completion, by
            way of a protective search.

            Checks that the data contained in the title documents have not recently
            altered/been amended are essential, and in this regard it is necessary to carry out a
            search at the Land Registry where the exact ownership status of the property can
            be ascertained, as well as the existence of any third party rights over the property
            (such as rights of usufruct, mortgages, restrictions or other encumbrances).

            In the case of restrictions revealed by searches, which have not been declared by
            the seller, the buyer is usually entitled to terminate the preliminary agreement (if
            already executed) and to claim compensation for damages.

            Deed of Sale

            The public deed of sale (atto pubblico di vendita) is the final contract and transfer
            of title, which is based upon the preliminary agreement and is drawn up, signed and
            sealed by a notary, usually appointed by the buyer.

            This document contains all the elements necessary to pass title, and includes all
            those matters which may have affected the title between the preliminary agreement
            and the deed of sale (such as the existence of mortgages, checks of the cadastral
            details and details of original deeds). Both parties, or their duly appointed attorneys,
            must be present to sign the deed.

            In Italy, a property may also be transferred by means of a private agreement with
            signatures authenticated by a notary. However, the public deed of sale is mostly




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            used as it provides more protection to the buyer. When a property is bought by
            private agreement and is subsequently found to have a charge against it, such as a
            mortgage, the liabilities of the notary may be limited. When buying by public deed,
            the buyer may more easily seek legal action against the notary for professional
            misconduct.

            Registration (tax office and land registry)

            The notary is obliged to register the deed at the competent tax office (Ufficio delle
            Entrate) and to pay the relevant registration tax and other charges (cadastral and
            mortgage duty) on behalf of the buyer.

            The notary must also file the deed of sale with the local office of the Land Registry
            in the shortest possible time and in any case within 30 days. The notary is also
            responsible for notifying the sale to the cadastral office.

   9.      Other common contract terms - What other provisions does a real estate sale
           contract commonly contain?

            A distinction should be made between the preliminary sale agreement (i.e. the
            agreement creating obligations to sell and purchase that is usually executed before
            the actual transfer of the property) and the deed of sale (i.e. the notarised agreement
            transferring title to the property).

            The preliminary sale agreement must be made in writing and notarisation is not
            required unless the parties intend to record the agreement at the Land Registry.

            The preliminary agreement often contains detailed provisions relating, inter alia, to
            the obligations of the parties pending execution of the deed of sale, deadlines for
            satisfying conditions precedents, if any, and terms and methods of payment of the
            purchase price, including down-payment(s) made by the buyer and the
            consequences of refusal by one party to execute the deed of sale.

            The preliminary agreement also usually contains detailed representations and
            warranties in relation to the property and matters affecting it as well as indemnity
            provisions. Specific warranties will usually be given in relation to any lease under
            which the property is occupied (e.g. validity of the lease, due performance by the
            seller, timely payment of rent by the tenants). Where individuals are purchasing a
            property being constructed, the terms for payment, details of bank or insurance
            guarantees in relation to the developer, the date by which the property must be
            constructed and details of any subcontractors must be set out.

            Since not all representations, warranties and, in particular, indemnity provisions set
            out in the preliminary agreement will be repeated in the deed of sale so as not to
            attract registration tax on the resulting obligations, the preliminary agreement may
            also contain provisions to the effect that certain obligations of the parties under the
            preliminary agreement will survive the execution of the deed of sale and will not be
            superseded by it.




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            The deed of sale must be made in writing and notarisation is required, though only
            for the purpose of complying with publicity requirements (registration at the land
            registry) and not for its validity.

            Only one original deed of sale is executed and the notary, who is required by law to
            keep the original in his records, is authorised to issue certified copies to the parties
            as well as to public offices to which the sale must be notified (e.g. land registry,
            cadastral office).

            The deed of sale must state the purchase price and may contain provisions dealing
            with its payment by the buyer. Usually, the deed of sale contains only an
            acknowledgement of payment of the price (quietanza) whereas detailed provisions
            concerning terms and methods of payment are set out in the preliminary
            agreement. If the deed of sale does not contain an acknowledgement of payment
            for the full price or a specific waiver by the seller, the land registry will automatically
            register a mortgage over the property as security in favour of the seller for payment
            of the price.

            The deed of sale must clearly identify the property, also by indicating its boundaries
            and cadastral details, and must set out the details of the instrument(s) whereby the
            property was acquired by the seller as well as the details of building permits
            (including amnesties) issued in relation to the property.

            The deed of sale must show details of any estate agent or broker who assisted in the
            sale, including his VAT number and the amount and method of payment of his
            fees.

            Where new properties are sold to individuals, the developer must at the time of sale
            deliver to the buyer an insurance policy valid for 10 years relating to defects in the
            property and any damages payable due to any collapse of the property.

   10.      Due Diligence - What investigations does the buyer normally make?

            The buyer of an Italian property would normally instruct different professionals,
            depending on the type and size of deal, to carry out investigations on the property
            and, in case of share deals, on the target company.

            Investigations are usually carried out before an offer to purchase a property is made
            or before execution of a preliminary agreement for sale. However, in certain cases,
            the offer may be made or the preliminary agreement may be executed subject to a
            condition that the investigations to be carried out or completed will not reveal any
            material issue or defects. This is often the case where the buyer is already generally
            satisfied with the result of a preliminary due diligence and only a few aspects need
            to be investigated or finalised.

            Usual investigations carried out for property transactions include, inter alia:

            •     inspection of title, carried out by reviewing the entries made at the Land
                  Registry and relevant documents registered (deeds of sales and other acts or
                  instruments, e.g. mortgage instruments). Records of the land registry are the
                  ultimate evidence of title , subject only to limited exceptions (e.g. unregistered




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                  easements, prescriptive rights and adverse possession, unregistered leases).
                  Title inspection may be carried out by lawyers or, more often, notaries. A
                  notary’s report on title is always required by banks before granting a loan to be
                  secured by a mortgage over the property

            •     review of building permits, for the purpose of ensuring that the necessary
                  permits were obtained and that no unauthorised works were carried out on the
                  property. This review is usually carried out by land surveyors or qualified
                  architects, due to the technical skills required. Notaries will also require copies
                  or details of all relevant permits before the deed of sale is executed

            •     review of cadastral registration of the property. The Cadastral Office, created
                  for tax purposes, records details of ownership, rateable values, property
                  categories and plans. The cadastral register is divided into two sections (land
                  and buildings). Though cadastral registrations do not affect title, they affect,
                  inter alia, taxes payable on the property and, if a property is not properly
                  recorded at the cadastral office, this may result in additional costs and liabilities
                  for the buyer

            •     where the property is occupied by tenants, leases are usually reviewed by
                  lawyers appointed by the buyer to establish, inter alia, the prima facie validity
                  of the leases and their terms and

            •     in the case of share deals, lawyers are usually instructed by the buyer to review
                  the main corporate documents to ensure, inter alia, the transferability of the
                  shares and any limits to their transfer. Review of the company’s accounts,
                  accounting books and tax documents is usually also required in order to assess
                  potential tax liabilities

   11.     Terms implied by law - What provisions are implied by Statute, Code or
           otherwise?

            The following provisions would normally be included in property transactions and
            would usually also apply if no reference to them is made in the deed of sale:

            Warranty for Defects

            Regardless of the investigations and the inspections carried out by the buyer prior
            to the purchase, the seller may remain liable towards the buyer for hidden defects in
            the property that would render the property unfit for its intended use or which may
            negatively affect its value. Any agreement or provision excluding or limiting this
            warranty would have no effect if the seller acted in bad faith and concealed the
            defects (art 1490 of the Civil Code). A claim for defects in the property must be
            notified to the seller within 8 days of discovery (unless a longer period is agreed)
            and claims are subject to a period of limitation of 1 year from the delivery of the
            property to the buyer.

            Warranty for Eviction (loss of title)




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            The Civil Code requires the seller to give a warranty on his title. The warranty also
            covers rights of third parties that, though not affecting ownership of the property,
            may affect the ability of the buyer to use or occupy the property. If a third party
            successfully claims title to the property from the buyer, even if the parties have
            excluded the warranty on title the seller would be liable to return the price to the
            buyer and reimburse the costs incurred by the buyer to purchase the property. If
            the parties want to exclude completely statutory warranty for eviction, the
            agreement must state clearly that the sale was made “at buyer’s risk and peril”.

            General rules on exclusion and limitation of warranties

            Agreements or contractual provisions aimed at excluding or limiting the liability of
            the seller would not operate in any case of gross negligence or wilful misconduct.

            General terms and conditions

            Pursuant to Article 1341 of the Civil Code, if an agreement is not the result of
            negotiations between the parties and one party imposed and required the
            application of his terms and conditions, certain provisions of the agreement that are
            in favour of such party (e.g. right of exit, limitation of liabilities) would not be
            enforceable against the other party unless specifically approved by such other party
            in writing (usually a second signature by such other party is required). This
            provision of the Civil Code would be more likely to apply to property leases (where
            use of standard forms is more frequent) rather than agreements for sale of
            properties, where actual negotiations of terms and conditions are usual.

            Sale of property as a whole (a corpo)

            Properties are usually sold a corpo (as a whole). This means that if the actual size
            of the property is not that stated in the agreement, price adjustments would be
            permitted only if the difference between the size stated and the actual size exceeds
            5%. If the property is not sold as a whole, but having regard to the size of the
            property (vendita a misura), any discrepancy would allow a price adjustment.
            Differences exceeding certain thresholds may also allow the parties to withdraw
            from the agreement.

   12.      Registration and Notarisation of real estate – What are the basic
            requirements?

            Agreements or other instruments transferring title to a property or creating,
            modifying or transferring rights in rem concerning a property must be recorded for
            publicity purposes with the Italian land registry (although the name of the
            competent office recently changed, it is still usually referred to using the previous
            name of Conservatoria dei Registri Immobilari). Usually there is a land registry
            office for each province though for larger provinces there are usually more offices,
            each having jurisdiction over a certain part of the territory of the province.

            Registration of the above agreements and instruments is required to ensure that
            they are enforceable against third parties (as opposed to enforceability limited to the
            parties to the agreement or instrument).




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            Also, the creation of charges and encumbrances (e.g. mortgages, court orders
            concerning title to the property or other rights in rem created over the property)
            requires compliance with publicity requirements to ensure that such charges and
            encumbrances are enforceable against third parties. However, registration with the
            land registry is permitted only for those instruments and agreements that are
            specifically identified by Italian law (e.g. registration of an option for purchase of a
            property is not permitted).

            It should be noted also that lease agreements may have to be recorded at the land
            registry, where their initial terms exceed 9 years.

            In general, notarisation (either in the form of certification of signatures by a notary
            or of a proper public deed, drawn up, signed and sealed by a notary) of contracts
            transferring title to a property or creating, modifying or transferring rights in rem
            concerning a property is not required for the validity of the contract itself but is
            required to allow the agreement to be recorded at the land registry.
            However, notarisation is a validity requirement for certain types of transfers of title
            to or other interests in a property (e.g. a public deed is required for transfers by way
            of gift).


   13.      Disputes - How are they dealt with and resolved?

            In Italy, the parties to a real estate transaction are free to choose the law governing
            the transaction as well as the methods to resolve disputes arising in relation to the
            transaction. Available methods of dispute resolution include, besides recourse to
            court proceedings, arbitration, independent expert determination and mediation
            (less usual).

            With regard to the law governing the contract, even if it may technically be possible
            when one or both parties are foreign nationals to choose a law other than the lex rei
            sitae (i.e. the law of the country where the property is located) as the law governing
            the contract, several aspects of the transaction would still be subject to the law of
            the place where the property is located (e.g. aspects relating to the property itself, its
            marketability, permitted use, title of the seller, and registration requirements) and
            therefore a choice of a foreign law for the contract may not be appropriate.

            A dispute may be referred to the determination of an independent person acting as
            arbitratore, particularly for those disputes where specific technical or professional
            qualifications are required (e.g. defects affecting the property or estimation of costs
            for repairing the property, or an audit of revenues generated by occupation of the
            property). In the case of recourse to an expert, the parties should establish clearly
            the level of discretion to be used by the expert in rendering his decision as that
            may affect the ability of the parties to challenge the decision.

            When the parties decide to refer disputes to one or more arbitrators, they should
            state clearly in the arbitration agreement or arbitration clause whether the
            arbitrator(s) should decide the dispute by strict application of rules of law or if an
            equitable decision should be rendered. The choice of certain arbitration courts or
            chambers (and respective arbitration rules providing for fixed or pre-established




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            fees) may help limit or control costs to incurred by the parties. However, the parties
            should be aware that such rules may also provide for an implied waiver (or partial
            waiver) of the rights of the parties to challenge the arbitration award.




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                                                   PART C

                            PERMITS INSURANCE AND ENVIRONMENT

   14.      Permits - What permits are required for the use and occupation of real estate
            and are they personal?

            Applications to obtain a planning permit to develop land must be filed with the
            municipal authority, which has the responsibility for controlling the use and
            development of land in the territory of the municipality.

            The approval of an application for a building permit is subject to compliance of the
            proposed development with, inter alia, planning instruments and building
            regulations. Construction fees and contributions towards costs for infrastructure
            are usually payable.

            The decision on an application for a building permit should be issued within
            statutory time periods set by national law

            If an application for a building permit is rejected, the applicant is entitled to
            challenge the decision before the Regional Administrative Tribunal (TAR).
            Recourse to the TAR is also available to third parties that may be affected by the
            development.

            In addition to obtaining a building permit, inspections must be carried out at the
            end of the works to confirm that the construction was carried out in accordance
            with, inter alia, applicable building regulations as well as health and safety and
            sanitary regulations. A certificate must be issued by the municipality (Certificato di
            Agibilità) to confirm compliance with the above rules and regulations.

            Also, major works to be carried out on existing properties require a prior
            authorisation by the municipal authority. Renovation or refurbishment works can
            usually be carried out without a prior authorisation provided that a 30-day prior
            notice of commencement of works (Denuncia di Inizio Attività) is sent to the
            competent office of the municipality along with designs of the works and a report
            by a qualified professional (chartered surveyor or architect) certifying that the works
            to be carried out are in compliance with applicable planning instruments and
            building regulations, health and safety regulations as well as sanitary regulations. No
            authorisation or notice is usually required for minor refurbishments or ordinary
            maintenance works.

            Properties of relevant artistic or historical value (listed buildings) may be subject to
            restrictions and works to be carried out on such properties would require a prior
            approval by the local agency of the Ministry of Cultural Heritage.

            In general, building permits are granted to the owner of the land or building or to a
            third party that, by virtue of a contract with the owner or of an interest held in the
            land/property, is authorised to carry out the works for which the permit is
            requested. The building permit can be transferred to successors, assigns or
            transferees only jointly with the land or property concerned.




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   15.      Insurance and Risk - What insurance will the parties effect and when does
            the insurance risk pass at the time of sale?

            The owner of a property usually takes out and maintains insurance covering both
            the property and its fixtures and fittings. Property insurance usually covers both
            damage to and destruction or loss of the property caused by a number of events
            including fire, explosion, lightning and road vehicles or, in some cases, aircraft
            collisions. Property insurance coverage would usually also protect the owner against
            claims for damage caused to equipment of third parties installed at the premises
            (e.g. equipment of utility companies) and may also cover damage resulting from loss
            of rent.

            The owner of a property may - and normally would - also take out an insurance for
            third parties’ liabilities (e.g. damages suffered by third parties that occupy or have
            access to the property). Insurance for damage caused by water (e.g. pipe bursting),
            riots and terrorism, storms (including rain, hail or snow) or earthquakes may require
            additional special heads of cover.

            Tenants are usually required by the lease to take out additional insurance cover for
            damage caused to the leased property or the entire building (e.g. by fire, water and
            explosion) or to third parties that have access to the leased property.

            Risks relating to a property pass with title (though the seller may remain responsible
            for custody of the property until delivery of the property is effected). The seller
            would usually maintain insurance on the property until the execution of the deed of
            sale and it would be the buyer’s responsibility to take out new insurance for the
            property with effect from the date of transfer of title.

   16.      Environmental - What are the common environmental issues?

            The buyer of a property, although not being the person directly responsible for
            contamination of the building or the land on which it is sited would still be
            responsible for costs incurred for de-contamination of the site and such obligations
            usually attach to the site itself.

            If a site is found to be contaminated, a legal charge may be created on the site and
            such charge would result also from a Certificato di Destinazione Urbanistica, a
            certificate issued by the municipality showing the permitted use of the land. Such a
            charge will also imply that costs incurred for the de-contamination of the site and
            to put in place necessary protection measures would be given priority over the
            proceeds generated by the sale (including a forced sale) of the site.

            The owner of a site that is contaminated as a result of former uses may also be
            responsible for taking the steps necessary for its de-contamination if he intends to
            change the use of the site and the new use imposes stricter environmental
            requirements.

            The occupier or owner of a site used for unauthorised waste disposal would be
            liable for environmental damages as well as for payment of fines if he fails to report
            to the competent regional authorities the illegal disposal of waste on the site before
            such illegal disposal is discovered and notified by competent authorities.




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            In relation to buildings, asbestos is usually the main environmental concern,
            particularly if the building is to be used as place of work (offices, retail properties).
            Asbestos found in the building should be removed or properly contained.

            When the characteristics of a property or the circumstances concerning its former
            use suggest that there might be potential environmental risks, an environmental due
            diligence would normally be carried out. The main aspects and documents to be
            considered for a preliminary assessment of environmental risks and to establish
            whether further investigations should be carried out are :

            •     the history of the site/property (e.g. previous owners)

            •     maps, planning and zoning instruments

            •     building permits and authorisations issued for the site/property

            •     Certificato di destinazione urbanistica (certification of permitted use of the
                  land)

            •     the register of potentially contaminated sites and sited to be de-contaminated

            •     Regional Plan for Decontamination

            •     certificates issued after decontamination of the site

            •     documentation concerning previous activities carried out on the site or in
                  surrounding areas and

            •     accounts of the seller/target company

            In general, environmental risks are addressed by specific provisions in the contract.
            In addition to general provisions that are often included in preliminary agreements
            and sale agreements, specific provisions will be included if particular risks are
            identified, so as to ensure that costs for decontamination are either deducted from
            the price or secured by specific (bank) guarantees.




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                                                   PART D

                                          FINANCE AND TAXES

   17.     Pricing/Valuation - What sets the price/valuation of real estate?

            Prices of commercial properties are usually determined on the basis of the expected
            revenues that the property can generate (rent paid by tenants) as well as on the
            average market value of the same type of properties in the same area. Should a
            property be capable of being converted from residential to non-residential or vice-
            versa, the value (usually calculated per square metre) of non-residential properties
            (or residential, as the case may be) in the same location and area could be used as
            reference.

            Whilst the expected revenues that a property is capable of generating are usually
            calculated on the net area capable of being leased, the value of the property (per
            square metre) is usually calculated on the so called “commercial size” of the
            property (total area of the property, including areas occupied by partitions and
            external walls). Certain areas of a property or a building (e.g. balconies, entrance
            hall, parking spaces, storage rooms) are usually taken into account only for a
            portion of their actual size.

            When a building is acquired with a view to its demolition and reconstruction, the
            value of the land where the building is located and the planning provisions
            applicable to such land are considered, together with estimated construction costs
            and fees.

   18.      Financing - How is a real estate acquisition financed?

            The principal ways in which real estate acquisition is financed are:

            •           Through the buyer’s own cash resources or general banking facilities

            •           By raising finance using the property or other assets of the company as
                        security

                        This will typically be supported by a security package which will involve
                        the grant of a voluntary mortgage over the property being purchased,
                        often along with charges over the shares in the company itself (mainly
                        when the property is acquired using a special purpose vehicle) or over
                        shares held by such company in other companies (less usual).

                        Other forms of security required to secure financing for large property
                        transactions include charges over rents payable by tenants and charges
                        over other debts of the company (e.g. value added tax credits). Floating
                        charges are not permitted under Italian law.

                        Enforcement of rights under a mortgage always requires the intervention
                        of the court whereas charges over debts and, to a certain extent, over
                        shares, may be directly enforceable by the secured creditors.




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            •           Raising finance by bond/debenture stock issue

                        Limits apply as to the amount for which bonds can be issued, mainly
                        based on the value of the share capital of the company and its reserves.
                        Those limits may not apply if bonds are offered for subscription to
                        professional investors (e.g. banks).

   19.      Security over real estate - How is security over real estate created and
            protected?

            The only security that can be created on a property is the ipoteca (mortgage), i.e. a
            fixed security interest over property.

            The main effect of an ipoteca is to give the secured creditors priority over other
            creditors of the debtor to seek satisfaction of their debts out of proceeds generated
            by a forced sale of the property. Though this charge does not legally prevent the
            disposal of the property, it does create substantial limitations to the de facto
            transferability of a property.

            A mortgage can be provided by law (legal mortgage, for instance when the purchase
            price is not paid in full at the time of the sale), based on court orders (judicial
            mortgage) or granted by the debtor (voluntary mortgage). A voluntary mortgage
            must be agreed in writing and notarisation is required for the purpose of recording
            the mortgage at the Land Registry.

            In any case, registration in the Land Registry is necessary to perfect the creation of
            the mortgage. The registration is effective for a maximum period of twenty years,
            and it ceases to be effective unless it is renewed before the expiration of such time
            limit, regardless of whether the debt secured by the mortgage has been repaid.

            The order of priority among various mortgages charged over the same property in
            favour of different creditors depends on the date on which the mortgage
            instruments were recorded at the Land Registry (first in time, first in priority).

            Should the debtor fail to fulfil its obligations, creditors secured by a mortgage are
            entitled to cause the forced sale of the property provided that they have a valid title
            for enforcement (court decision or, usually, a loan agreement executed in the form
            of a notarised public deed).

            The sale of property takes place under the control of the court though notaries are
            often appointed by the court to act as auctioneers. Proceeds of sale are assigned to
            secured creditors up to the amount of their claim for the principal debt, accrued
            interest and costs. The balance, if any, must be returned to the debtor.

   20.     Taxes and Costs - What are they and who pays them?

            Generally, please refer to our CMS transaction costs guide as to the nature and
            amount of the taxes and costs.




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            The sale of a property may be subject to value added tax (VAT) or registration tax
            (stamp duty), depending on the nature of the property sold (residential or
            commercial property) whether or not the seller is VAT-registered, on the activity
            carried out by the seller and on the right of the buyer to deduct the VAT paid in
            whole or part.

            In general:

            •             If the seller is a VAT-registered entity/individual and the property sold is
                          a commercial property, VAT is not due. However, certain exceptions
                          apply. In particular VAT at a rate of 20% is due:

                          -        if the seller is a construction company (i.e. active in
                                   construction and refurbishment business, not a property
                                   investment company) and the sale is made within four years
                                   from the date of construction/refurbishment

                          -        if the buyer can deduct VAT in a percentage not exceeding 25%

                          -        if the buyer is not subject to VAT

                          -        if the seller opts for the application of VAT

                        In any of the above cases regardless of whether or not VAT applies,
                        registration tax is payable in a fixed amount of €168. Cadastral and
                        mortgage charges are also payable at a rate of 4% of the value of the
                        property.

                •         If the seller is a VAT-registered entity/individual and the property sold is
                          not a commercial property, VAT is not due. An exception applies if the
                          seller is a construction company (in the sense described above) and the
                          sale is made within four years from the date of
                          construction/refurbishment. In that case VAT is charged at a rate of
                          20%.

                          When VAT is not due, registration tax will be payable at a rate of 7% of
                          the value of the property. When VAT is due, registration tax will be
                          payable in the fixed amount of €168. Cadastral and mortgage charges are
                          also payable, in the fixed amount of €336 if VAT is due and at a rate of
                          3% of the value of the property if VAT is not due.

                          Under certain limited conditions VAT, registration tax and cadastral and
                          mortgage charges may be payable at a reduced rate.

                •         If the seller is not a VAT-registered entity/individual, irrespective of the
                          nature of the property sold, VAT is not due.

                          Registration tax will be payable at a rate of 7% of the value of the
                          property. Cadastral and mortgage charges are also payable, at a rate of
                          3% of the value of the property.




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                        Under certain limited conditions VAT, registration tax and cadastral and
                        mortgage charges may be payable at a reduced rate.

              In theory, the seller and the buyer are both liable for payment of registration tax
              as well as cadastral and mortgage charges, unless they agree otherwise. The buyer
              would usually appoint the notary for the execution of the deed of sale and will pay
              the notary’s fees and expenses. Notaries’ fees vary according to the value of the
              transaction and the title investigations the notary will have to carry out. Typically,
              those fees would range from 2% to 0.15% of the value of the transaction.

              The buyer will also pay the costs for conducting searches on title and on matters
              affecting the property as well as, in general, costs for the due diligence review of
              the property and any valuations or audits he may require.

              Each party will bear the costs for its own consultants (e.g. lawyers).

              Brokers’ commissions may be payable by both parties unless the broker acted
              upon specific instructions and only in the interest of one of the parties, in which
              case that party would be responsible for the relevant commission.




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                                               PART A

                                    PARTIES AND INTERESTS

   1.         Parties - Who can own real estate?

              Any legal “person” may own real estate. This will include individuals, companies,
              entities established by statute and certain charitable bodies.

              Owners of commercial real estate include private developers, insurance
              companies, pension funds, banks and other financial institutions, private or public
              property companies, charities, the government and local authorities.

              There are no restrictions preventing foreign nationals or companies from owning
              real estate.

   2.         Property - What property interests are currently sold?

              Property interests which exist in The Netherlands include:

              •         absolute ownership

              •         right of usufruct

              •         ground lease

              •         easements

              •         right of superficies

              •         apartment right

             Absolute ownership is the equivalent of freehold title in England.

             Right of usufruct is the next closest class of title to absolute ownership as is
             possible according to Dutch law. The owner of the right of usufruct has all the
             rights and obligations of the owner, except the right to sell the property. The
             right of usufruct perishes when the owner of it passes away or the company is
             dissolved. If the beneficiary is a legal entity the maximum period for which
             usufruct may be created is 30 years.

             A ground lease is a right to use and hold the land without owning it. There are no
             restrictions in The Netherlands on how long ground leases can be. The most
             common lengths of institutionally acceptable ground leases tend to be 10, 15 or 25
             year terms and provide for the payment of a market rent. Long ground lease
             interests tend to be for 50 years or indefinite terms; such ground leases are
             normally granted on payment of a premium (yearly or as a lump sum) with only
             low or nominal rents payable.

              An easement is a right which burdens one piece of land and benefits another’s
              registered land.




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              The right of superficies is a right to own a property in, on top of or above another
              property. If items are fixed to the property, the presumption is that they form
              part of it and belong to the owner of the property. By the use of a right of
              superficies this rule can be circumvented.

              An apartment right divides a building into units giving entitlement to the exclusive
              use by the owner of an apartment right. The ownership of the building is
              exercised by all the owners of the apartment rights together.

   3.         Ownership - What types of ownership are there?

              There is only one type of unrestricted legal ownership in The Netherlands:
              absolute ownership. The other property interests - usufruct, lease, easements,
              right of superficies and apartment right restrict the absolute ownership, and are
              called restrictive rights. The restrictive rights are transferable.

   4.         Matters burdening or benefiting real estate - What matters can affect real
              estate?

              Common matters affecting real estate include:-

                       Matter                           Effect                          Example

               Easements              Rights which burden one piece of land       A right of way; a
                                      and benefit another. They are not           right to deposit
                                      personal but attached to the land itself.   rubbish; a right to
                                      They do not permit the owner of the         light
                                      benefited land to remove anything from
                                      the burdened land

               Covenants              Express or implied promises which can       Positive: a covenant
                                      be positive or restrictive. Positive        to repair a fence.
                                      covenants are personal and may not
                                      burden the land after the person who        Restrictive: a
                                      gives the covenant no longer owns the       covenant not to use
                                      property. Restrictive covenants             the land for a
                                      “continue to run with the land” and         particular purpose
                                      burden that land after a change in
                                      ownership

               Right of superficies   Contractual rights exercisable by one       A right to run a
                                      party over the land or real estate of       telephone or
                                      another, normally given to companies        electricity cable or
                                      supplying utility services                  erect
                                                                                  telecommunications
                                                                                  equipment or a
                                                                                  building

               Restrictions of        Restrictions imposed on a property          Restrictions for
               public law             and/or its use by a public entity, often    renovation of listed
                                      with a view to preserving the property      buildings; a pre-




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                       Matter                            Effect                            Example

                                       and/or to give a right of pre-emption to emption right of the
                                       the public entity                        state

               Prescriptive rights     Where a legal right over land belonging      A right of way
                                       to another person is acquired by long        exercised for more
                                       usage                                        than 20 years


   5.         Occupation of real estate - Who may occupy real estate?

              Real estate is usually occupied by one of the following categories of person:

              •         Owners – those persons with absolute ownership

              •         Holders of restrictive rights – those persons with a restrictive right

              •         Tenants – those persons with a lease of the property or part of it. It is
                        possible for any number of leases to be created in relation to the same
                        property, so creating a chain of interests. Normally, however, a
                        restriction will be contained in the first lease created limiting the number
                        of subsidiary leases that may be created out of it. Tenants of business
                        premises usually have statutory rights to renew their leases when the
                        contractual term ends.

              •         Persons claiming ownership by adverse possession – where they have
                        occupied the property for a long period of time without having any legal
                        rights to do so, but without challenge by the owner

   Please also see our CMS Lease Guide

   6.         Brokers - What is the broker's role?

              Brokers in the Netherlands generally fall into five categories:

              Investment
              Valuation
              Management
              Rent Review

              They are employed by any party to any transaction involving real estate. Their
              role may include:

              •         acting for a seller to find a buyer for a sale property, including marketing
                        the property for sale

              •         acting for a landlord to find a tenant for a leasehold property, including
                        marketing the property




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              •         acting for a buyer to find a property to buy

              •         acting for a tenant to find a property to lease

              •         acting for any party to a transaction drafting and negotiating heads of
                        terms

              •         valuing a client’s existing and target properties

              •         day to day management of property owned by clients, including
                        managing maintenance programmes and landlord and tenant work

              •         project management of development of new buildings or refurbishments
                        and

              •         negotiating rent reviews of existing properties

              Brokers available in the market range from those employed by major international
              organisations to specialist advisers providing advice on a more restricted basis.
              The role of the broker is decreasing, because of increasing professionalisation and
              transparency.

   7.         Employees - What employment issues affect real estate acquisitions?

              In The Netherlands typical employment issues are not relevant to real estate
              transactions.




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                                               PART B

                                   PROCEDURE AND TERMS

   8.         Procedure - What are the steps in a sale and purchase transaction?

              Transactions formally start when proposed heads of terms are drafted, negotiated
              and agreed by the brokers or Dutch lawyers for the seller and the buyer. The
              heads of terms (or memorandum of understanding) set out the principal terms
              agreed between the parties and are generally expressed to be “subject to contract”
              and not legally binding. They form the basis of the documents to be drafted.

              Once the heads of terms have been finalised and all information relating to the
              property is collected (through, for example, due diligence), a sale and purchase
              agreement (contract) is drafted. The form of the sale agreement will vary
              according to whether the property being sold is under construction or already
              built and the extent to which leases to tenants have already been granted.

              Legal completion of the sale and purchase transaction must occur in person or by
              written authorisation at a civil law notaries office. Completion may take place at
              the same time as exchange, depending on the acquisition timetable. Where the
              purchase is made with borrowed finance a charge over the property will be
              completed at the same time. The lender of the finance may instruct its own
              lawyers to carry out due diligence procedures on its behalf and negotiate security
              documentation.

              Following completion, the civil law notary needs to deal with registration of the
              transfer documents (and any charging documents) at the Land Registry and
              payment of tax, which is assessed on the price paid for the property.

   9.         Other common contract terms - What other provisions does a real estate
              sale contract commonly contain?

              An agreement for the sale and purchase of land can be in writing or in any other
              form. An agreement with a private person to buy or sell a house should be in
              writing. It should contain or clearly refer to all main terms and conditions. When
              the sale and purchase transaction is completed at a civil law notaries office a
              written agreement is to be signed which can be registered at the Land Registry.

              It is common for the sale and purchase agreement to provide for a deposit of
              between 5-10% of the purchase price on exchange of agreements, where there is
              to be a gap between exchange and completion. The civil law notary usually holds
              deposits.

              Where there are matters of title affecting the property, such as restrictive rights,
              the seller may require reciprocal obligations from the buyer and an indemnity in
              respect of any liability the seller may still have following completion of the
              transaction.

              Real estate contracts with private persons commonly incorporate standard terms.
              Where incorporated, the conditions will apply unless the contract expressly




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              provides otherwise. When a private person is the buyer he has the possibility of
              annulment of the agreement within three days after the agreement is signed by
              both the buyer and the seller.

              Provisions relating to value added tax or transfer tax will be included where
              relevant to ensure that the agreed tax position is preserved between exchange and
              completion.

              Contracts for sale of property subject to occupational interests such as leases will
              include clauses to cover ongoing management matters, and provide for
              apportionment of occupational income and outgoings on completion of the
              transfer of ownership in the property.

              If the property being sold is in the course of construction, the contract for sale
              will incorporate provisions dealing with the obligations of the seller to construct
              in accordance with an agreed specification and to provide to the buyer separate
              deeds of warranty from the building contractor and persons such as the architect
              in order to safeguard the buyer against defective design or workmanship.

   10.        Due Diligence - What investigations does the buyer normally make?

              Pre-exchange of agreements

              The prudent buyer is likely to commission a survey of the building and in
              appropriate cases, soil and geological investigations, plant and machinery tests,
              and environmental investigations. There are three limbs to the pre-exchange due
              diligence by the buyer’s lawyers.

              Firstly, title to the property will be investigated. The buyer’s lawyers will consider
              the entries on the Land Register and where relevant historic title documents.
              Where title to the property is not registered at the Land Registry, the buyer’s
              lawyer will consider the unregistered deeds to satisfy himself that the seller has a
              good and sufficient title to the property.

              By submitting a plan of the property to the Land Registry, the buyer’s lawyers will
              receive confirmation of whether or not the title is registered. Additional details of
              the registered interests then need to be obtained from the Land Registry.

              Where restrictive rights are established on the property, the terms of the relevant
              occupational documents need to be considered carefully to ensure they are not
              contrary to the buyer’s intentions for the property. The buyer’s lawyers will also
              need to check whether these documents require the consent of any third party to
              be given to the transaction.

              Secondly, the buyer’s lawyers will commence their own due diligence, which will
              include the conducting of various searches to check the position regarding
              municipal and zoning consents, environmental matters, utilities serving the
              property, financial encumbrances etc. Where the seller is a company, the buyer’s
              lawyers will also conduct searches against the seller’s name at the Companies
              Registration Office to ascertain whether the company is solvent and therefore able
              to dispose of its assets freely. Where the search result refers to security, the




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              buyer’s lawyers will ask for confirmation that such matters do not encumber the
              property and that no third party consents are required for the transaction to
              proceed.

              The investigation of existing lease agreements has become increasingly important.
              The lawyers investigate how these agreements affect the purchase price, because
              this price is often based on the rental income.

              Thirdly, the buyer’s lawyers will raise pre-contract enquiries (“preliminary
              enquiries”) of the seller’s lawyers to obtain information regarding a large number
              of practical matters which may affect the property and ask any relevant questions
              in relation to the title to the property. Whilst a seller must not knowingly or
              negligently mislead a buyer the general rule is “caveat emptor” (buyer beware).
              The seller generally gives replies, which may be actionable if wrong or misleading.
              During the due diligence process the buyer may often arrange that a survey is
              carried out at the property.

              Pre-completion

              After exchange of agreements and before completion the buyer’s lawyers will raise
              requisitions. These ask the seller to confirm that replies to pre-exchange enquiries
              remain correct and to divulge any further information that has arisen since
              exchange. The requisitions also deal with completion formalities such as the
              seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-
              completion searches including a priority search of the Land Registry.

              Reporting to the client

              Before exchange of agreements the buyer’s lawyers usually report their due
              diligence findings to their client, raising any matter of particular importance or
              concern.

              Occasionally, and normally only where the buyer is acquiring property as a result
              of the acquisition of a company, instead of due diligence being carried out by the
              buyer’s lawyers, the seller’s lawyers provide a certificate of title addressed to the
              buyer and any lender to the buyer. This may occur where the sale has been
              planned for some time and the parties wish the transaction to proceed quickly.

   11.        Terms implied by law - What provisions are implied by Civil Code or
              otherwise?

              Some of the most significant are as follows:

              Buyer Beware (Caveat Emptor)

              The overriding point of principle under civil law is “caveat emptor” - let the buyer
              beware. The buyer must satisfy itself in all respects as to the nature of the
              property it is acquiring. However, this does not absolve the seller from the
              obligation to provide truthful replies to enquiries raised by the buyer’s lawyers. It
              does not absolve the seller from giving information to the buyer (even without




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              enquiry of the buyer) if the seller knows that this information is essential for the
              buyer in respect to the buyer’s stated intentions.

              Unregistered interests

              Where a registrable interest is not registered against a property’s title number at
              the Land Registry, a buyer will take the property without being subject to it. An
              exception to this rule is the presence of a right that is created by prescription,
              which will not be registered, but the buyer will be subject to it.

              Misdescription and misrepresentation

              There are statutory rules which protect against clear misrepresentations or
              misdescriptions of fact made by the seller to the buyer which have the effect of
              inducing the buyer to enter into a transfer of land. In such cases, damages may be
              payable to the buyer or the buyer may be entitled to withdraw from the
              transaction.

              Unfair terms

              Agreements for sale that include exemption clauses, which seek to allocate risk,
              are subject to evaluation in legal proceedings. Statutory provisions restrict or
              render void the effect of clauses that unreasonably attempt to exclude liability.

              Standard conditions

              Real estate contract with private persons commonly incorporate standard terms.
              Standardised contracts and conditions, issued by the NVM or GIW, are usually
              used.

   12.        Registration and Notarisation of real estate - What are the basic
              requirements?

              The Netherlands have a central land register. The Land Registry is run through
              regional district land registries which are responsible for specific areas of the
              country. Registration of land is compulsory.

              When a party acquires a registrable interest in land, it must apply for registration
              of that interest at the appropriate district land registry. Only when the registration
              is complete can the party properly prove its right of ownership.

              The Land Registry has the benefit of a state backed guarantee of accuracy. It is
              the definitive record of who owns what land, the nature of the interest and any
              registrable matters affecting that land. The title register for a particular property
              comprises:

              •         the Property register, which gives a description of the property together
                        with any rights benefiting the property




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              •         the Proprietorship register, which gives details of the registered owner of
                        the property and the price paid for the property by the current owner
                        and

              •         the Charges register, which lists all registrable matters that encumber the
                        property such as rights benefiting other property, covenants, financial
                        charges, contracts and registrable leases

              The Registers may also contain, where appropriate, special entries that restrict the
              registered owner’s ability to deal with its title without obtaining the consent of
              another person.

              There is a requirement for notarisation of title in The Netherlands. Contracts for
              the disposal and acquisition of interests in real estate are signed by or on behalf of
              the parties at a notary’s office. Instruments effecting the sale of the interest itself
              have to comply with certain formalities relating to execution.

   13.        Disputes - How are they dealt with and resolved?

              Dutch law permits considerable freedom of contract and the parties must give
              careful thought to which law they want to govern the contract, in which
              jurisdiction they would prefer that any disputes are resolved and what method of
              dispute resolution they would prefer. Methods of dispute resolution could
              include court proceedings, arbitration (whether domestic or international),
              reference to an independent expert or a mediation process. This freedom of
              contract is not absolute, however, and can in certain circumstances be
              circumvented if statute (or more rarely, the common law) requires.

              The choices should be stated expressly in the contract. If it can be avoided, these
              matters should not be left to the courts to decide, since the uncertainty of law and
              jurisdiction shopping will be costly to all parties and can mean that any dispute is
              likely to take a very long time to resolve. The parties can agree to leave any or all
              of these matters fluid to be resolved at the time any dispute arises, but this can
              create its own problems.

              Different types of dispute are often resolved in different ways. For example, rent
              reviews are often dealt with by arbitration only; disputes of fact (or under
              particular clauses or in respect of particular aspects of the contract) are often dealt
              with by expert determination. Disputes of law should preferably be referred to
              court, or to an arbitrator.

              When choosing a method of resolving disputes, the parties will have regard to
              various issues, including the following:

              •         The domicile/nationality and governing law of the contracting parties
                        and any relevant statutory limitations may inhibit such choice or the
                        effectiveness of such a choice

              •         Can awards be enforced in the relevant jurisdictions? For example, is
                        there an international treaty that will allow enforcement of an award in a




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                        particular jurisdiction? If such a treaty does exist, does it recognise
                        arbitration awards and agreements arising out of a mediation process?
                        Many jurisdictions will not enforce awards that have not arisen through
                        the consideration and final judgment of a court/judge

              •         If any remedy that could be sought is an interest in land, rather than
                        payment of money, a consideration is whether the particular system of
                        law, jurisdiction or method of dispute resolution will permit such an
                        award. Under English law, an arbitrator would not usually have the
                        power to order the transfer of land from one party to another in a title
                        dispute

              •         Obtaining the decision of an expert may be faster and cheaper than
                        obtaining one from an arbitrator

              If the parties are not satisfied by the decision of the independent person, different
              remedies and courses of action apply depending upon whether that person acted
              as an expert or as an arbitrator.




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                                               PART C

                        PERMITS INSURANCE AND ENVIRONMENT

   14.        Permits - What permits are required for the use and occupation of real
              estate and are they personal?

              Applications to obtain planning permission to develop land must be made to the
              local government authority which has the responsibility for controlling the use
              and development of land in its area. Local government authorities have statutory
              time periods within which a decision must be made as to whether or not planning
              permission should be issued. There are various statutory rights in relation to
              appeals, which can be made if an application is refused, and rights of challenge
              regarding the validity of any permission granted. For developments that are likely
              to cause significant environmental impact, an Environmental Statement will need
              to be submitted with the application for planning permission, explaining the likely
              environmental impact of the development.

              Generally, planning permission will be required for the construction of a “new
              build” property, work that is proposed for refurbishment of an existing building,
              and where an existing use (for example office space) is to be changed to another
              distinct use (for example retail or licensed premises). Planning permission, when
              granted, benefits the licensee (but is transferable to the new owner of the
              property) and will contain conditions which will regulate the impact of the
              development. Under the Planning legislation the terms “develop” and
              “development” have a much wider meaning than the construction or replacement
              of buildings. Minor building works or simple changes of use may amount to
              “development” requiring planning permission.

              A different type of permit is required when it is proposed to do work to
              historically or architecturally important buildings. Whilst some work to such
              buildings such as the removal of a stone pillar or a sundial may not require
              planning permission because it is not “development”, the removal of such items
              could be seen as affecting the building’s importance, and consent would then be
              required.

              Larger districts or areas of buildings (called “beschermde stads- en
              dorpsgezichten”) that have architectural or historical importance may also be
              subject to a separate regime of control that requires consent to be obtained before
              work is carried out that would damage the character and appearance of the area
              that the local government authority wishes to conserve and enhance.

              During the consultation period that the local government authority must
              undertake when considering the development, third party groups are able to put
              forward objections (or support) that should be considered by the authority before
              deciding whether or not a permission should be granted. In addition, even after a
              permission has been obtained, there will be a period within which a third party
              group is entitled to challenge the validity of granting the permit and this should be
              kept in mind by lawyers and agents acting for the developer, before any work on
              the permitted development begins.




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              In addition to a planning permission, the building must also have approvals
              confirming that construction has taken place in accordance with applicable
              building regulations and health and safety legislation. This is checked when a
              request for a planning permission has been put forward. Certain types of building
              may also have other kinds of certificate issued by independent bodies in relation
              to building or construction matters generally.

   15.        Insurance and Risk - What insurance will the parties effect and when does
              the insurance risk pass at the time of sale?

              Before a sale is contemplated, insurance is generally the responsibility of the
              owner of the property. However, where such property is the subject of a lease,
              the terms of the lease will prescribe which party has responsibility to insure.
              Whatever the length of the lease, the tenant will generally insure the contents of
              the property belonging to the tenant and in some cases certain parts of the
              property for which the tenant is contractually responsible, such a plate glass.

              The insuring party should have a fully comprehensive buildings insurance policy
              to protect the structure and fixtures and fittings of the property in the event of
              damage or destruction by any of a comprehensive list of insured risks, such as
              storm, lightning, fire and water damage. The policy may also cover additional
              special heads of cover such as subsidence, heave, earthquake and, if available,
              terrorism.

              Generally it is the buildings, and not the land, which are insured for the
              reinstatement cost rather than the reinstatement value.

              Insurance policies may either comprise a single policy for one particular property
              or a block policy designed to cover a portfolio of properties. Larger institutional
              investors may self-insure.

              Occupying owners generally have separate policies to cover the contents of the
              property, especially if the property includes costly plant and machinery.

              Where the property is subject to an old restrictive covenant and the property
              owner does not know whether it is still enforceable, a special restrictive covenant
              indemnity insurance policy may be taken out to insure against enforcement of the
              covenant by third parties. Similar policies can be taken out if there is some
              specified defect in the title to the property. The benefit of such insurances may
              usually be claimed by subsequent owners of the property and tenants.

              In some cases (e.g. policies insuring the seller’s interest to maintain the property),
              rights under the insurance policy will automatically transfer on sale. However, the
              policy will expire if the new owner does not confirm to the insurer that the policy
              should continue within two months after the transfer, while the insurer has a right
              to terminate. In other cases insurance policies are personal and will not
              automatically transfer on sale. It is important to check each policy carefully to
              ascertain the precise position.

              Where a sale is taking place, timing of the transfer of risk is normally prescribed
              by the sale agreement. Agreements for sale of leased land will still be governed by




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              the insurance terms of the lease. It is common market practice for the parties to
              agree that the seller will continue to insure occupied property until completion.

              Third party liability risks (e.g. environmental or personal damage) are intrinsic to
              almost every property. It is important to have third party liability insurance which
              properly covers these risks.

   16.        Environmental - What are the common environmental issues?

              Real estate may be contaminated as a result of current and former uses. Primary
              legal responsibility follows the “polluter pays” principle: the person who spilled,
              released or discharged a substance will normally be liable for any ill-effects it
              causes. However, environment laws may also operate to make future owners and
              occupiers liable for contamination already present at the real estate when they
              acquire it. This can only occur if:

              •         the substance is causing, or there is still potential for it to cause, actual
                        harm to humans, to real estate, to personal property, to protected
                        ecosystems or pollution of groundwater or surface waters; and

              •         either the new owner or occupier knows about the presence of the
                        substance but fails to take adequate steps to limit the harm it causes, or
                        no person more directly responsible for causing or knowingly permitting
                        the substance to be present at the real estate can be found (for example,
                        because a more directly responsible company has since been wound up)

              If development is proposed, then planning permission may be made conditional
              upon the proper investigation and remediation, if necessary, of potential historic
              contamination. If the planned development is of a type considered potentially
              detrimental to the environment, the application for planning permission may need
              to be supported by an assessment of the development’s likely future
              environmental impact.

              Those who have control of places of work are obliged to assess the risk of
              asbestos being present in the fabric of the building and are obliged to manage the
              human health risks posed by any asbestos found.

              Acquisition due diligence may involve the appointment of environment
              consultants to consider documentary information and to carry out a site visit
              (Phase I). If considered necessary, further, intrusive investigations (Phase II) may
              then be undertaken. It is important to identify potential problems early so that
              there can be negotiation on price, the need for and scope of any remediation
              and/or the need to put in place protection measures in respect of any existing
              contamination related losses that may arise in the future. Such protection may
              take a number of forms, including obligations to remediate any contamination
              discovered post-acquisition, indemnities in respect of first party loss or third party
              claims, or specialist historic liabilities environment insurance to cover any of these
              risks.




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                                                    PART D

                                           FINANCE AND TAXES

   17.        Pricing/Valuation - What sets the price/valuation of real estate?

              Pricing of real estate investments is a combination of the aggregate rent being paid
              by occupational tenants of the property and the yield that investment buyers
              consider that a property of the specific type and location is worth at the time of
              valuation taking that income into account.

              The rent for a particular property is likely to be assessed by multiplying the area of
              the property by the market rental value per square metre. The market rental value
              will take into account factors such as the location of the property, its type and
              condition, the length of the lease term and the quality and stature of the tenants.

              In the case of retail shops, it is common for the rent of the property to have
              differential values according to the positioning of the floor space. The rental
              values of the various areas will be added together to provide an overall rental
              value for the property.

   18.        Financing - How is a real estate acquisition financed?

              The principal ways in which real estate acquisition is financed are:

              •         Through the purchaser’s own cash resources or general corporate
                        banking facilities

              •         By using the capital value of the property to raise specific finance
                        secured on the property

                        A typical security package will involve the grant of a mortgage (also
                        known as a legal charge) over the real estate itself together with a
                        supporting floating charge over all of the other assets of the purchaser
                        where the purchaser is a company. Floating charges cannot be created
                        by individuals.

                        Under the current law, a secured lender who has security from a
                        company over the whole or substantially the whole of its assets may
                        appoint a receiver of the company to enforce its security if the borrower
                        defaults.

              •         Raising finance by bond/debenture stock issue

                        Here the interest rate is usually fixed by reference to the nearest
                        equivalent government stock plus a spread or margin.

                        The required security package is likely to be equivalent to that in relation
                        to secured bank debt.




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   19.        Security over real estate - How is security over real estate created and
              protected?

              A fixed security interest over land is generally created under a document called a
              “mortgage” or “legal charge”. A “mortgage debenture” or “debenture” which
              incorporates a full range of fixed and floating charges over all of the assets of the
              borrowing company may be required as an alternative.

              In the case of land to which the title is registered at the Land Registry, all charges
              must be registered in the charges register of the relevant title by making the
              appropriate application to the Land Registry.

              In the case of investment property, some lenders require all rental income
              (excluding service charge receipts) to be paid into a specific account charged to
              the lender and will restrict withdrawals from that account to the making of
              payments in respect of the financing costs and repayment of the principal sum
              secured on the property.

              In the case of a property where a managing agent collects the rents on behalf of
              the owner, it is not unusual for notice of the mortgage/legal charge to be given to
              the managing agent, and for the managing agent to enter into a duty of care
              arrangement with the lender in relation to the collection of rent and to agree to
              collect the rent and pay it into a specific rent collection account charged to the
              lender.

   20.        Taxes and Costs - What are they and who pays them?

              Generally, please refer to our CMS transaction costs guide as to the nature and
              amount of the taxes and costs.

              The supply of immovable property which is situated in the Netherlands is
              exempted from 19% value added tax (VAT).

              However, in the following three situations the supply of immovable property is
              subject to 19% VAT:

              •         the supply of building land

              •         the supply of buildings or parts of buildings, including the accompanying
                        land, prior to, on, or two years after the moment the building has been
                        taken into use (“newly constructed immovable property”) or

              •         where the property is the subject of a valid election to waive the
                        statutory exemption from the VAT regime. The buyer may make its
                        own election immediately prior to or upon completion. An advantage of
                        opting for VAT on property is that the parties may be able to recover
                        any VAT on professional fees associated with the transaction

              The exception to the rule that VAT is payable on the sale of an (elected) property
              is where the transaction constitutes a “transfer as a going concern”, where the
              property is let and operated.




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              Transfer tax (6% of the purchase price) is due where the purchaser acquires the
              legal ownership or the economic interest in an immovable property which is
              situated in the Netherlands. The acquisition of shares in a company is also subject
              to 6% transfer tax if:

              •         70% or more of the assets of the company consists of immovable
                        property (or right in rem) which is situated in the Netherlands

              •         the company has the intention to exploit immovable property and

              •         the purchaser acquires at least 33 1/3 % of all shares in the concerning
                        company

              In principle, transfer tax will not be due in case of the supply of building land or a
              newly constructed immovable property (see above).




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                                                  PART A

                                       PARTIES AND INTERESTS

1.        Parties - Who can own real estate?

          General

          There are no specific limitations as regards ownership of property. Natural persons, legal
          persons (corporations) and organisational units not having legal personality but which have
          been granted the legal capacity by virtue of statutory law may own real estate. Owners of real
          estate include: individuals, corporations (such as property funds, developers, insurance
          companies, banks and other financial institutions), the State Treasury and local governments.

          Acquisition of real estate by foreigners

          There are some restrictions limiting foreign ownership of real estate in Poland. To a certain
          extent they still apply to EU companies and citizens.

          The 1920 Act on the Acquisition of Real Estate by Foreigners provides restrictions on the
          acquisition of real estate and majority stakes in companies holding properties by foreign
          nationals or companies. Based on this Act, prior to acquiring land or majority stake in a
          company owning property in Poland, a foreigner is obliged to obtain a permit issued by the
          Ministry of Internal Affairs and Administration (“MOI”). A property sale agreement executed
          without a required MOI permit is invalid.

          Companies and individuals from the European Economic Area (“EEA”) which includes EU
          members, Switzerland and Norway do not need permits to acquire property with the exception
          of agricultural land and forests. Shares in companies owning real estate may be purchased by
          companies from EEA without any permits.

2.        Property - What property interests are currently sold?

          Under Polish law interests in property include:

          •          ownership (freehold) (własność)

          •          perpetual usufruct (użytkowanie wieczyste) established for 99 years

          •          limited property rights: usufruct (użytkowanie), easement (służebność), cooperative
                     ownership right to residential premises (spółdzielcze własnościowe prawo do lokalu
                     mieszkalnego), mortgage

          •          contractual rights to use property: lease (najem), tenancy (dzierżawa) and leasing

          Ownership and perpetual usufruct are the only rights that are freely transferable and can be
          mortgaged and that are recognised by institutional lenders and investors for long term
          investment purposes. The ownership of buildings and other structures is always vested with the
          owner (or perpetual usufructee) of the land but individual premises may constitute separate
          properties whereby the owner of the premises also holds a share in ownership (or perpetual
          usufruct) of the land. Other property rights are either accessory (road easements) or are not
          common because of legal restrictions (usufruct right for instance is not transferable).

          Occupational leases (tenancy, lease and leasing) are usually a source of profit for the property
          owners investors. Leases entitle the holder of the lease to the use of the leased property or


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          premises and to derive income from the leased property. The detailed scope of the rights and
          mutual obligations of the lessor and lessee depend on the wording of the agreement.

          Ownership

          Ownership (Freehold) is the broadest right in property, enjoying full constitutional protection.
          Public owners of real estate (State Treasury, local authorities, other public bodies) are not
          privileged over private ones. Private ownership of land is becoming more and more common - it
          was in fact quite common even during the communist era, especially in relation to farmland.

          Perpetual usufruct

          One of the most important property interests in land is the right of perpetual usufruct
          (użytkowanie wieczyste).

          The concept of the right of perpetual usufruct to land arises from the historical reluctance of the
          State to hand over control of properties to full private ownership. Perpetual usufruct has now
          become a strong and stable right in property, far removed from its origins, the closest relation to
          ownership of all property rights.

          Perpetual usufruct may only be created on land belonging to the State Treasury or local
          authorities. Currently it can be created by contract only. However, the majority of existing
          perpetual usufruct titles to the land were created by operation of law in 1990, when all state
          owned enterprises were granted perpetual usufruct title to the land belonging to the Polish State
          which they held under management. The acquisition of the perpetual usufruct by the enterprises
          required confirmation by an administrative decision usually referred to as the decision
          establishing perpetual usufruct. Once created (regardless of the method of creation), perpetual
          usufruct title can be inherited, transferred to third parties and encumbered (with a mortgage,
          easements or usufruct). The perpetual usufructee holds freehold title to buildings and other
          constructions erected on the land. In comparison with the wide powers granted to the holder of
          the perpetual usufruct right, the owner of the land (the State Treasury or the local authority) is
          limited: it cannot encumber the property or sell it to an entity other than the holder of perpetual
          usufruct. Only the holder of the perpetual usufruct right is entitled to use and collect income
          from the land.

          One of the fundamental differences between perpetual usufruct and ownership is that perpetual
          usufruct is supposed to be created for a defined specific purpose (e.g. the development of a
          project or conducting a particular activity) as set out in a perpetual usufruct contract. If the
          perpetual usufruct was created by operation of law the purpose is usually very broadly defined
          in the decision establishing perpetual usufruct. The decision very rarely includes limitations
          with respect to use of the land. If the holder of the title breaches the provisions of the contract or
          decision establishing perpetual usufruct concerning the purpose, it may lead to an increase of
          the annual fees, or even the termination of the contract.

          Another fundamental difference is that perpetual usufruct is created for a specified term (40 to
          99 years depending on the purpose of its creation). All perpetual usufruct titles created in 1990
          by operation of law were created until 5 December 2089. If the holder demands an extension
          within five years before the scheduled termination date, the owner must extend the term, unless
          there are material public reasons for not doing so. The perpetual usufructee may also demand an
          extension earlier if developments are planned on the land, which will be depreciated over a
          period longer than the remaining term of this right.

          Upon the creation of a right of perpetual usufruct by virtue of contract, the perpetual usufructee
          is obliged to pay an ‘initial fee’ amounting from 15% to 25% of the value of the land.


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          Thereafter, he pays annual fees of 3% of the land value of land with commercial purpose and
          1% of the land zoned for residential purposes. The percentage of those fees may be lower in
          certain specific cases, for example in relation to some non-profit organisations and for historic
          monuments.

          Upon termination of a perpetual usufruct contract, the perpetual usufructee loses the right, and
          the land (together with the buildings and other improvements) is taken over by the owner. The
          owner is, however, obliged to reimburse the perpetual usufructee for the current market value of
          the buildings and other improvements legally made on the land.

          Usufruct

          Usufruct grants its holder the right to use and collect income from the property in compliance
          with a notarised usufruct contract. Under the contract, the usufructee is granted full economic
          use of the property, along with all responsibility for making improvements or repairs to the
          property. Usufruct cannot be contractually transferred to a third party, which is a major
          inconvenience of this right. There is no maximum time limit for which usufruct may be created.

          Easements

          Polish law recognises two types of easements: land easements and personal easements. The
          former are established to the benefit of each owner (or perpetual usufructee) from time to time
          of (usually neighbouring) land, and the latter are established to the benefit of a specific
          individual. Land easements are transferred together with the property (whether dominant or
          servient) and personal easements may not be transferred. Depending on the content of the
          easement right, defined in the easement deed, the holder of the dominant tenement may exercise
          various rights such as using the servient property to a specific extent (e.g. passage by foot and
          vehicle) or requiring the holder of the servient property not to exercise some of his rights to his
          property (e.g. not to build closer than x metres to the boundary). As a rule, any installations
          necessary to exercise the easement should be financed, maintained and repaired by the holder of
          the dominant tenement. Easements expire if they are not exercised for more than 10 years. In
          general, easement is not a suitable title for a development, but it has a subsidiary function,
          which amongst other things enables the provision of connections to the municipal media
          network or an access road, for example.

          A specific type of easement (the transfer easements, służebność przesyłu) are available to utility
          companies. These easements may be established also on non-neighbouring land for the purpose
          of operating utility installations. The transfer easement constitutes a part of the utility enterprise
          and as such is transferable.

          Lease and tenancy

          The basic contractual rights allowing the use of a property are a lease (najem) and a tenancy
          (dzierżawa). Both can be concluded for unspecified period of time of for a maximum fixed
          period of 30 years (10 years in the event of a lease concluded by natural persons outside of
          business activity). The lease grants the right to use the object for any lawful purpose including
          business activity, while the tenancy grants the right to use and to collect income from the object.
          After the lapse of their statutory maximum terms, both contracts transform into agreements for
          an unspecified period of time (and are thus subject to termination on notice). In general terms,
          30-year tenancies may be signed with respect to farmland, operating businesses and rights,
          while leases are available for all types of moveable and immoveable assets leased for any
          business activity.




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3.        Ownership - What types of ownership are there?

          Ownership is the broadest title a legal person can hold in relation to property under Polish law.
          Ownership can be equated with freehold title under Anglo-American legal systems.

          Title register

          There are two parallel types of title register in Poland: (i) the land and mortgage register or
          “perpetual book” (księga wieczysta), registering titles and encumbrances, maintained by the
          courts, and (ii) the land register (ewidencja gruntów i budynków) maintained by administrative
          authorities (powiat), the main purpose of which is to describe the physical features and the
          designated use of the land and buildings.

          Land and mortgage register

          Land and mortgage registers (further “mortgage registers”) are kept by special divisions of
          district courts competent for the relevant territory. They include a description of the property
          and register titles and encumbrances. The long-term target of the mortgage register system is to
          have all properties registered.

          The mortgage register is predominantly kept in a freely accessible electronic format. The
          traditional paper registers continue to exist in some courts, but these are continually being
          converted into the electronic register.

          The mortgage register is broken down into four sections. The first section contains a physical
          description of the property and lists the rights benefiting the property (e.g. granted easements).
          In section two, the owner (and perpetual usufructee, where appropriate) is specified. Section
          three contains all encumbrances other than mortgages (easements, usufructs, leases, pre-emption
          rights etc.). It also includes restrictions in disposals, such as warning notices (e.g. regarding
          enforcement proceedings, or the status of the register not being in conformity with the actual
          legal status). Section four contains mortgages.

          Certain rights are created or transferred upon registration (i.e. perpetual usufruct, mortgage).
          Moreover, the sequence of registration determines the ranking of the rights. Registered rights
          rank higher than unregistered ones.

          According to the “principle of public faith of mortgage registers”, everybody may rely on the
          contents of the mortgage register with respect to registered rights.

          Mortgage registers are publicly available for review by anyone.

          Land register

          Land registers, in comparison to mortgage register, have a technical function. The registers
          concern physical features of the land (surface, borders etc.), as well as its designated use
          (agricultural, forest, construction purposes etc.), and the class of land etc. Land registers are
          kept by powiats (local-government units at a level between gmina – district or municipality, and
          województwo – province).

          The land register is supposed to be converted into a cadastral register, however it is not likely to
          happen soon due to the huge amount of work necessary to value properties.

          Transfer of ownership



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          Subject to limited restrictions, ownership is freely transferable. Agreements on transfer of
          ownership title and perpetual usufruct title must be entered in the Land and Mortgage Register.
          Ownership title passes upon execution of the property transfer agreement and perpetual usufruct
          title passes upon execution of the decision of the Land and Mortgage Registry Court, but the
          decision takes effect retrospectively from the date on which the application to register the
          transfer was filed.

          Purchase from public bodies

          The largest Polish landowners are the public bodies, i.e. the State Treasury and local authorities
          (mainly gminas). The acquisition of real estate from public bodies (or granting perpetual
          usufruct on their land) is regulated by the same civil law regime as transactions between
          individuals. However, due to the public status of the land, it is additionally subject to specific
          regulations contained in the 1997 Real Estate Management Act.

          As a rule, the acquisition of public land is subject to the principle of transparency reflected by a
          general obligation to dispose of land via public tenders. The relevant authority selects the
          purchaser of the land from the bidders in an oral or written tender. An oral tender is used if the
          highest price is considered, while a written tender is used if there are other aspects to take into
          account than simply price.

          The Act exempts certain disposals from the tender procedure. The most important exemption is
          an in-kind contribution to a company. As a matter of fact, several reputable developments were
          carried out in this more flexible way. Municipalities selected developers in a less formal
          procedure, set up common SPVs and sold their stake of shares once the development was
          completed. However, this scheme is no longer popular due to restrictions on the acquisition of
          shares held by public bodies (they must be sold via a public tender, or another public procedure;
          in other words the private shareholder already holding shares in such SPV has no priority in the
          acquisition).

          Pre-emptive right

          In certain cases, public bodies may have a statutory pre-emptive right relating to properties put
          up for sale. If such a property is sold without observing this right, the sale is invalid. This
          involves the district’s (gmina’s) pre-emptive right (almost always waived) applying to the sale
          of the following kinds of properties (i) undeveloped land previously acquired from the State
          Treasury or from the local authority (ii) undeveloped land held in perpetual usufruct (iii) land
          for which a public use is provided in the local Master Plan (if the pre-emptive right is registered
          in the mortgage register) and (iv) an historical monument (if the pre-emptive right is registered
          in the mortgage register). The district in question has one month following the notification of
          the conditional purchase agreement by the notary to exercise its right, failing which the parties
          may enter into the final purchase agreement.

          In addition, the 2003 Agricultural System Act introduced a pre-emptive right of tenants of
          agricultural land. If there are no qualifying tenants, the pre-emptive right may be exercised by
          the Agricultural Properties Agency. Selling agricultural land in violation of the Act or without
          notifying the entitled tenant or the Agency is null and void. There are plans to limit the pre-
          emptive right of the Agricultural Properties Agency to the properties exceeding 1 hectare.

4.        Matters burdening or benefiting real estate - What matters can affect real estate?

          Common matters affecting real estate include:




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            Matter               Effect                                Example
                                 Polish law recognises two types
                                 of easements: land easements and
                                 personal easements. The former
                                 are established to the benefit of
                                 each owner (or perpetual
                                 usufructee) from time to time of      A right of way; a right to use
                                 (usually neighbouring) land, and      pipes and cables, the right of
            Easements
                                 the latter are established to the     operating utility installations, the
                                 benefit of a specific individual.     right to use water
                                 Land easements are transferred
                                 together with the property
                                 (whether dominant or servient)
                                 and personal easements may not
                                 be transferred
                                 A mortgage may be established
                                 either as a contract between the
                                 borrower and the lender in the
                                 form of a notarial deed or
                                 through a notarial statement of
                                 the borrower submitted on the
                                                                       Mortgage securing receivables
                                 basis of the written statement of
            Mortgage                                                   arising out of a loan agreement or
                                 the lender (a bank).
                                                                       other monetary claims (taxes)
                                 Alternatively, a written document
                                 issued by the bank together with
                                 a written statement of the
                                 borrower may also serve as the
                                 legal basis of establishing a
                                 mortgage
                                 Usufruct grants its holder the
                                 right to use and collect income
            Usufruct
                                 from the property in compliance
                                 with a notarised usufruct contract
                                                                       Occupation of land for more than
                                 Acquisition of ownership to
                                                                       20 years in good faith and on
            Adverse possession   property based on long term
                                                                       others case for more than 30
                                 possession in good faith
                                                                       years
                                 When a party has reserved the
                                 priority of the purchase of a
            Pre-emption right    property where the other party
                                 sells the property to a third party

                                 Lease (najem) and a tenancy
                                 (dzierżawa) which are
                                 contractual rights allowing the
                                 use of a property. Annuity
                                 (dożywocie) – when in exchange
                                                                       Lease of land, lease of building,
            Contractual rights   for the transfer of the ownership
                                                                       lease of the premises
                                 of a property, the buyer has
                                 assumed the obligation to
                                 provide the seller with financial
                                 support for life or with
                                 accommodation for life


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5.        Occupation of real estate - Who may occupy real estate?

          Real estate is usually occupied by one of the following categories of person:

          •          Owners - persons with an ownership right to the property

          •          Perpetual usufructees - persons holding perpetual usufruct interest in the property

          •          Tenants - persons with a lease (tenancy) of the property or part of it. It is possible to
                     create a sublease to a leased property

          •          Persons claiming ownership by adverse possession - where they have occupied the
                     property for a long period of time without having any legal rights to do so, but without
                     challenge by the owner or the perpetual usufructee

          •          Persons benefiting from the right of easement and usufruct

          Please also see our CMS Lease Guide.

6.        Brokers - What is the broker's role?

          Brokers in Poland are employed by any party to any transaction involving real estate. Their role
          may include:

          •          acting for a seller to find a buyer for a sale property, including marketing the property
                     for sale

          •          acting for a landlord to find a tenant for a leasehold property, including marketing the
                     property

          •          acting for a buyer to find a property to buy

          •          acting for a tenant to find a property to lease

          •          acting for any party to a transaction drafting and negotiating heads of terms (or LoIs)

          •          valuing a client's existing and target properties

          •          day to day management of property owned by clients, including managing
                     maintenance programmes and landlord and tenant work

          •          project management of development of new buildings or refurbishments

          Brokers available in the market range from those employed by major international organisations
          to specialised advisers providing advice on a more restricted basis. Brokerage services are
          licensed in Poland and rendering services without a license is an offence.

7.        Employees - What employment issues affect real estate acquisitions?

          Typical employment issues such as the transfer of undertakings, redundancies and changing
          terms and conditions of employment may be relevant to the following real estate transactions:



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          •           the acquisition of the business enterprise if real estate is a component of that business
                     enterprise

          In the event of the transfer of the property through the transfer of business enterprise the buyer
          becomes employer in all employment agreements binding on the day of transfer by operation of
          law. The previous and a new employer are joint and severally responsible for all claims and
          liabilities arising from employment relationship created before the transfer. The new employer
          is obliged to propose new terms and conditions of employment to all workers who work on
          other basis than an employment agreement. Transfer of business enterprise may not be a reason
          of a termination of the employment agreement.

          •          the acquisition of shares of the company that owns the property

          In the event of the transfer of shares of the company that owns property, the employer remains
          unchanged and consequently the company is still responsible for all claims and liabilities
          relating to employees and the terms and conditions of the employment agreements remain
          unchanged.




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                                                  PART B

                                       PROCEDURE AND TERMS

8.        Procedure - What are the steps in a sale and purchase transaction?

          A sale and purchase transactions usually start when proposed heads of terms (or LoI) are
          drafted, negotiated and agreed by the seller and the buyer. The heads of terms (or similar
          documents) set out the principal terms agreed between the parties and are generally expressed to
          be "subject to contract" and not legally binding. They form the basis of the documents to be
          drafted by the lawyers.

          Once the heads of terms have been finalised, they are sent to the parties' lawyers. The seller's
          lawyers will usually collate all information relating to the property and send it to the buyer's
          lawyers together with a draft sale and purchase agreement (contract). The form of the sale
          agreement will vary according to whether the property being sold is under construction or
          already built and the extent to which leases to tenants have already been granted. Sometimes
          there is a need to enter into a preliminary agreement caused by the fact that Polish law does not
          allow for the conditional transfer of real estate. This limitation does not apply to share deals, but
          due to some practical reasons (difficulty to establish whether all the conditions were fulfilled
          and when the title to the shares finally passes to the purchaser) two stage transactions are also
          recommended in this case. The preliminary agreement should also establish clear criteria as to
          the rights and obligations of the seller in respect of operating the asset/target company during
          the interim period between the execution of the preliminary sale agreement and the final
          agreement. The buyer's lawyers consider and suggest amendments to the draft sale agreement
          and at the same time will undertake general due diligence investigations. Once the sale
          agreement is in an agreed form, the seller and the buyer sign the sale agreement.

          Before signing the sale agreement the buyer's lawyers will also conduct pre-completion
          searches, including a protective search at the Land and Mortgage Registry, to ensure that the
          seller is still the owner of the property and that there are no new encumbrances affecting the
          property.

          The preliminary agreement, as with a final agreement, must be executed as the notarial deed (for
          the sale of real estate) or with the signatures of the parties certified by a notary (for the sale of
          shares).

          Following completion, the notary before whom the sale agreement was signed deals with
          registration of the transfer document at the Land and Mortgage Registry and the notary needs to
          collect and arrange payment of transfer tax (tax on civil transaction), which is assessed on the
          price paid for the property, if applicable. In the case of VAT, it is paid directly by the seller to
          the buyer who then settles it with the tax office.

9.         Other common contract terms - What other provisions does a real estate sale contract
          commonly contain?

          An agreement for the sale and purchase of land must be in the form of notarial deed, must
          contain all main terms and conditions as required by the law, and must be signed by the seller,
          the buyer and the notary.

          The sale and the purchase agreement apart from essential terms such as the exact description of
          the property, the price and the parties includes the following:

          •          description of all encumbrances burdening and benefiting of the property


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          •          representations and warranties of the seller with respect to the property and to the
                     seller’s status

          •          representations and warranties of the buyer with respect to its status

          •          specification of documents evidencing the Seller’s title to the property

          •          price and the method of payment of the purchase price

          •          date of a delivery of the property to the buyer

          •          seller’s liability for breach of warranties

          •          transfer of contractor’s warranties (if a property is developed and the warranties are
                     still in force)

          •          in the event if the property is subject to occupational interests such as leases - clauses
                     to cover ongoing management matters

          •          confidentiality

          •          tax provisions setting out whether the transfer of the property is subject to VAT or
                     transfer tax (tax on civil transactions)

          •          application to the court to register the buyer as the new owner of the property, the
                     application being filed by the notary

10.           Due Diligence - What investigations does the buyer normally make?

          General

          Before the acquisition of the property it is recommended to carry out comprehensive legal,
          technical and limited tax due diligence of the property and in the case of the acquisition of the
          property through a share deal due diligence of the property holding company (including full tax
          due diligence) is recommended. Legal due diligence is typically carried out by specialised legal
          advisors. A prudent buyer is likely to commission also technical due diligence including a
          survey of the building and in appropriate cases, soil and geological investigations, plant and
          machinery tests, and environmental investigations. Tax due diligence is carried out in particular
          to check whether the sale is subject to VAT (22% fully recoverable) or transaction tax (2% non-
          recoverable).

          Title to the property will be investigated first. The buyer's lawyers will consider the entries on
          the Land and Mortgage Register and where relevant documents on previous title transfers. At
          this stage also additional details of the interest registered at the Land and Mortgage Registry are
          investigated, such as mortgages, easements, pre-emption rights and other rights. In addition to
          standard checks it is recommended that a special check is carried out in respect of potential
          restitution claims of former owners. This concerns in particular Warsaw, which had a special
          nationalisation regime after the Second World War that allowed former owners to reclaim title
          for a certain period of time following nationalisation. In other parts of Poland it may often be
          reasonable to check for restitution claims following the title history check.

          If the property is subject to leasehold or other occupational interests, the terms of the relevant
          occupational documents need to be considered carefully to ensure they are not contrary to the
          buyer's intentions for the property and that there are no limitations to property transfers. Leases

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          are transferred to the acquirer of property by operation of law and the tenant does not have
          termination right unless such right is granted in the lease.

          The buyer's lawyers will review permitting process for a developed property to check the
          position regarding zoning consents, environmental permits, building permits and occupation
          permits.

          If the seller is a company, the buyer's lawyers will also conduct searches against the seller's
          name at the companies register to ascertain whether the company is solvent and therefore able to
          dispose of its assets freely. Where the search result refers to security, the buyer's lawyers will
          ask for confirmation that such matters do not encumber the property and that no third party
          consents are required for the transaction to proceed.

          Remaining due diligence items include environmental matters, utilities serving the property,
          financial encumbrances, pending proceedings which may affect the property, insurance policies
          etc.

          Reporting to the client

          The buyer's lawyers report their due diligence findings to their client, raising any matter of
          particular importance or concern during the diligence process.

11.           Terms implied by law - What provisions are implied by Statute, Code or otherwise?

          Some of the most significant are as follows:

          •          Principle of public faith of mortgage registers (zasada rękojmi wiary publicznej
                     ksiąg wieczystych)

                     According to the “principle of public faith of mortgage registers”, everybody may rely
                     on the contents of the mortgage register with respect to registered rights. A good faith
                     purchaser of a registered right acquires this right as it is described in the mortgage
                     register and from the person registered as the holder of the right (even if such person
                     did not actually hold it). It should also be noted that there is a legal presumption of
                     good faith in the Polish Civil law i.e. the burden of proof is on the party questioning
                     good faith.

                     Mortgage registers are publicly available for review by anybody.

          •          Warranty for defects (rękojmia za wady fizyczne i prawne)

                     There is statutory law rule which protects the buyer against physical and legal defects
                     of the sold property. The seller is responsible to the buyer if the sold property has
                     defects which reduces its value or utility with respect to the purpose stipulated in the
                     sale agreement or resulting from the circumstances or the designation of the thing if
                     the property does not have the properties about which the seller assured or if the
                     property. The seller is also responsible to the buyer if there are third party claims on
                     the title or if it is encumbered with a right of a third party. There is no seller’s liability
                     for defects if the buyer knew about the defect when the sale agreement was concluded.
                     The parties (other than consumers) may extend, limit or exclude the liability. This
                     kind of liability is strict liability and the seller is liable to the buyer for legal and
                     technical defects even if the seller did not know about the defects. If the sold property
                     has defects, the buyer may withdraw from the sale agreement or demand a reduction



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                     of the price. In order to enforce this claim the buyer has to notify the seller
                     immediately after discovering the defect.

          •           Registration of perpetual usufruct

                     Agreements on transfer of ownership title and perpetual usufruct title must be entered
                     in the Land and Mortgage Register. Ownership title passes upon execution of the
                     property transfer agreement and perpetual usufruct title passes upon execution of the
                     decision of the Land and Mortgage Registry Court, but the decision takes effect
                     retrospectively from the date on which the application to register the transfer was
                     filed.

          •           Change of landlord

                     If the property leased is sold during the period of the lease the acquirer replaces the
                     seller in the relationship of lease. The acquirer may terminate the lease while
                     observing the statutory time limits for notice, unless the lease agreement was
                     concluded for definite period of time in writing and with certified date, and the
                     premises were delivered to the tenant. This rule is applicable to all kind of the
                     premises (residential and non-residential).

12.           Registration and Notarisation of real estate - What are the basic requirements?

          Poland has a central title register, the Land and Mortgage Register. The Land and Mortgage
          Register is run through regional district courts which are responsible for specific areas of the
          country.

          An excerpt from the Land and mortgage Register for a particular property provides the
          following information:

          •          Section I “Description of the property” – provides the location, address, area, geodesy
                     number of land plot(s) comprising of the property

          •          Section II “Ownership” – provides the name of the owner and/or perpetual usufructee
                     or names of all co-owners or perpetual co-usufructees

          •          Section III – “Rights, claims and encumbrances” – discloses all rights and claims of
                     any third party affecting the property (leases, pre-emption right), name of a third party
                     and all encumbrances of the property, except for a mortgage

          •          Section IV – “Mortgage” – discloses all mortgages encumbering the property,
                     including the kind of a mortgage, the amount of a mortgage, the beneficiary of a
                     mortgage and the amount secured by a mortgage

          Agreements transferring ownership and perpetual usufruct title to property must be executed
          before a notary. The transfer of the property as a share deal requires notarisation of signatures
          of the parties to the share transfer agreement.

13.           Disputes - How are they dealt with and resolved?

          Polish law permits considerable freedom of choosing dispute resolution methods. Parties are
          free to choose whether they want arbitration tribunals (domestic or international) or state courts
          to resolve disputes.



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          When choosing a method of resolving disputes, the parties will have regard to various issues,
          including the following:

          •          the domicile/nationality and governing law of the contracting parties and any relevant
                     statutory limitations which inhibit such choice or the effectiveness of such a choice

          •          whether or not awards may be enforced in the relevant jurisdictions. Many
                     jurisdictions will not enforce awards that have not arisen through the consideration
                     and final judgment of a court.




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                                                  PART C

                                PERMITS INSURANCE AND ENVIRONMENT

14.        Permits - What permits are required for the use and occupation of real estate and are they
          personal?

          In general, development of land requires a building permit and in many cases it also requires a
          planning permit and an environmental permit. The use of the completed building requires
          notification to the relevant authority or an occupancy permit. A reform is planned under which
          the building permits will be replaced by registration of construction with the local authorities.

          Planning permit

          If the site is not covered by a master plan, a planning permit must be obtained before submitting
          the building permit application. The law makes a distinction between planning permits for
          public developments and those for private schemes. “Private” planning permits are much more
          difficult to obtain. Obtaining a “private” planning permit requires a number of conditions to be
          fulfilled, including securing media connections (at least signing contracts with grid operators)
          and ensuring architectural compliance with neighbouring developments. The local authority
          architecture department has to prepare a “zoning analysis” in order to verify whether those
          conditions are met, and if not, whether they can be waived. The planning permit procedure may
          be suspended (at the city’s discretion) for up to 12 months. If a master plan for a given
          development or territory is “obligatory”, the planning permit procedure is suspended until the
          adoption of the master plan.

          The current form of the planning permit makes it possible for the authorities to approve only
          those developments that they in their discretion consider appropriate. Obtaining a planning
          permit may also turn out to be dangerous to the developer, as it has to satisfy the claims related
          to the restriction of use or loss of value of neighbouring plots caused by this decision.

          Planning permits may be obtained by any interested party, irrespective of whether such party
          holds a legal title to the site. They are also transferable into third parties.

          A planning permit specifies its validity period (usually 2 – 3 years). It expires if another
          developer obtains a building permit for the site, or if a master plan is adopted and the planning
          permit does not comply with the new plan (unless a building permit has already been granted).

          Building permit

          Building permits may be obtained if the project complies with the master plan and technical
          requirements. If there is no master plan then a building permit may be obtained if it complies
          with the planning permit and technical requirements. In this latter case, the building permit
          application must be submitted within the validity period of the planning permit.

          A building permit is usually composed of two basic elements: approval of the designs and
          permission to start the works. If the project is phased, the developer may request permission to
          start the works for the initial phase(s) only. In this case, the building authority must approve the
          “site development plan” (forming part of the building documentation) and detailed architectural
          designs for the initial phase. This flexibility allows considerable savings in terms of the
          preparation of architectural designs for consecutive phases (which may be approved at a later
          stage, together with granting permission to start the works for such future phases). In order to
          obtain a building permit, the developer needs to hold a legal title to the site (not necessarily
          freehold – it may be even a simple lease).


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          The building permit documentation must be approved in advance by various authorities,
          including (as applicable): the sanitary inspector, environmental protection inspection, the
          cultural and heritage inspector, the road management authority, the work safety administration,
          the fire marshal etc. A large part of the land in Poland is considered “agricultural” (the formal
          criterion is the relevant entry in the land register). In such a case, prior to issuing a building
          permit, the site should be excluded from agricultural use. This involves payments from the
          owner, in ten annual instalments, depending on the category of the land. The above limitations
          will not apply to land designated as “agricultural” located in the city limits where no master
          plan is applicable.

          In most cases, building permits are issued by the starosta (head of mid-level administrative unit
          called powiat). In bigger cities, the functions of the starosta are exercised by the mayor. As with
          a planning permit, a building permit may be transferred on a third party, provided that it holds a
          title to the site and accepts conditions provided in these decisions.

          An additional building permit issued by the monument restorer is required when it is proposed
          to do work to historically or architecturally important buildings. Such a building permit must be
          obtained before a regular building permit.

          Construction works exempted from building permits.

          Certain construction works do not require a building permit, but simply a notification to the
          building authority. The notification should include appropriate drawings, as well as opinions
          and approvals from various administrative bodies (if applicable). The works may be started if
          the building authority does not raise any objections within 30 days from the notification. The
          works concerned include: parking lots with no more than 10 spaces, certain temporary objects,
          fencing, renovation works (except for structures entered into the register of historical
          monuments), certain advertising billboards, reconstruction and modernisation of roads etc. The
          list of construction works that may be commenced via the notification procedure has been
          extended by the recent amendment to the Building Code. In particular, the general rule requiring
          the building permit no longer applies to the construction of power, water, sewage, gas, heating
          and telecommunications connections, irrespectively of whether such works are related to the
          construction of the building or work performed on an undeveloped land.

          Planned amendments

          The Polish Parliament is currently in the progress of reforming the statutory regulation
          concerning the construction process. The important changes concern replacing the building
          permit with notification of planned construction works. Under the currently debated amendment
          bill, the authorities may object the notification in the event the intended construction is
          incompliant with the zoning of the property. In such case the building design must be amended.
          The authorities may raise their objections only once and the applicant will have to introduce the
          relevant changes within six months.

          Environmental procedures

          The provisions of the law on environmental information and environmental impact assessment
          introduced in November 2008 expand considerably the scope of application of the
          “environmental decisions”. The law divides the investments between those which (i) may
          always significantly influence the environment and (ii) may potentially significantly influence
          the environment. For both an environmental decision will be required.

          Certain investments require preparation of an environmental impact assessment report due to
          their potential impact on the environment. The developments concerned include: most industrial


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          facilities, public roads at least 1 km long, parking lots or garages for more than 100 lorries or
          300 cars, shopping centres of more than 10,000 square metres, other service developments of
          more than 20,000 square metres, out of town hotels with more than 100 beds, and many others.
          For others such requirement may be imposed by the authorities after an application for an
          “environmental decision” is submitted.

          The developer has to obtain a “decision on environmental conditions” prior to obtaining a
          planning permit or filing for a building permit (and without the need to secure the title to the
          site). The decision on environmental conditions is valid for 2 years and will be binding on the
          building authority while granting the building permit. The 2 year term may be extended if the
          conditions specified in the decision on environmental conditions do not change and the project
          is developed in phases. In the event of conducting an environmental impact assessment,
          environmental NGOs have the right to participate in the environmental procedure.
          Environmental NGOs may submit an appeal against the “environmental decision” and challenge
          such decision before the administrative court. Environmental NGOs do not participate in the
          building permit procedure. An environmental impact assessment is mandatory for investments
          which will significantly influence the environment. The assessment may be required for
          investments which may potentially significantly influence the environment.

          In the currently planned amendments to the law, a notification of construction works will not be
          sufficient if the investments may significantly impact the environment. For those investments a
          decision on registration of construction works will be required. The proceedings for registration
          of construction works will be treated as proceedings involving the public, with all consequences
          regarding the participation and appeals by Environmental NGOs.

          Occupancy permit

          The use of the completed building or structure may be commenced upon notifying the relevant
          authority, subject to cases specified in the Building Code. The investor may take the occupancy
          if the authority has not reported any objections within 21 days of the delivery of the notification.
          However, in some cases the notification is not sufficient and a occupancy permit is required.
          This applies to the following cases: (i) where a building permit was required for the erection of
          the structure and the structure falls within the relevant category as stipulated in the article 55 (1)
          of the Building Code (ii) where use of the structure is to be commenced prior to the completion
          of all construction works (iii) for illegal construction projects, if the body conducting the
          legalisation proceedings imposes such an obligation on the investor and (iv) when the building
          works were temporarily halted due to the “material” deviations from the approved design or
          other conditions as indicated in the building permit.

          The issuance of the occupancy permit requires a compulsory inspection by the relevant
          authorities provided for in the Building Code.

          Moreover, if the investor was obliged to obtain a building permit, it should also inform the
          Environmental Protection Inspection, the Sanitary Inspection, Labour Inspection and Fire
          Marshal of the completion of the construction works and of the intention to use it. If there are no
          objections or official statements from the relevant authorities within 14 days of the notification
          date, it is to be treated as tacit consent to use the building structures.

          The use of the building structures without notifying the relevant authorities or without required
          occupancy permit is considered illegal. Apart from the administrative consequences of illegal
          use, such as a fine which may be imposed by the relevant authorities, the lack of notification or
          a occupancy permit causes fundamental problems concerning leasing or insuring the building.




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          The planned amendments to law intend to eliminate the occupancy permits altogether. The
          investor will be obliged to notify the authorities on completion of the construction works and
          enable an inspection by the relevant bodies within 14 days. Failure to conduct such an
          inspection will be deemed an acceptance of the construction.

          Energy Performance Certificate

          From 1 January 2009 the Building Code introduced a requirement that applications for an
          occupancy permit will have to include an energy performance certificate (świadectwo
          charakterystyki energetycznej) as an attachment. The certificate may refer to the entire building
          or a separable part thereof (e.g. an apartment). Moreover, on concluding a purchase or lease
          agreement of buildings, apartments and premises the seller or landlord is obliged to disclose this
          energy performance certificate to the buyer or the tenant.

          The energy performance certificate specifies the type of the building, its relevant features and
          the energy consumption. These certificates are issued by individuals holding certification
          authorisations issued by the Ministry of Infrastructure or persons authorised to prepare
          construction designs or graduates of dedicated postgraduate studies.

15.        Insurance and Risk - What insurance will the parties effect and when does the insurance
          risk pass at the time of sale?

          Before a sale, insurance is generally the responsibility of the owner or perpetual usufructee of
          the property. However, where property is the subject of a lease or the property is a leasehold
          interest, the terms of the lease will prescribe which party has responsibility to insure.

          As a rule, the landlord insures the building and the common areas and the tenant insures its
          premises fit-out. The premium paid by the landlord is usually recovered in the service charge. It
          is important to structure the various policies so that the scope of the insurances do not overlap.
          Otherwise, there may be problems with payment in the event of a claim, as there may be a
          dispute between the insurers as to which of them is actually bound and in what proportion.

          Tenants are also usually required to insure their civil liability for any possible damage to
          individuals or assets which they, their employees or agents etc. may cause in their operations.
          Sometimes, they also take out “business interruption” insurance or participate in “loss of rent”
          insurance. Landlords’ policies are often assigned (at least conditionally) to the banks which
          finance the development. Tenants’ policies may sometimes be assigned to the landlord and then
          further to the banks. In the event of fit-out works by the tenant, the tenant has to take out a
          liability insurance policy covering construction risks.

          Insurance policies may either comprise a single policy for one particular property or an
          umbrella policy designed to cover a portfolio of properties. Insurance policies are transferable
          on sale with the consent of an insurance company. However, usually the buyer executes a new
          policy after sale completion.

          In transactions concerning real properties, there are two specific types of insurance:

          •          gap insurance - for the purpose of insuring the event where the court refuses to register
                     the mortgage or insuring the beneficiary’s rights until a mortgage is registered in the
                     Land and Mortgage Register

          •          title insurance - in situations where even a legal due diligence cannot answer whether
                     the legal title to particular land can be challenged by third parties or not. This concerns
                     “border line” situations, where the full certainty would only be assured by a final court


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                     verdict. In all such cases it is possible to obtain title insurance, offered by specialised
                     firms acting in the Polish market

16.        Environmental - What are the common environmental issues?

          Regardless of the kind of development, the buyer before the acquisition of the property must
          take certain environmental issues into account. The development of land in many cases requires
          an environmental impact assessment. As some environmental issues can play a crucial role in
          the development and investment process, it is advisable to undertake environmental due
          diligence. Acquisition due diligence may involve the appointment of environment consultants to
          consider documentary information and to carry out a site visit. It is important to identify
          potential problems early on so that there can be negotiation on price, the need for and scope of
          any remediation and/or the need to put in place protection in respect of any existing
          contamination related losses that may arise in the future.

          Real estate may be contaminated as a result of current and former uses. Primary Polish
          Environmental Law (the “Environmental Law”), as in other European jurisdictions, contains a
          general rule of “polluter pays” as regards counteracting and removing pollution. This principle
          concerns pollution of all major areas of the environment, i.e. air, water, soil, protection from
          noise, electromagnetic fields, protection of animals and plants and protection of extracted
          minerals.

          In respect of land where industrial activity has been conducted, there may be a potential risk of
          residual pollution of the soil. In this context, a duty to keep the land free from pollution rests
          with the holder of the real estate and is further transferred to subsequent holders of the real
          estate. There is a statutory assumption that the holder is liable for any pollution of the soil. The
          current holder of real estate may be exempted from this liability if it proves that the previous
          holder of the real estate caused the pollution in question. If some land turns out to be polluted,
          the holder may be obliged to re-cultivate it at its own cost. If the current holder is successfully
          exempted from liability, the obligation to take appropriate steps to re-cultivate the soil will
          revert back to the previous holder.




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                                                   PART D

                                          FINANCE AND TAXES

17.           Pricing/Valuation - What sets the price/valuation of real estate?

          Polish law requires that the price, or at least a price fixing mechanism, be agreed in the sale
          agreement. When the price for the shares is considered, apart from the value of the asset, the
          parties should agree to the adjustment of the price to reflect the receivables and liabilities of the
          target company. Such an adjustment is often made on the basis of the balance sheet of the
          company as of the date of executing the final agreement The price established in the transfer
          agreement may also be adjusted to reflect, for example, progress in leasing the scheme after
          transferring shares or an asset. Such post-closing adjustments create certain tax and
          bookkeeping consequences that should be considered beforehand.

          Pricing of real estate investments is a combination of the aggregate rent being paid by
          occupational tenants of the property and the value that investment buyers consider that a
          property of the specific type and location is worth at the time of valuation taking that income
          into account. The rent for a particular property is likely to be assessed by multiplying the area of
          the property by the market rental value per square metre. The market rental value will take into
          account factors such as the location of the property, its type and condition, and the length of the
          lease term. Investment properties are commonly referred to as being sold on a particular yield,
          meaning the investment return that will be gained from the capital sum which it is necessary to
          pay to buy the property. For example, where a property with an aggregate annual rent of EUR
          100,000 is sold for EUR 2,000,000, it will have a yield of 5%.

18.           Financing - How is a real estate acquisition financed?

          The principal ways in which real estate acquisition is financed are:

          •           through the purchaser's own cash resources

          •           through external debt

          Banks offer a variety of construction and refinancing facilities, mixtures of the two, as well as
          various hedging options.

          Equity may be financed through mezzanine lending. Mezzanine lending is characterised by low
          security level and the mezzanine lender is sometimes able to have second ranking security over
          the assets encumbered in favour of the senior lending bank(s). Quasi-mezzanine financing may
          be provided by parent companies or affiliates through subordinated loans or other forms of
          equity contribution. In this respect, thin capitalisation rules should be taken into account at the
          stage of structuring forms of equity and quasi entity. Those rules apply to such loans that exceed
          3 times the share capital of the borrower, and disallow the tax deductibility of interest allocated
          to the excess. Interest on loans granted by unconnected entities will not be subject to thin
          capitalisation.

          Types of Loan Agreement

          There are three main types of loan documentation reflecting the type of the transaction: (a)
          financing the construction of a development (b) refinancing an existing development (including
          acquisition) and (c) convertible facilities which initially finance the construction of the
          development, and are then converted into investment loans.



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          Floating rate and fixed rate facilities

          The vast majority of commercial loans for construction purposes will bear interest at a floating,
          rather than a fixed rate. The floating rate will vary periodically to reflect the cost to the banks of
          providing the money. In respect of Euro loans, it will be usually based on Euribor, with US
          dollar and Polish Zloty loans at Libor and Wibor respectively.

          A fixed rate is more likely to be selected in transactions where the borrower’s cash flow
          generated from its main activities is expected to reach a certain level (e.g. if the loan is intended
          to refinance the acquisition or construction of an office building in which the rental payments
          are fixed).

          As the fixing mechanism requires the lenders to take refinancing for a long term (in line with
          the fixed rate term selected in the loan agreement), the loan documentation will normally either
          prohibit the borrower from making prepayments of the loan, or will require the borrower to bear
          all costs resulting from such prepayment.

          Currency

          The market offers loans in various currencies. To decrease foreign exchange risks, the currency
          of the loan should match the currency of the rents payable by tenants in the property concerned.
          As buildings are usually rented under Euro or US dollar denominated rents, these are the main
          lending currencies. Sometimes a building has leases denominated in both currencies. In this
          case, a solution is to match such incomes with a loan of two tranches in mirroring currencies.

          Financial Covenants

          All types of facility agreements most often include two financial ratios that the borrower needs
          to maintain during the lifetime of the loan: (a) debt service cover ratio and (b) loan to value
          ratio.

          Debt service cover ratio is usually the ratio between the amount of the outstanding loan and the
          rental income on the property, decreased by the operating costs of the property. The borrower is
          required to maintain the ratio at a certain agreed level.

          Loan to value ratio is the ratio between the amount of the outstanding loan and the value of the
          property established through a valuation completed by a reputed valuer.

          In the case of construction loans, the debt to equity ratio is also introduced.

          If any ratio provided for in the agreement is not respected, an event of default is triggered. It is,
          therefore, vital from the borrower’s point of view that the facility agreement envisages a cure
          period to remedy the level of the ratio.

          Default

          The facility agreements preview standard representations and warranties as well as events of
          default. It is worth noting that most facility agreements include the concept of a potential event
          of default, meaning a situation in which it might be expected that an event of default will occur
          shortly. Furthermore, an event of default is triggered if any circumstances occur that would have
          an adverse effect on the borrower’s performance of obligations under the facility.




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19.           Security over real estate - How is security over real estate created and protected?

          Securities over real estate are as follows:

          Mortgages

          In real estate financing transactions, the following types of mortgage are used: (i) ordinary
          “contractual” mortgages (used when the exact amount of the loan is already known) and (ii)
          capped mortgages (hipoteka kaucyjna) (used when the facility is made up to a certain amount).
          Both types may be also used in what is called a joint mortgage (hipoteka łączna), which is one
          mortgage (either ordinary or capped) encumbering several real estate properties. A mortgage is
          a right in rem encumbering ownership or perpetual usufruct title. Unlike in some other
          jurisdictions, the title of encumbered property remains with the debtor and the creditor may only
          demand an auction sale of the property if the debtor defaults on the loan and may satisfy its
          receivable from the proceeds of the sale.

          A mortgage may be established either as a contract between the borrower and the lender in the
          form of a notarial deed or through a notarial statement of the borrower submitted on the basis of
          the written statement of the lender (a bank). Alternatively, a written document issued by the
          bank together with a written statement of the borrower may also serve as the legal basis of
          establishing a mortgage. In practice, the form of a notarial statement of the borrower is used
          most frequently.

          Pledges

          Polish law recognises four types of pledges: (i) registered pledge over shares (ii) registered
          pledge over assets, (iii) ordinary pledge and (iv) financial pledge. It has become market practice
          that the banks granting property financing secure their claims with a registered pledge over
          shares in the company to which the facility is granted, as well as a registered pledge over the
          rights and assets of that company. Until the registration of the pledge over shares, the banks take
          an ordinary or financial pledge. The sub-sections below present the main information on the
          four types of pledges:

          •           Registered pledge over shares

          Until recently, banks accepted registered pledges only over shares in limited liability companies
          and joint stock companies. However, when, due to tax reasons, borrowers begin to develop
          properties belonging to limited partnerships, there were attempts to pledge the interests in
          limited partnerships. This has not yet become standard on the market.

          Registered pledges over shares established by the parent company(ies) to the borrower, allow
          the lending bank, upon enforcement of the loan, to seize the shares or sell them at public
          auction. The seizure of shares is accomplished at a value established by the parties according to
          the method set out in the agreement.

          A standard registered pledge agreement includes (i) a negative pledge clause where any form of
          disposal of shares is forbidden without the prior written consent of the bank (ii) an obligation to
          pledge any new shares created in the company and (iii) an ordinary or financial pledge clause
          with expiry upon registration of the registered pledge.

          The share pledge agreement must be entered into with signatures certified by a notary and
          registered with the National Pledge Register.

          •           Registered pledge over assets


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          Under this agreement, the company pledges all of its current and future assets, including any
          rights, especially rights to the accounts. It is the equivalent of a floating charge under common
          law.

          Upon enforcement of the loan, the bank may sell the enterprise at public auction, lease the
          enterprise or take over administration of the enterprise.

          A standard registered pledge agreement includes a negative pledge clause where any form of
          disposal of shares is forbidden without prior written consent of the bank.

          The pledge agreement should be entered into with the date certified by a notary and registered
          as described above.

          •          Ordinary Pledge

          Typically entered into in a form with signatures certified by the notary, in the case of pledge of
          shares in limited companies and joint-stock companies. Upon enforcement of the loan, the
          shares will be sold in an enforcement procedure as provided for by the civil procedure code.
          Such enforcement is more difficult from the bank’s perspective.

          •          Financial Pledge

          This is a new form of security. It may be established on monies, financial instruments and
          shares. The pledge may be enforced through a seizure of the object of the pledge.

20.           Taxes and Costs - What are they and who pays them?

          Generally, please refer to our CMS Transaction Costs Guide as to the nature and amount of the
          taxes and costs.

          Transactional costs

          The notary and registration fees depend on various factors: in particular, on the value (price) of
          the property, but also on the parties (e.g. private or public bodies) and the category of the
          property (e.g. agricultural or commercial). They are subject to statutory tariffs and are calculated
          based on degressive rates with caps.

          •          Notary fees

          These are the fees for preparing the notarial deed. VAT is added to notarial fees at a rate of
          22%. The maximum net fee for one deed is approx. PLN 15,000 (approx. EUR 3400).

          •          Registration fees

          Fixed fees of between PLN 100 and 200 (approx. EUR 30 and EUR 60) are levied at the time of
          registration.

          Transfer taxes

          The transfer of real estate may be subject to either VAT or transfer tax (tax on civil
          transactions). VAT will apply if a business entity makes the sale, unless the property fulfils
          certain conditions (the building is considered “used”, or the land is not developed or zoned for
          development). Sales made by individuals not conducting business activities are not subject to
          VAT. The base rate of Polish VAT is 22%, but a 7% rate applies in certain cases (e.g. sale of


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          apartments). If the sale of real property is not subject to VAT, it is subject to a transfer tax at the
          rate of 2% (asset deal) or 1% (share deal). The notary is responsible for the collection of the
          transfer tax and registration fees. VAT is paid directly by the seller to the buyer who then settles
          it with the tax office.

          Land tax

          Land buildings and structures are subject to land tax. The tax is payable by owners, perpetual
          usufructees, and lessees of public (state or municpality-owned properties). The tax is based on
          surface area in the case of land, and on the useable area in the case of buildings. The rate of the
          tax is defined by a city council but there is a statutory cap. Polish governments have been
          working on a new common property tax based on the value of the property since 1994. The
          introduction of the tax requires the valuation of all real properties. The process of valuation is
          still far from completion and there are no credible estimates regarding introduction of such a
          tax.

          Perpetual usufruct fee

          Holders of a perpetual usufruct right are obliged to pay the annual perpetual usufruct fee by 31
          March of each year. The annual fee is calculated on the basis of a rate applicable to the land and
          the value. The rate is 3%, if the land is designed for commercial purposes, and 1% if it is
          designed for residential purposes. The city council may increase the fee by re-evaluating the
          land.

          Public infrastructure fee

          Owners must participate in the costs of public infrastructure developed by local authorities. The
          public infrastructure fee is calculated on the basis of the increase in the value of a property due
          to the development of infrastructure and a percentage rate adopted by the city council (not to
          exceed 50%). The payment of the fee may be imposed by the city council within three years
          following the development of the infrastructure.

          Re-zoning and subdivision fees

          It happens that the market value of land increases or decreases as a result of the adoption or
          modification of a master plan, or as result of subdivision of land.

          If the market value of land decreases (but the owner may still use the land in the same manner
          as before the master plan), then the owner (or holder of the perpetual usufruct) may demand that
          the local authority (the city) pay compensation equal to decrease of the value of the land
          calculated as at the date of sale. Such a claim may be raised only if the owner sells or otherwise
          transfers the title to the land, but not later than five years from the adoption or modification of
          the master plan.

          More frequently, the value of land increases as a result of adoption or modification of a master
          plan, e.g. green-field is re-zoned to land on which a shopping centre may be built. In such a
          case, if the owner sells or otherwise transfer the title to the land (e.g. by means of an in-kind
          contribution to a company), within five years from the adoption or modification of the master
          plan, the city will charge a re-zoning fee. The re-zoning fee may not exceed 30% of the increase
          of the value of the land calculated as at the date of sale. The percentage for calculation of the re-
          zoning fee must be provided for in the master plan.

          If, as a result of the subdivision of land made at the request of the owner of the land, the value
          of the land increases, the municipality may charge a subdivision fee within three years from the


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          subdivision. The amount of the fee may not exceed 50% of the increase of the value. The
          increase of the value is calculated as at the date of the city’s decision charging a subdivision fee.

          Road infrastructure

          Under the Act on Public Roads, owners (perpetual usufructees) of real estate must participate in
          the cost of construction and modernisation of public roads that serve their properties, in
          proportion to the traffic they generate. The construction or modernisation of the road is usually
          regulated in the agreement with the public manager of the road.


          Exclusion from agricultural use

          Properties legally recognised as farmland and forest can only be turned into non-agricultural (or
          non-forest) use if special conditions are met. First of all, the local master plan must provide for
          such a possibility. If this is not the case then no investment falling outside the scope of their
          current use is allowed. Secondly, and provided that the master plan allows such new
          investments, the investor must obtain a special decision excluding a given site from agricultural
          (or forest) use. Following the issue of the decision and the actual change in use of the site, the
          investor will be obliged to pay an initial fee, and then 10 consecutive annual fees (equal to 10%
          of the initial fee). The actual amount of these charges depends on the class of the land (or
          forest), the surface of the site and the current price of rye (or wood). It should be noted that the
          initial fee is decreased by the market value of the property, which in most cases means that it is
          not due at all. If the property is sold, the obligation to pay the annual fees passes to the
          purchaser.

          The provisions on exclusion from agricultural use do not apply to agricultural land located
          within the city limits, provided this land is not designated as agricultural in the applicable
          master plan. If the property is designated as agricultural land in the master plan, amendment of
          this plan (and the underlying zoning study) will be necessary to change this designation.




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                                                  PART A

                                       PARTIES AND INTERESTS

1.        Parties – Who can own real estate?

          Any “person” can own real estate. This will include individuals, companies, entities established
          by statute and certain charitable bodies.

          The concept of trust is not recognised under Romanian law.

          Owners of commercial real estate include private developers, private or public companies,
          charities, the central bodies of government and the local authorities. Property owned by the
          government and local authorities is either in their public or private domain.

          Foreign nationals or companies can own buildings, but under current law cannot directly own
          land (although a foreign national may inherit land in certain circumstances). They are, however,
          allowed to do it indirectly, by creating a 100% held company incorporated in Romania. Also, it
          is contemplated that foreign nationals and companies will be able to own land under terms
          resulting from Romania’s accession to the European Union on 1 January 2007 and other
          international treaties.

          The general rule is that the acquisition of land for secondary residence/headquarters will be
          permitted after 5 years from accession, while the acquisition of agricultural and forestry land
          will be permitted after 7 years from accession.

          However, an exception is set out in favour of European Union nationals and corporations who
          acquire Romanian residency status: these are allowed to acquire ownership in land immediately
          after accession.

          Natural and legal persons, whether Romanian or foreign, may rent property in Romania.

2.        Property – What property interests are currently sold?

          Romanian law does not operate a classification of property as either freehold or leasehold.

          Nevertheless, freehold would be similar to the Romanian concept of ownership, i.e. a perpetual
          real right (a right in rem) that gives to its holder the power to possess, use and dispose of a
          property.

          Leasehold would include leases, i.e. personal rights (rights in personam), though in practice
          leasehold could also be regarded to include real rights such as usufructs, surface rights
          (superficies) or concessions, which have many of the attributes of ownership, but are limited in
          time (usufructs enjoyed by companies – 30 years, surface rights – limited to the duration of a
          building’s existence and concessions – 49 years).

          There is exclusive and common ownership. Common ownership can be temporary or perpetual,
          the latter being similar to a condominium interest.

          Other property interests that are recognised under Romanian law include:

          •          Options and pre-emptions – rights to buy or first refusal




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          •          Easements – such as rights of way or for the use of services - and wayleaves –
                     contractual rights to use land for limited purposes such as to site telecommunications
                     equipment (both easements and wayleaves are deemed as being servitudes, i.e. real
                     rights over property owned by a another person)

          All real rights and the leases having a period longer than 3 years must be registered in the Land
          Book.

          Any items that are fixed to the property are presumed to form part of it and to belong to the
          owner of the property.

3.        Ownership – What types of ownership are there?

          Ownership of property in Romania is either public or private.

          Public ownership belongs to the state and the administrative-territorial units (communes, towns,
          municipalities and counties). Public property cannot be sold, seized or acquired by virtue of
          occupation. It may, however, be granted into concession or leased, typically following a public
          tender procedure.

          Public property includes property of public use (such as parks, squares, streets, which are
          accessible to any person) or of public interest (such as schools, theatres, museums, which
          although being of limited access are allocated to activities of a social nature).

          Romanian law distinguishes between exclusive ownership and co-ownership of land and
          buildings. This means that a condominium style ownership is permitted where, for example, a
          person may be exclusive owner of a part (unit) of a building and co-owner with other unit
          owners of the common areas, the structure and the land on which the building stands.
          Alternatively, more than one person may own the whole of a building and/or plot of land. In
          each case, the co-owner is said to have an "ideal" share (percent) in such common parts or the
          whole of the building or land plot.

          In Romania, like other countries, where a natural person owning land dies without heirs, or
          where a company is wound up without its land (and any other properties) being transferred to a
          third party, the land will automatically pass to the State as res derelictae.

          Aside from ownership rights, another important right in real property is the usufruct, which
          provides the right to possess and use a property but without conferring the right to sell it.
          However, usufruct rights are not particularly common and are therefore just worth a mention for
          completeness.

          Long term leases are also available and they confer to the tenant the right to use a property in a
          manner similar to the usufruct rights. Nonetheless, rights under such leases are not deemed as
          being real rights.

          After 1990, a large number of claims for restitution were made against the Romanian State and
          the public authorities from former owners (or their successors) of property confiscated by the
          communist regime. Subsequently, a number of laws instituting administrative restitution
          procedures came into force, all of which purported to establish a time frame beyond which no
          further claims could be admitted. Although many of these were prolonged, it is now becoming
          more firmly established that none remain open and thus it appears that new restitution claims
          may no longer be filed. Nevertheless, most of the restitution laws were modified, directly or
          indirectly, resulting in the conditions and content of filings being changed (and some of the


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          legislation is extremely complex). Thus, there may still be a possibility of some limited new
          claims.

          As the number of applications was high and the process of their analysis is slow, the title to a
          large number of apparently public properties will still remain unclear for a period. In many
          cases, there is little possibility to check whether restitution claims over certain types of property
          remain pending, although public authorities sometimes made information public about
          restitution claims. Nevertheless, where the restitution laws enabled a person legally to acquire a
          property, then the title acquired is granted some protection. Each case needs to be reviewed on
          its merits.


4.        Matters burdening or benefiting real estate – What matters can affect real estate?


            Matter                   Effect                                Example

            Easements                Rights which burden one piece of A right of way; a right to drain
            (Servituti)              land and benefit another. They     rain water; a right to light; a right
                                     are not personal but attach to the to run pipes and cables
                                     land itself. They do not permit
                                     the owner of the benefited land to
                                     remove anything from the
                                     burdened land

            Wayleaves                Rights of use for a temporary         A right to erect equipment, to
            (Drepturi de uz)         period corresponding to the           remove crops or to deposit on the
                                     building and operation of utilities   land materials and equipments
                                     infrastructure, exercisable by one    related to operation of cables or
                                     party over the land of another,       installations
                                     granted by law to companies
                                     supplying utility services, subject
                                     to payment of compensation for
                                     damages caused to the land and
                                     reinstatement of the land to its
                                     initial status at the expiration of
                                     such rights

            Land charges             Land charges represent a              A mortgage agreement in favour
            (Sarcini)                restriction or prohibition imposed    of a bank financing a real estate
                                     on land (e.g. an attachment, or       development project
                                     interdiction to sell), a mortgage
                                     or a lien, which is binding on
                                     successive owners of land or
                                     occupiers of property.
                                     To burden subsequent owners of
                                     the land they must be registered
                                     in the local land registry for the
                                     region in which the land is
                                     located (known as the “Land
                                     Book”)

            Adverse possession       Where one party makes a claim         Peaceful occupation of land for


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              (Prescriptie achizitiva   to a piece of land that is contrary   more than 30 years
              or uzucapiune)            to another's assertion of
                                        ownership, either based on a just
                                        title (e.g. a testament or a sale
                                        purchase agreement invalidated
                                        subsequent to the transfer of
                                        ownership) and an adverse
                                        possession of 10 to 20 years or,
                                        in the absence of a just title
                                        based, only on an adverse
                                        possession of at least 30 years.
                                        The adverse possession needs to
                                        satisfy certain legal requirements
                                        before being accepted as a valid
                                        ground for acquiring ownership



5.        Occupation of real estate – Who may occupy real estate?

          Real estate is usually occupied by one of the following categories of persons:

          •           Owners – those persons with a freehold interest in the property

          •           Tenants or holders of other usage rights – those persons with a lease or other
                      contractual personal usage rights over the property or part of it. It is possible for any
                      number of usages to be created in relation to the same property, so creating a chain of
                      interests if no restriction is contained in the first agreement created limiting the
                      number of subsidiary usages. Tenants of business premises do not usually have
                      statutory rights to renew their leases when the contractual term ends

          •           Holders of concessions, usufructs, surface rights or interests in unregistered
                      partnerships – this is common for land owned by the local authorities over which
                      private entities acquire real usage rights for a determined, usually long, period of time.
                      For instance, concessions may run for up to 49 years and may be renewed, subject to
                      the parties’ agreement, for another 24 years and 6 months

          •           Persons claiming ownership – typically, this occurs when they have registered
                      ownership rights recorded in the Land Book, but also occupy unregistered buildings
                      located on the land

          Please also see our CMS Lease Guide


6.        Brokers – What is the broker’s role?

          Brokers, also referred to as surveyors or agents, generally fall into five categories:

          •     Investment

          •     Valuation

          •     Buildings


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          •    Management

          •    Rent review

          They are employed by any party to any transaction that involves real estate. Their role may
          include:

          •    Acting for a seller to find a buyer for a sale property, including marketing the property for
               sale

          •    Acting for a landlord to find a tenant for a leasehold property, including marketing the
               property

          •    Acting for a buyer to find a property to buy

          •    Acting for a tenant to find a property to lease

          •    Acting for any party to a transaction drafting and negotiating heads of terms

          •    Preparing heads of terms for documenting and liaising with lawyers

          •    Valuing a client’s existing and target properties

          •    Day to day management of property owned by clients, including managing maintenance
               programs and landlord and tenant work and

          •    Project management of development of new buildings or refurbishments and negotiating
               rent reviews of existing properties


7.        Employees – What employment issues affect real estate acquisitions?

          Transfer of undertakings (“TUPE”) is likely to be the most significant employment issue under
          Romanian law.

          TUPE applies when an undertaking or business (or part of one) is transferred from one party to
          another.

          The broad effects of TUPE are that:

          •    with effect from completion of the transfer, the buyer assumes responsibility for employees
               working in the business transferred

          •    accrued continuity of employment is preserved

          •    dismissal for a reason connected to the transfer is automatically unfair

          •    if the buyer changes terms and conditions by reason of the transfer, these changes generally
               are ineffective, even where the employee's agreement is obtained

          •    employees' elected representatives must be informed and consulted about the transfer and


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          •    any attempt to circumvent the effect of TUPE is void

          Although the legal effects of TUPE cannot be avoided, it is possible to apportion TUPE
          liabilities by agreement between the seller and the buyer. For instance, the seller could agree to
          be responsible for all claims and liabilities relating to employees up to the date of transfer, and
          the buyer could take on all post-transfer employment liabilities.




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                                                       PART B

                                            PROCEDURE AND TERMS

8.        Procedure – What are the steps in a sale and purchase transaction?

          Real estate business transactions formally start when proposed heads of terms are drafted,
          negotiated and agreed by the brokers for the seller and the buyer. The heads of terms (or
          memorandum of understanding) set out the principal terms agreed between the parties and are
          generally expressed to be “subject to contract” and not legally binding. They might be
          accompanied by a (legally binding) exclusivity and confidentiality agreement.

          The seller’s lawyers will usually collate all information relating to the property and send it to
          the buyer’s lawyers. The buyer’s lawyers will undertake general due diligence investigations.
          The buyer’s lawyers usually prepare the form of the sale agreement. The scope of the due
          diligence and the draft of the sale agreement will vary according to whether the property being
          sold is under construction or already built and the extent to which leases to tenants have already
          been granted, as well as whether the transaction will be structured as a property deal or a share
          deal.

          Romania has adopted a new registration (or cadastral) system for land and buildings, a key part
          of which is that the registry is intended to provide definitive property boundaries. However,
          many plots (particularly those outside the main commercial centres) have not yet been
          registered in this way. If a property has not been newly registered, its sale will trigger an
          obligation to complete the cadastral registration, meaning (amongst other things) that certified
          surveyors must produce detailed and definitive plans to be approved by the territorial Cadastral
          and Real Estate Publicity Office and subsequently submitted to the relevant Land Book. There
          is a resulting time and cost implication for transactions of this type, which (depending upon the
          nature and use of the land concerned) may prove to be significant.

          Once the sale agreement is in an agreed form, the seller and the buyer will sign it. In case of a
          property deal involving a sale of land, the agreement needs to be authenticated by a public
          notary.

          The notary is bound to verify the power of the corporate bodies and their signatories and that
          there are no impediments to the sale. Updated Land Book excerpts and certificates issued by
          the fiscal authorities (stating that there are no outstanding debts) also need to be presented to the
          notary on authentication. The real estate publicity fee and notary fees (see below) need to be
          settled in full. Following this, the notary is able to register the buyer’s interest in the contract
          against the property in the Land Book, thereby affording the buyer some protection against a
          subsequent sale (assuming the ownership was not transferred upon authentication to the buyer).

          Legal completion of the sale and purchase transaction may occur at the same time as the
          authentication or subsequently, depending on the acquisition timetable. Where the purchase is
          made with borrowed finance, a mortgage over the property (and other security interests) will
          generally be instituted at the same time as the authentication.

          Following completion, the notary needs to complete final registration of the transfer in the Land
          Book, in case the transfer of title has not already occurred and been registered upon
          authentication. Registration of other documents (e.g. security documents) in other relevant
          registries (e.g. the Electronic Archive for Secured Transactions) may also be necessary. In case
          of financing being involved, the disbursement of the price will generally be made only after the
          security interests have been appropriately recorded, in order to protect the financier’s ranking.


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9.        Other common contract terms – What other provisions does a real estate sale contract
          commonly contain?

          An agreement for the sale and purchase of property must be in writing and, if it involves land,
          authenticated by a Romanian public notary, must contain or clearly refer to all main terms and
          conditions and must be in a form signed by both seller and buyer.

          It is common for the sale and purchase agreement to provide for a deposit of between 5-10% of
          the purchase price payable on exchange of agreements. The deposit can be placed in an escrow
          account opened with a Romanian bank.

          There are no standard terms published by the Romanian National Bar Union for commercial
          property sales.

          Contracts for sale of property subject to occupational interests such as leases will include
          clauses to cover ongoing management matters, and provide for apportionment of occupational
          income and outgoings on completion of the transfer of ownership in the property.

10.       Due Diligence – What investigations does the buyer normally make?

          Pre-signing of agreement(s)

          The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil
          and geological investigations, plant and machinery tests, and environmental investigations.
          There are two limbs to the pre-signing due diligence by the buyer’s lawyers.

          Firstly, title to the property and existence of any encumbrances or restrictions will be
          investigated. The buyer’s lawyers will first consider the entries in the Land Book, the cadastral
          documentation and historic title documents. Where title to the property is not registered in the
          Land Book, the buyer’s lawyers will advise the buyer to enter into a pre-sale or an option
          agreement pending completion of the cadastral documents and Land Book registration, as no
          sale is permitted in cases where the property is not registered. The buyer’s lawyers will also
          make enquiries of the local authorities where the land is located or other institutions involved to
          obtain information regarding any restitution claims affecting the property and their current
          status. In cases where any claim was rejected by such authorities or institutions, the search will
          also be pursued with the courts of law having relevant jurisdiction in order to assess the status,
          impact and/or potential outcome of court proceedings.

          Where the property is leasehold, or subject to leasehold or other occupational interests, the
          terms of the relevant occupational documents need to be considered carefully to ensure they are
          not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to
          check whether these documents require the consent of any third party to be given to the
          transaction.

          Secondly, the buyer’s lawyers will undertake general due diligence, which will include
          conducting various searches to check the position regarding municipal and zoning consents,
          environmental matters, utilities serving the property, financial encumbrances etc. Where the
          seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at
          the Trade Registry to ascertain whether the company is solvent and therefore able to dispose of
          its assets freely. A search referring to moveable security will be undertaken on-line by the
          buyer’s lawyers with the Electronic Archive in Security Interests to obtain confirmation that
          there are no moveable security interests in any way affecting the envisaged transaction.

          Pre-completion

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          After signing of the agreement and before completion the buyer’s lawyers will deal with
          completion formalities such as the seller’s lawyers’ bank details etc.

          Reporting to the client

          Before completion of any agreement the buyer’s lawyers usually report their due diligence
          findings to their client, raising any matter of particular importance or concern.

          Occasionally, and normally only where the buyer is acquiring property as a result of the
          acquisition of a company, instead of due diligence being carried out by the buyer’s lawyers, the
          seller’s lawyers provide a certificate of title addressed to the buyer and any lender to the buyer.
          This may occur where the sale has been planned for some time and the parties wish the
          transaction to proceed quickly.


11.       Terms implied by law – What provisions are implied by Statute, Code or otherwise?

          Some of the most significant are as follows:

          Title guarantee

          In a transfer of property there are various statutory obligations on the part of the seller in
          relation to the quality of the title being sold. The seller is under an obligation to guarantee to
          the purchaser that he will not be evicted by any third parties and may be called into court
          proceedings as a respondent if the title of the purchaser is challenged by such third parties.

          Misdescription and misrepresentation

          In cases of misrepresentations or misdescriptions of fact made by the seller to the buyer which
          have the effect of inducing the buyer to enter into a transfer of land, damages may be payable to
          the buyer or the buyer may be entitled to rescind the transaction.

12.       Registration and Notarisation of real estate – What are the basic requirements?

          Romania is in the process of implementing a unified cadastral and land book system. The
          system is run by cadastral and real estate publicity offices, one for each county of Romania.
          Registration of land is compulsory throughout Romania and to the extent that land is
          unregistered, it must be the subject of an application for first registration before it can be sold.
          Large areas of land still remain unregistered, although the owner may make an application for
          voluntary registration at any time.

          Land Books are created at municipality level and also for every immovable asset which is
          identified by an individual number. Therefore, a new land book entry will be created each time
          a new property is required to be registered.

          The system of cadastral and real property publicity is designed to make public through
          registration: (i) all of the real rights that are transferred, created, modified, terminated or erased
          pursuant to juridical acts and facts or events related to immovable assets and (ii) certain other
          items of information related to immovable assets.

          Registration gives constructive notice to third parties (making certain registrations binding on
          them). In certain regions (for example, Transylvania, Banat and Bucovina) the existing land
          book system (which will be replaced by the cadastral system described above) was the
          definitive record of land ownership, and so there are some regional variations in application.


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          There are three types of registration in the Land Book:

          •    registration of a real property right (this is the primary registration)

          •    provisional registration of a real property right on the condition that it will be confirmed at a
               later date and

          •    notification of other juridical relationships, including status, capacity and incapacity, certain
               personal rights, claims and appeals, and measures taken for making an immovable asset in
               the Land Book unavailable for transfer or further encumbrances

          The registration of a real property right establishes the rights obtained through a property title
          transfer, a final and irrevocable judicial ruling or decision of an administrative authority.

          The provisional registration operates for those rights granted subject to conditions, or by
          extinctive periods.

          The title registration for a particular property all over Romania comprises:

          •    the Property register, which gives a description of the property

          •    the Proprietorship register, which gives details of the registered owner of the property and

          •    the Charges register, which lists all recordable matters that encumber the property such as
               rights benefiting other property, covenants, financial charges, contracts, recordable leases
               and, where appropriate, special entries that restrict the registered owner’s ability to deal
               with its title without obtaining the consent of another person

          There is an ad validitatem requirement for notarisation of any deed for acquisition/disposal of
          ownership of land, as well as for mortgage deeds. Also, for all practical purposes, all deeds
          regarding property (including those referring to buildings only) should be concluded in a
          notarised form.


13.       Disputes – How are they dealt with and resolved?

          Romania law permits considerable freedom of contract and the parties must give careful thought
          to which law they want to govern the contract, in which jurisdiction they would prefer that any
          disputes are resolved and what method of dispute resolution they would prefer. Methods of
          dispute resolution could include court proceedings, arbitration (whether domestic or
          international), reference to an independent expert or a mediation process. This freedom of
          contract is not absolute, however, and can in certain circumstances be circumvented if statute
          requires.

          The choices should be stated expressly in the contract. If it can be avoided, these matters should
          not be left to the courts to decide, since the uncertainty of law and jurisdiction shopping will be
          costly to all parties and can mean that any dispute is likely to take a very long time to resolve.
          The parties can agree to leave any or all of these matters fluid to be resolved at the time any
          dispute arises, but this can create its own problems.

          Different types of dispute are often resolved in different ways. For example, rent reviews are
          often dealt with by arbitration only whilst disputes of fact (or under particular clauses or in


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          respect of particular aspects of the contract) are often dealt with by expert determination.
          Disputes of law should preferably be referred to a court or institutional arbitration.

          When choosing a method of resolving disputes, the parties will have regard to various issues,
          including the following:

          •          The domicile/nationality and governing law of the contracting parties and any relevant
                     statutory limitations may inhibit such choice or the effectiveness of such a choice

          •          Whether or not awards can be enforced in the relevant jurisdictions. For example, is
                     there an international treaty that will allow enforcement of an award in a particular
                     jurisdiction? If such a treaty does exist, does it recognise arbitration awards and
                     agreements arising out of a mediation process? Many jurisdictions will not enforce
                     awards that have not arisen through the consideration and final judgment of a
                     court/judge

          •          Obtaining the decision of an expert may be faster and cheaper than obtaining one from
                     an arbitrator

          If the parties are not satisfied by the decision of the independent person, different remedies and
          courses of action apply depending upon whether that person acted as an expert or as an
          arbitrator. An arbitral award may be subject only to a cancellation application on limited
          grounds.




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                                                       PART C

                                PERMITS INSURANCE AND ENVIRONMENT

14.       Permits – What permits are required for the use and occupation of real estate and are
          they personal?

          Before performing operations involving real estate (especially regarding building/construction),
          it is recommended, and in certain cases compulsory, to obtain a planning certificate from the
          local government authority responsible for controlling the use and development of land in its
          area (county councils and city halls). This planning certificate provides information regarding
          legal, economic and technical issues with respect to the land or construction. This certificate is
          issued upon request to any interested person, and within the legal time limit of 30 days.

          The planning certificate (certificat de urbanism) generally also indicates a number of other
          authorizations and endorsements (e.g. environmental permits, public safety and health permits,
          permits from the fire prevention service and public utilities providers) required in order
          subsequently to undertake building/construction works. Subject to fulfillment of the required
          conditions, a building permit (autorizaţie de construire) will be issued by the local government
          authorities (usually from the city hall) within 30 days from the date of request.

          Generally, a building permit will be required for the construction of a “new build” property,
          work that is proposed for refurbishment of an existing building, and where an existing use (for
          example office space) is to be changed to another distinct use (for example retail premises).
          Under the planning legislation the terms “develop” and “development” have a much wider
          meaning than the construction or replacement of buildings; minor building works or simple
          changes of use may amount to “development” requiring planning permission and building
          permit.

          Special approvals from the competent Ministry are required when it is proposed to do work to
          historically or architecturally important buildings.

          In addition to a building permit, at the end of construction, the building must obtain approvals
          confirming that construction has taken place in accordance with plans and applicable
          regulations.

          The Government, through the Ministry of Regional Development and Housing, coordinates the
          activity of territory arrangement and urbanism at a national level. Locally, the county councils
          or local councils draw up urbanism plans to supplement national activities and policies.

          The framework Planning and Zoning Law no. 350/2001 establishes the main principles
          governing this activity, as follows: (i) local autonomy (ii) transparency (iii) partnership (iv)
          decentralized public services and (v) durable development.

          There are three different kinds of urbanism plans: (i) General Urbanism Plan ("PUG"), one for
          each locality (ii) Local Urbanism Plan ("PUZ"), providing detailed regulations for a specific
          area (e.g. districts of Bucharest) and (iii) Detailed Urbanism Plan ("PUD"), required only in
          certain cases and referring to one or more plots.

          In application of the relevant regulations on territorial arrangement and urbanism, urbanism
          plans are issued by county councils and city halls.




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15.       Insurance and Risk – What insurance will the parties effect and when does the insurance
          risk pass at the time of sale?

          Before a sale is contemplated, insurance is generally the responsibility of the owner of the
          freehold interest in a property. However, where such property is the subject of a lease, the terms
          of the lease will determine which party has responsibility to insure. It is common for owners of
          long leasehold interests in commercial properties to insure rather than the landlord/freehold
          owner. Whatever the length of the lease, the tenant will generally insure the contents of the
          property belonging to the tenant and in some cases certain parts of the property for which the
          tenant is contractually responsible.

          The insuring party should have a fully comprehensive buildings insurance policy to protect the
          structure and fixtures and fittings of the property in the event of damage or destruction by any of
          a comprehensive list of insured risks, such as storm, lightning, fire, earthquake and water
          damage. The policy may also cover additional special heads of cover such as subsidence, heave
          and, if available, terrorism.

          Generally it is the buildings, and not the land, which are insured for the reinstatement cost rather
          than the reinstatement value.

          Insurance policies may either comprise a single policy for one particular property or a block
          policy designed to cover a portfolio of properties.

          Owner-occupiers generally have separate policies to cover the contents of the property,
          especially if the property includes costly plant and machinery.

          Policies for defects in title to property are not yet available on the Romanian market (although
          at the time of going to press, there are initiatives in this direction). Also, certain foreign title
          insurance companies may be offering policies on a case-by-case basis, in particular for
          properties of significant size/value

          Insurance policies are generally personal and not transferable on sale.

          Recently a new law was enacted imposing on the owners (legal or natural persons) of residential
          buildings, situated either in the urban or the rural zone, the duty to conclude for such dwellings
          insurance policies against natural disasters such as earthquakes or floods.

          The mandatory insured sum is:

          •    Euro 20,000 for each type A dwelling and

          •    Euro 10,000 for each type B dwelling.

          The qualification of the dwellings is to be made in accordance with the norms issued by the
          Insurance Supervision Commission in this respect, using the criterion of the construction
          materials (type A - construction materials subject to chemical or thermo treatment; type B - not
          subject to such treatment).

          The insured risk is any form of deterioration arising directly or indirectly from the occurrence of
          a natural disaster.




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16.       Environmental – What are the common environmental issues?

          Real estate may be contaminated as a result of current and former uses. Primary legal
          responsibility follows the “polluter pays” principle: the person who spilled, released or
          discharged a substance will normally be liable for any ill-effects it causes.

          All activities with a potential adverse impact on the environment should be carried out only on
          the basis of authorizations or permits issued by the relevant authorities.

          For certain specified activities (present or future) which have a significant impact on the
          environment and are identified by an order of the Ministry of Environment and Waters
          Management, it is necessary to obtain an environmental authorization (autorizatie de mediu).

          Upon the sale of a majority stake in a company, of a disposal of an undertaking or unit, or in
          case of a merger or spin-off, or of a new development, owners or investors in real estate that
          perform activities with a significant impact on the environment must obtain an environmental
          permit (aviz de mediu), based on an environmental survey report (bilant de mediu).

          The responsibilities of the acquirer or the developer are laid down in an environmental
          conformity plan (program de conformare), the terms of which are negotiated between the
          acquirer/developer and the environmental authority. These may refer to both reduction and
          rehabilitation measures.




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                                                       PART D

                                              FINANCE AND TAXES


17.       Pricing/Valuation – What sets the price/valuation of real estate?

          Pricing of real estate investments is a combination of the aggregate rent being paid by
          occupational tenants of the property and the value that investment buyers consider that a
          property of the specific type and location is worth at the time of valuation taking that income
          into account.

          The rent for a particular property is likely to be assessed by multiplying the area of the property
          by the market rental value per square metre. The market rental value will take into account
          factors such as the location of the property, its type and condition, and the length of the lease
          term. The area of the property will be calculated by reference to Gross Internal Area (used, for
          example, in relation to warehouses and industrial buildings) and Net Internal Area (used, for
          example, in relation to offices and shops).

          In the case of retail shops, it is common for the rent of the property to have differential values
          according to the positioning of the floor space – that nearest to the frontage is the most valuable
          and will be described as “Zone A”. The rental values of the various areas will be added together
          to provide an overall rental value for the property.

          Investment properties are commonly referred to as being sold on a particular yield, meaning the
          investment return that will be gained from the capital sum which it is necessary to pay to buy
          the property. For example, where a property with an aggregate rent of ROL 1,000,000 is sold
          for ROL 20,000,000, it will have a yield of 5%. Conversely, the interest can be said to have
          been sold at a YP (years’ purchase) of 20.

18.       Financing – How is a real estate acquisition financed?

          The principal ways in which real estate acquisition is financed are:

          •    through the purchaser’s own cash resources or general corporate banking facilities and

          •    by using the capital value of the property to raise specific finance secured on the property

          A typical security package will involve the grant of a mortgage over the real estate itself
          together with a pledge of cash receivables under the building contract, the lease agreements and
          insurance policies, a pledge on rent and other collection accounts, and, ideally, a pledge of the
          shares of a special purpose vehicle company owning the property. Note that it is not possible
          under Romanian law to take an assignment over all the rights and benefits arising under a
          contract, only a pledge over the receivable.

          Lenders typically require floating interest rate borrowings to be hedged under separate interest
          rate hedging arrangements so that the interest cost is effectively fixed.

19.       Security over real estate – How is security over real estate created and protected?

          A fixed security interest over land and/or buildings is generally created under a mortgage, which
          must be executed in a notarised form.




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          An ownership right and a usufruct right can be the subject of a mortgage. All mortgages must
          be registered in the Land Book.

          In the case of investment property, some lenders require all rental income (excluding service
          charge receipts) to be paid into a specific account pledged to the lender and will restrict
          withdrawals from that account to the making of payments in respect of the financing costs and
          repayment of the principal sum secured on the property.

20.       Taxes and Costs – What are they and who pays them?

          Generally, please refer to our CMS Transaction Costs Guide as to the nature and amount of the
          taxes and costs.

          Revenues obtained from the sale by individuals of real estate properties are taxed as a
          percentage of the sale price. For properties sold after less than 3 years as from their acquisition,
          the tax is 3% if the purchase price is less or equal to RON 200,000 or RON 6,000 plus 2% of
          what exceeds RON 200,000. For properties sold after 3 years as from their acquisition, the tax is
          2% if the purchase price is less or equal to RON 200,000 or RON 4,000 plus 1% of what
          exceeds RON 200,000.

          Some exemptions to the tax apply, for example in the case of property inherited from close
          relatives, as defined in the Fiscal Code.

          A company’s income from direct and indirect sales of properties (i.e. also sale of shares in a
          property holding company) will be taken into consideration for the calculation of general profit
          tax of 16%.

          The ownership transfer publicity fee (replacing the formerly so-called ‘stamp duty’) is payable
          at the rate of 0.15% of the value of the transaction for individuals and 0.5% of the value of the
          transaction for legal entities.

          The publicity fee is collected by the notary and paid to the cadastral authority upon the date of
          the authentication of the sale and purchase agreement.

          Notary fees are due on the authentication of the deed of transfer of the ownership over real
          estate by a public notary.

          The following taxes are additionally due:

          •    Tax for issuing urbanisation certificates: RON 10 + RON 1 for each square metre exceeding
               1,000 square metres (for urban areas). This is reduced to half for rural areas

          •    Tax for issuing the construction authorization: 1% of the authorised value of the works. For
               buildings intended to be used for living, the tax is 0.5% of the authorized value of the works

          •    Public utility permissions: these permissions should generally be listed in the urbanisation
               certificate and there may be up to 20 or 30 such permissions. Also generally the taxes for
               such permissions are low (fixed nominal values), but public utility providers might request
               feasibility studies and the issue of the permission is in practice conditional upon paying the
               fees for such studies. Costs associated with the preparation of a PUZ/PUD (urbanisation
               plans) may also need to be considered




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          •    Tax to be paid to state construction inspection (ISCLPUAT) by investors or owners: 0.7%
               of the total costs for performing the construction works and

          •    Contribution of 0.5% of the estimated value of the works for the Social Housing of
               Contractors

          The sale of shares owned by a natural person in a property holding company is subject to an
          income tax of 16%.

          Value added tax may also be payable, except (broadly) where the property is sold by an
          individual or a non VAT-paying company.

          The VAT quota for the transfer of ownership over certain so-called “social policy dwellings”,
          including the ownership over the appurtenant land, has been reduced from 19% to 5%. This
          category includes residential properties having a usable area of maximum 120 sqm, excluding
          any annexes, which are built on a plot of land (in case of houses) or the corresponding co-
          ownership quota over the land (in case of a apartments located into a condominium) does not
          exceed 250 sqm and their value, including the value of the land on which they are built, does
          not exceed RON 380,000.00 (approx. EUR 90,000).

          The purchasers of such dwellings could benefit of the reduced VAT quota, only if individually
          or as a family, they had not previously acquired another dwelling subject to the reduced VAT
          quota.

          During the due diligence for the acquisition, the buyer will also pay the costs of conducting
          searches, including in particular at the local authority (which includes zoning matters, building
          regulations and general municipal consents, notices etc) and, if relevant, companies providing
          utilities etc. The buyer will also pay for any valuations and surveys of the physical state of the
          property and any environmental audits or desktop studies.

          The seller will generally pay the commission of any land agent or broker employed to find a
          purchaser, but in many cases commissions are charged to both seller and purchaser.

          Occasionally, the negotiated heads of terms for a transaction will provide for one or other party
          to pay the other’s costs. Generally each party pays its own expenses.

          The purchaser will be responsible for the payment of the Land Book fees associated with
          registration of the transfer to the purchaser.

          For property transactions concluded in a notarised form, a notary fee is payable. These fees may
          vary between 0.5% to 2% of the transaction value, depending on several mandatory thresholds
          applied by the notary to ownership transfers in accordance with the notary fees grid which is
          approved by the Ministry of Justice, subject to periodic reviews. The percentage decreases as
          the value of the transaction increases.

          Depending on the size of the transaction, other fees may be triggered, such as fees of valuers,
          legal counsel and other professionals. There are no rules regarding who pays what, but generally
          notary fees are paid by the buyer and each party pays the fees generated by its actions.

          In the case of savings deposited with real estate saving houses, the State grants to each client
          (provided he/she is a Romanian natural person domiciled in Romania) a premium on 25% of the
          annual amount saved, but no more than EUR 250 each year.



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                                                   PART A


                                       PARTIES AND INTERESTS

1.        Parties - Who can own real estate?

          Real estate in the Russian Federation may be owned publicly or privately.

          Public Property

          Public real estate may be owned by the state (this includes federal and regional levels) or by
          municipalities and can be sold by an agency of the federal government, a regional or a
          municipal agency.

          Substantial areas of land in Russia (and in the City of Moscow particularly) have always been
          state-owned. State ownership means that land may be owned either by the Russian Federation or
          its constituent parts. Before the beginning of 2001 (when the Land Code was adopted),
          the process of delineation of state-owned and municipal land plots was regulated by a number of
          acts both at federal and regional level. The process of delineation was complicated and at times
          confusing. Pending the determination of ownership rights over state land and to ensure that such
          land is still marketable, the State has held that until ownership rights are determined, state land
          may be disposed of by the local authorities. To clarify this issue: in order for the City of
          Moscow to be authorised to dispose of a specific land plot, such a land plot must be within the
          borders of the City of Moscow and contain no objects of immovable property which belong to
          the federal government.

          Private Property

          Any legal entity or individual may own private real estate in the Russian Federation.

          The Land Code of the Russian Federation (the “Land Code”) gives the same rights to foreigners
          with a few exceptions in respect of private land (including its acquisition) as to Russian citizens
          and legal entities. Foreign individuals and entities cannot own land that is located in border
          territories or in other specially-designated territories. Also, the law “On Agricultural Land”
          which governs the sale and purchase of agricultural land, provides that foreign individuals and
          legal entities may only acquire leasehold interests in farmland. The same rule applies to
          Russian legal entities, providing that the foreign participation in the charter capital exceeds
          50%. The maximum term of such land leases is 49 years.

2.        Property - What property interests are currently sold?

          There are two basic types of rights which apply to land plots pursuant to Russian land
          legislation: (i) the ownership right to the land plot (freehold); and (ii) the right to lease the land
          plot (leasehold). Rights of ownership to land, as well as long term leasehold rights (for
          a period exceeding one year) are subject to state registration. Rights that require state
          registration arise only at the time of registration. However, rights to property that arose
          prior to the Russian legislation on registration coming into force (January 1997) are valid
          without being registered.

              •      Right of ownership – an absolute title to the property (a right in rem)

                     Under the Land Code, land can be in public and in private ownership. However, in
                     some regions (e.g. City of Moscow) land plots are held as public property and are
                     controlled by the regional authorities. In these regions, private companies and


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                     individuals are able to use these land plots only by agreement with the authorities
                     (mostly, lease agreements). No similar limitations exist in relation to other types of
                     real estate property.

                     Ownership rights can be sold; however, in order to sell such ownership rights (and
                     other types of disposal of land) the land plot in question must have passed cadastral
                     registration and have been allocated a cadastral registration number. The freehold title
                     must then be registered with the Federal Service for registration, cadastre and
                     cartography of the Russian Federation (“Registration Service”). A transaction
                     involving an unregistered land plot will be declared null and void.

              •      Right of lease – a contractual right to possess and use the property (right in personam)
                     where the State is the owner of the land

                     A right of lease is obtained either through an auction, the purchase of a leasehold right,
                     or through individual negotiations with state authorities. On acquiring a leasehold
                     right, a land lease agreement must be entered into in writing.

                     Plots of land, whole buildings and parts of buildings (premises) are commonly
                     provided through a lease agreement.

                     In accordance with the Land Code, there is no maximum term for a lease. Leases of
                     residential premises are an exception, as they may not exceed five years. Where
                     the duration of a lease is not stipulated by a lease agreement, such agreement is
                     deemed to have been concluded for an indefinite period of time and can be terminated
                     by either party giving three months’ notice to the other. A tenant has a priority right to
                     any subsequent lease of the same land plot.

                     The length of a land lease depends on the purpose of use of the land plot in question.
                     Land plots for construction are usually provided for 3 to 6 years. The standard term of
                     agreements for the lease of land plots for buildings in the city of Moscow is 25-49
                     years. Discrepancies in the length of standard leases can be explained by the fact that
                     there is no prescribed term for such leases and therefore the term is dictated by market
                     conditions and the intended use.

                     As a general rule under the Land Code, it is possible to sublet, assign, mortgage or
                     contribute to the share capital of another legal entity any leasehold rights. Unless
                     otherwise provided for in the lease agreement, such transactions can be entered into
                     without the consent of (but subject to notification to) the landlord. However, the
                     Land Code outlines an exception under which the tenant is obliged to obtain the
                     landlord's consent if the lease agreement is for a state or municipal land plot and is
                     for a term of less than 5 years.

                     If the term of the lease is longer than one year, the lease of any real estate property
                     must be registered with the Registration Service, unless it is a lease of residential
                     premises.

          There are other rights to land plots:

          •       Right of lifetime inheritable possession of land plot – this right is only available to
                  individuals and must have been obtained prior to 2001

          •       Right of permanent (unlimited) use of land plot – a right to possess and use land plots.
                  Historically, this right was available to state and municipal legal entities, religious
                  organisations and individuals who obtained such right prior to 2001. However, the Land

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                 Code has now restricted this right to state and municipal institutions and enterprises only.
                 Private companies holding land plots under this right will need to buy or lease the land
                 plots by 1 January 2010

          •      Free-of-charge use of a land plot for a limited period – this right is similar to a lease but
                 provided without compensation. If the land is owned by a state or municipal authority,
                 this right can only be granted to state and municipal institutions and enterprises. For
                 private land, it can be granted to any legal entity or any individual and will be subject to
                 an agreement between the relevant parties

          Other property interests also exist in Russia; however it is very difficult to transfer such rights to
          third parties:

          •      Right of economic management of property – limited right to possess, use and dispose of
                 property granted to state and municipal enterprises

          •      Right of operative administration of property – limited right to possess, use and dispose
                 of property granted to state enterprises

          •      Right of trust management of property – right to possess, use and dispose of property to
                 the benefit of the title owner granted to commercial legal entities and individual
                 entrepreneurs

          •      Right to use subsoil, forests, water resources – limited right to use land and subsoil plots
                 for the purposes of research, exploration and production of natural resources. Natural
                 resources are state-owned. These rights are granted by authorised state authorities in
                 the form of licences

          •      Right to use residential premises of family members of the owner of residential premises

3.        Ownership - What types of ownership are there?

          Ownership of a land plot provides an absolute title to the property. As such, ownership rights
          are not divided into different classes of title.

          Where more than one person has ownership, they will hold their interests in one of two ways:

          •      Joint tenants – this is where a property is possessed, used, and disposed of jointly, without
                 determination of interests of the tenants (e.g. in the case of a married couple). Such
                 property may be disposed of by either of the joint tenants as it will be assumed that both
                 parties have agreed to the disposal. However, when the disposal is registered, the
                 Registration Authority should ask for the approval of the other joint tenant(s)

          •      Tenants in common – this is where the respective interests of each of the tenants are
                 determined (although the property is possessed, used and disposed of commonly).
                 The tenants may each dispose of their individual interests in such property, however in
                 the case of an onerous disposal; the other tenant(s) will have pre-emptive rights to
                 purchase the interest

          A property owner has an exclusive right to obtain ownership or leasehold rights to a land plot
          on which any real estate property stands. The building owner is free to choose whether to
          acquire ownership or leasehold rights to the land plot.




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4.        Matters burdening or benefiting real estate - What matters can affect real estate?

          Common matters affecting real estate include:

              Matter                              Effect                              Example

           Easements              Rights which burden one piece of A right of way; a right to
                                  land and benefit another. They are use pipes and cables; a right
                                  not personal but are attached to the to use water
                                  land itself. They do not permit the
                                  owner of the benefited land to
                                  remove anything from the burdened
                                  land. The easements should be
                                  registered in the Unified State
                                  Register (see Section 12).

           Location-related       Limitations which restrict various        (a) Designated use
           encumbrances           types of use of the property due to       (zoning) of land plots
                                  environmental, social, or cultural        determined by the
                                  specifics. Such encumbrances will         authorities (farmland, lands
                                  often limit rights to construct on a      of transportation, public
                                  territory of land plots or to             lands, etc)
                                  reconstruct        property.        The
                                  encumbrances should be reflected in       (b) Location of land plots
                                  the cadastral documents (for the          in pipeline protection zones;
                                  land) and registered in the Unified       location of property in
                                  State Register (although in practice      water protection zones;
                                  there is often a lack of registration)    treatment of property as
                                                                            cultural heritage

                                                                            (c) City-planning
                                                                            limitations, e.g.
                                                                            construction of trading
                                                                            centre in recreational zone

           Covenants              Express promises determined by            Positive: a covenant to
                                  contracts between the owner of            repair a fence, to plant trees,
                                  the property and other parties. These     to refurbish the premises
                                  can be positive or restrictive and        until a fixed date
                                  affect the relations between the
                                  property    holders    rather    than     Restrictive: a covenant not
                                  the property itself                       to use the land for a
                                                                            particular purpose, e.g. for
                                                                            construction of a building

           Contractual            Rights, powers, and encumbrances          Mortgage; preliminary
           obligations to third   in favour of a third party, which         agreements for sale or lease
           parties                burden the property even if not           of property; short-term
                                  specified on the Unified State            leases
                                  Register


           Adverse possession     There is no concept of “adverse Unauthorised (without
           and Rights of          possession” in Russian civil law. official expertise and
           ownership that must    However “Rights of ownership that approval) construction of

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                Matter                                 Effect                             Example

              be confirmed by the      must be confirmed by a court             a property
              court                    decision” are a similar concept. It is
                                       rare that such rights will apply as      The right of ownership to
                                       they will only be recognised by a        an unauthorized structure
                                       court of law if certain legal            may be recognised by a
                                       requirements are satisfied (please see   court if the following
                                       the examples section)                    requirements are met:

                                       It is not possible to dispose of the     (i) the person owns
                                       real estate before the court has         the land plot on which
                                       determined if such ownership rights      the said structure has been
                                       apply                                    built

                                                                                (ii) the maintenance of the
                                                                                structure does not infringe
                                                                                any right or legal interest of
                                                                                any other person/entity



5.        Occupation of real estate - Who may occupy real estate?

          Real estate is usually occupied by one of the following categories of person:

          •        owners – persons with a freehold interest in the property

          •       tenants – persons with a lease of the property or part of it. It is possible for any number
                  of subleases to be created in relation to the same property. This may create a chain of
                  interests (unless otherwise prohibited in the initial lease agreement or sublease
                  agreements)

          •       franchisees, holders of concessions and licensees – persons holding contractual
                  permissions to occupy the property rather than interests in the property itself.
                  Transferability of such rights to third parties is determined by the respective contracts

6.        Brokers - What is the broker's role?

          A number of international and local brokers, also referred to as surveyors or agents, operate in
          Russia. Their functions are similar to those acknowledged internationally: investment,
          valuation, management, legal and organisational support of the deal, and rent review.

          A broker may be employed by any party involved in a real estate transaction. Their role may
          include any of the following tasks:

          •       acting for a seller to find a buyer for a sale property, including marketing the property for
                  sale

          •        acting for a landlord to find a tenant for a property, including marketing the property

          •        acting for a buyer to find a property to buy

          •        acting for a tenant to find a property to lease



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          •      acting for a developer to find an investor; acting for an investor to find a co-investor

          •      organising tenders and auctions related to the acquisition of real estate property

          •      acting for any party to a transaction by drafting and negotiating heads of terms

          •      preparing heads of terms for documenting and liaising with lawyers

          •      valuing a client’s existing and target properties

          •      day to day management of property owned by clients, including managing maintenance
                 programmes and landlord and tenant work

          •      project management of development of new buildings or refurbishments

          •      negotiating rent reviews of existing properties

          •      performing functions of quasi escrow agents in property sale and purchase transactions
                 (usually banks or notaries)

          Brokers available in the market range from those employed by major international organisations
          to specialised advisers providing advice on a more restricted basis.


7.        Employees - What employment issues affect real estate acquisitions?

          As a general comment, we note that Russian employment legislation is employee-oriented. In
          case of disputes, the courts usually make decisions to the benefit of employees.

          In relation to real estate transactions, employment issues may arise during the course of the sale
          of an enterprise (transfer of undertakings). These transactions often result in redundancies and
          in changes to employee’s terms and conditions of employment.

          The broad effects of the sale of an enterprise are that:

                •    with effect from completion of the transfer, the buyer assumes responsibility for
                     employees working in the business transferred

                •    accrued continuity of employment                (including   terms   and   conditions    of
                     the employment) is preserved

                •    dismissal for a reason connected to the transfer is viewed as unfair - unless
                     the company is restructured, or the dismissed employee used to act as a senior
                     manager of the old company

          Redundancies may arise on the closure of a business or part of a business or where there is
          a reduction in the number of employees required, for example on the merger of two businesses
          or a sale of an enterprise. Care should be taken to ensure that the redundancies are carried out in
          a procedurally fair manner. Normally the seller will agree to be responsible for all claims and
          liabilities relating to employees up to the date of transfer, and the buyer will take on all post-
          transfer employment liabilities.




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                                                 PART B

                                      PROCEDURE AND TERMS

8.        Procedure - What are the steps in a sale and purchase transaction?

          Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by
          the brokers for the seller and the buyer. The heads of terms (or memorandum of understanding,
          or letter of intent) set out the principal terms agreed between the parties and are generally
          expressed to be “subject to contract” and not legally binding. They form the basis of the
          documents to be drafted by the lawyers.

          Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s
          lawyers will usually collate all of the information relating to the property and send it to
          the buyer’s lawyers, together with a draft sale and purchase agreement (contract). The form of
          the sale agreement will vary according to whether the property being sold is under construction
          or already built and the extent to which leases to tenants have already been granted.

          The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the
          same time undertake general due diligence investigations (see Section 10).

          Once the sale agreement is in an agreed form, the seller and buyer will sign an agreement
          (which needs to be a single document). After the parties sign the agreement, they will also
          execute an Act of Transfer and Acceptance. The real estate sale and purchase agreement then
          needs to be registered in the Unified State Register (see Section 12).

          Depending on whether the purchase is direct (asset) or indirect (shares) the completion
          mechanism and process will differ. Where the purchase is made with borrowed finance a charge
          over the property will generally have been put in place and registered just prior to completion to
          protect against the “registration gap”. The lender of the finance may instruct its own lawyers to
          carry out due diligence procedures on its behalf and negotiate security documentation.

          Occasionally, the negotiated heads of terms for a transaction will provide for one or other party
          to pay the other’s costs. Generally each party pays its own costs.

9.        Other common contract terms - What other provisions does a real estate sale contract
          commonly contain?

          An agreement for the sale and purchase of real estate must be in writing in the form of a single
          document signed by both the seller and the buyer. It must also contain or clearly refer to all of
          the main terms and conditions.

          The agreement usually contains provisions setting out the responsibilities of the parties in
          respect of state registration of the agreement and allocation of related expenses.

          The mechanism for payment of the sale price is usually by means of a letter of credit or a wire
          transfer.

          Where matters of title affect the property, such as restrictive covenants, the seller may require
          reciprocal obligations from the buyer and an indemnity in respect of any liability the seller may
          still have following completion of the transaction.

          Provisions relating to value added tax will be included where relevant to ensure that the agreed
          tax position is preserved between exchange and completion.



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          Contracts for the sale of property which is subject to occupational interests such as leases will
          include clauses to cover ongoing management matters and provide for apportionment of
          occupational income and outgoings on completion of the transfer of ownership in the property.

          In order to sell a property which is under construction, the construction should be stopped, and
          the property should be registered as an “unfinished construction item”. If this procedure is not
          followed, the property will not be treated as real estate and will need to be transferred by means
          of an assignment of rights and obligations under construction agreements and in this case, land
          title (freehold/leasehold) should also be transferred to the buyer.

10.       Due Diligence - What investigations does the buyer normally make?

          Pre-signing

          The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil
          and geological investigations, plant and machinery tests, and environmental investigations. The
          following issues should be considered by the buyer’s lawyers during the pre-exchange due
          diligence:

          •          Title to the property

                     The buyer’s lawyers will consider the entries on the land cadastre and Unified State
                     Register (see Section 12) and check relevant historic title documents: history of
                     allocation of the land plot, chain of property acquisition, history of privatization of
                     an enterprise in the 1990s.

                     If state-owned or obtained by the seller before 1997, the property may not be
                     registered in the Unified State Register (see Section 12), as state registration was only
                     introduced in 1997 and further use of such property without state registration is
                     considered legal. However in order to transfer the title, or grant any other rights (such
                     as lease rights for more than one year), the owner should properly register its title.
                     This procedure usually takes one to two months.

          •          Legal, administrative, and contractual burdens on the property and the specifics of its
                     designated use

                     The buyer’s lawyers should check the position regarding municipal and zoning
                     consents (in particular, the designated purpose of use of the land plots), environmental
                     matters, utilities serving the property, financial encumbrances, previous mortgages,
                     etc. In case of a building or premises, the compliance of the seller or the preceding
                     owners with the construction procedure should be examined. Also, hidden risks should
                     be investigated, e.g. short term leases, rights of the third parties to dispute title.

          •          Facilities under construction

                     It is important to consider how the relationships between investor/co-
                     investor/contractors are structured. The status of the permit documentation is
                     extremely important, as well as the project risks (possibility of obtaining any
                     outstanding consents and permits, the risk of cost overrun, risks of delays and
                     underfinancing).

          •          The terms of preliminary lease agreements and their enforceability

                     Preliminary lease agreements should be considered and together with those, any key
                     agreements and subcontracts (including as to termination).

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          •          Corporate issues

                     Where the seller is a company, the buyer’s lawyers will also conduct an examination
                     of basic corporate (and if necessary contractual and financial) documentation to
                     ascertain whether the seller is solvent and therefore able to dispose of its assets freely.
                     Where the search result refers to security, the buyer’s lawyers will ask for
                     confirmation that such matters do not encumber the property and that no third party
                     consents are required for the transaction to proceed. In most cases, a real estate
                     property transaction will require various corporate approvals. The scope of
                     examination depends on whether the acquisition is structured as a share purchase or
                     an asset (real estate) purchase.

          •          Practical matters

                     Also, the buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of
                     the seller’s lawyers, to obtain information regarding a large number of practical mattes
                     that may affect the property and will ask any relevant questions in relation to the title
                     to the property. For example, the following items should be considered:

                     •      construction costs
                     •      official permits and approvals
                     •      competency of the project team
                     •      utilities and infrastructure
                     •      utility loads
                     •      managing and insurance contracts
          Whilst a seller must not knowingly or negligently mislead a buyer, “caveat emptor” (buyer
          beware) applies. Consequently, the seller’s replies may be actionable if they are wrong or
          misleading. During the due diligence process the buyer may often arrange for a survey to be
          carried out at the property.

          Before signing, the buyer’s lawyers usually report their due diligence findings to their client,
          raising any matter of particular importance or concern. The legal due diligence report seeks to
          answer the main question on quality of the asset.

          During the due diligence in the acquisition process, the buyer will meet the costs of conducting
          searches, including in particular the documents provided by the local authorities (which includes
          zoning and city-planning matters, building regulations and general municipal consents, notices,
          etc).

11.       Terms implied by law - What provisions are implied by Statute, Code or otherwise?

          Real estate sale contracts are governed by the Civil Code of the Russian Federation (the “Civil
          Code”), the Land Code (as far as land plots are concerned) and other civil law legislation.
          The law contains obligatory provisions applicable to all agreements as well as optional
          provisions applicable unless otherwise provided for in the agreement. The most important legal
          requirement is the state registration of any transactions where real estate property is involved.

12.       Registration and notarisation of real estate - What are the basic requirements?

          The Civil Code introduced mandatory state registration of some transactions as well as
          mandatory registration of most rights to and encumbrances over (including mortgages, long-
          term leases) land or any other real estate.

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          State registration of rights is affected by making the appropriate entry in the Unified State
          Register of Rights to Real Estate and Transactions (the “Unified State Register”). State
          registration is the only proof of the existence of the registered right, which may be contested
          only in a court of law by an interested person. Information in respect of rights to real estate
          included in the Unified State Register is publicly available. The Unified State Register was
          established in 1997 and title to real estate acquired prior to 1997 may not be included in it. Such
          title was registered in other state institutions, and the absence of records in the Unified State
          Register does not lead to invalidation of the title. However, in order for the owner to enter into
          transactions with such property, it has to register the existing title in the State Register.

          Real estate, including plots of land, may be sold and purchased by way of a written agreement
          (a single document signed by both parties) that must subsequently be registered. The Land
          Code provides that agreements containing re-purchase options or imposing restrictions on
          the rights of a purchaser to sell, mortgage or lease the acquired land will be declared null and
          void. Similarly, any limitations on a seller’s liability will also be void.

          Real estate sale and purchase agreements and other agreements dealing with real estate are not
          required to be notarised. However, in an acquisition of real estate by a share transaction, the title
          to shares is generally transferred upon notarisation. Additionally, from July 1, 2009 Russian
          legislation places a mandatory requirement that agreements transferring participatory interests
          in Limited Liability Companies (LLC) or pledge agreements over participatory interests in
          LLCs, be certified by a notary. To clarify, this amendment will only affect share transactions.

13.       Disputes - How are they dealt with and resolved?

          Russian law permits considerable freedom of contract and the parties must give careful thought
          to which law they want to govern the contract, which jurisdiction they would prefer that any
          disputes are resolved and what method of dispute resolution they would prefer. Most
          commonly applied methods of dispute resolution include court proceedings and arbitration
          (whether domestic or international). This freedom of contract is, however, not absolute.
          In particular, all statutory requirements in relation to real estate located in the Russian territory
          must be observed.

          Any choice made should be stated expressly in the contract. If it can be avoided, these matters
          should not be left to the courts to decide since the uncertainty of law and jurisdiction shopping
          will be costly to all parties and can mean that a dispute is likely to take a long time to resolve.
          The parties can agree to leave any or all of these matters fluid and to be resolved at the time
          a dispute arises, but this can create its own problems.

          Unless the governing law is determined by the parties, Russian law will be applied to
          agreements concerning real estate located in Russia. Russian law will be applied to disputes
          related to land plots, water objects and mineral resources located in Russia.

          When choosing a method of resolving disputes, the parties will have regard to various issues,
          including the following:

          •      The domicile/nationality and governing law of the contracting parties and any relevant
                 statutory limitations that may inhibit such choice or the effectiveness of such a choice

          •      Can awards be enforced in the relevant jurisdictions? For example, is there
                 an international treaty that will allow enforcement of an award in a particular jurisdiction?
                 If such a treaty does exist, does it recognise arbitration awards and agreements arising out
                 of a mediation process?

          Under Russian domestic law, the following claims can be filed in relation to real estate disputes:

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          •      Vindication claims brought by title owners and aimed to reclaim property from the illegal
                 use of third parties. Such claims may be brought against a bona fide buyer of the property
                 (i.e. the buyer who did not and could not know that the seller did not have proper title to
                 the property) only if the property was lost by, or stolen from, or by any other means was
                 taken from its actual owner against its will

          •      Claims on invalidation of transactions. It is important to consider the “statute of
                 limitation”, i.e. regulations of the applicable Russian law limiting the right to bring a
                 claim at court due to the expiry of a specified term. Under Russian law the term specified
                 for void transactions is 3 years and 1 year for voidable transactions

                 Until the middle of 2005 the limitation period was 10 years for void transactions and 1
                 year for voidable transactions. The length of the limitation period for void transactions
                 led to a number of attempts to challenge the results of privatisation of land. In order to
                 prevent this, in 2005 the Russian Civil Code was amended and the limitation period in
                 respect of void transactions was reduced to 3 years.

                 Pursuant to Russian civil law, relations between parties are regulated by the civil law
                 from the moment that such relations are established. The new shortened limitation period
                 will apply to any type of transaction provided that the relationship between the parties
                 began after July 2005. Therefore, if a claim is brought before July 2005, the 10 year
                 limitation period will apply and if a claim is brought after July 2005, the 3 year limitation
                 period will apply.

                 The reduction in the length of the limitation period in relation to void transactions has
                 prevented court revision of the majority of privatisation claims.




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                                                  PART C

                                PERMITS, INSURANCE AND ENVIRONMENT

14.       Permits - What permits are required for the use and occupation of real estate and are they
          personal?

          The permits required for use of real estate are determined by the nature of such use. By way of
          example, below we will overview construction activities.

          In the case of construction, the applicant should follow a lengthy administrative process,
          including the following principal stages:

          •      Identification of a land plot suitable for development and its further allocation for
                 development purposes, which includes territorial zoning and city-planning procedures,
                 preliminary agreement on location and boundary survey (it takes 6 months
                 approximately)

          •      Conversion to a suitable “category of lands” (if necessary), public auction, official
                 allocation of the land plot to the applicant, registration of the rights to the land plot
                 (usually leasehold)

          •      In Moscow it is quite a common situation that an investor will conclude a separate
                 investment contract with the Moscow government. Under such contract, the investor will
                 have additional obligations to develop engineering networks and objects of social
                 infrastructure, etc.

          •      Engineering survey

          •      Preparation of the project documentation

          •      Expert approvals of the project documentation and architectural design of the building

          •      Obtaining of the construction permit

          •      Completion of the construction works

          •      Commissioning of the completed building by the official authorities; receiving “Putting
                 into Operation” certificate

          •      Registration of the investor’s title to the completed building with the Registration Service

          Each of the above stages requires a number of formalities and approvals from the state
          authorities. As a rule, until all of the formalities related to a particular stage of development
          have been fulfilled, it is prohibited to move to the next stage.

          The above permissions are personal, however if necessary some of them can be transferred to
          another person.

          Currently the following activities in the field of construction and design require licensing:

          •      the design of buildings and structures
          •      the construction of buildings and structures



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          •      engineering and surveying for the purpose of erecting buildings and structures

          According to the latest amendments to Russian legislation in this area, the need for a licence for
          design, construction and engineering activities will be abolished from January 1, 2010.
          Licensing will be replaced with compulsory membership of construction companies in self-
          regulated organisations who are responsible for issuing the certificates. During the transfer
          period, from January 1, 2009 till January 1, 2010 both licences and certificates of the self-
          regulated organisations will be valid.

          Russian legislation outlines a number of conditions where the Federal Antimonopoly Service
          (“FAS”) must be notified of transactions. Notification must generally be made 45 days after
          the relevant transaction has taken place. However, if certain thresholds and criteria are met or
          exceeded, post-notification may be insufficient and prior consent must be granted by
          the FAS. A transaction which has or may lead to restriction of competition and to which
          prior consent (or notification) from the FAS has not been obtained (or given) may be held
          to be invalid by the courts if challenged by (or to) the FAS.

          Generally, there are two main groups of permits to be obtained when organising and
          administering natural resource use activities:

          (1)        Permits for use of natural resources, which may include:

                     •          Licences for geological study, exploration and production of subsoil, etc.

                     •          Land and mining allotments for the use of land and subsoil plots

                     •          Licences and permissions for the use of forests, water, etc.

          Obtaining these licences and permissions usually requires provision of a technical and economic
          specification for the future use of the natural resources and obtaining a number of approvals
          from various state authorities and institutions (e.g. ecological).

          (2)         Licences for performance of various types of activities, for example:

                     •          exploitation of chemically dangerous/flammable/explosive production
                                facilities

                     •          treatment of dangerous waste, etc.

15.       Insurance and Risk - What insurance will the parties effect and when does the insurance
          risk pass at the time of sale?

          Before a sale is contemplated, the owner of the freehold interest in a property should take out
          insurance. However, where such property is the subject of a lease, the terms of the lease may
          prescribe which party has the responsibility to insure. Whatever the length of the lease,
          the tenant will generally insure the contents of the property and in some cases certain parts of
          the property for which the tenant is contractually responsible.

          We note that sale and purchase, as well as lease agreements in Russia, may contain unusual
          provisions in relation to allocation of responsibility to insure property. Such provisions should
          be carefully checked and discussed with sellers/landlords in each particular case.



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          The insuring party should have a fully comprehensive buildings insurance policy to protect
          the structure and fixtures and fittings of the property in the event of damage or destruction by
          any of a comprehensive list of insured risks, such as storms, lightning, fire and water damage.
          The policy may also cover additional risks during the refurbishment/reconstruction of the
          property and, if available, it may also cover the risk of terrorism.

          Generally it is the building(s) and not the land that is insured for the reinstatement cost rather
          than the reinstatement value.

          Insurance policies (the insurance contracts containing the contractual terms between
          the insurance company and the insured) may either comprise a single policy for one particular
          property or a block policy designed to cover a portfolio of properties. Larger institutional
          investors may self-insure.

          Occupying owners generally have separate policies to cover the contents of the property,
          especially if the property includes costly plant and machinery.

          If the property is mortgaged, the mortgagee usually insists on additional insurance, such as
          insurance to cover potential interruptions of commercial activity and insurance protecting
          against third party liabilities.

          It is not common practice within Russia to obtain “insurance of the title”.

16.       Environmental - What are the common environmental issues?

          In general, Russian law contains the following groups of environmental protection provisions:

          •      General requirements to performing activities involving air, soil, ground water and other
                 natural resources. To protect the natural resources, there are a system of “protection
                 zones” where construction and business activities are limited

          •      Specific industry-oriented requirements (such as maximum levels of toxic pollutions,
                 noise, radiation). Almost all industrial objects have “sanitary zones”, within which other
                 activities, such as construction of residential houses, are limited

          •      Penalty provisions related to the pollution of natural resources

          Environmental protection rules should be observed, in particular, in the course of the following
          activities:

          •      Design and construction of facilities (including industrial facilities)

          •      Operation of facilities

          •      Utilisation of wastes

          In addition to various other measures designed to ensure that the environmental protection
          provisions are met, Russian law requires an ecological examination of the project to be
          performed prior to construction/reconstruction of any industrial object.

          When acquiring real estate, it should be noted that real estate (especially land plots) may be
          contaminated by current and former uses. Primary legal responsibility follows the “polluter
          pays principle”. This means that the person who spilled, released or discharged the polluting
          substance will normally be liable for any ill-effects caused. However, environmental laws may
          also operate to make future owners and occupiers liable for contamination which was already


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          present when the real estate was acquired if the substance is causing, or there is still potential
          for it to cause, harm to the environment and there is direct or indirect fault of the new owner or
          occupier in such harm. However, the standard ecological tests performed during
          the allocation/acquisition of the land plot usually allow the buyer to avoid such problems.




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                                                      PART D

                                             FINANCE AND TAXES

17.       Pricing/Valuation - What sets the price/valuation of real estate?

          The pricing of real estate investments is determined by a combination of the aggregate rent
          being paid by occupational tenants and the value that investment buyers consider that a property
          of the specific type and location is worth at the time of valuation taking that income into
          account.

          A number of reliable local and international valuation companies act in Russia. However,
          it should be noted that there is a lack of publicly available, reliable statistics (especially for
          cities and territories outside Moscow and Saint-Petersburg), or other information
          affecting/proving the real estate prices.

          The rent for a particular property is likely to be assessed by multiplying the area of the property
          by the market rental value per square metre. The market rental value will take into account
          factors such as the location of the property, its type and condition, and the length of the lease
          term. The area of the property is usually calculated either based on the measurements effected
          by the local Bureau of Technical Inventory (state institution dealing with real estate
          measurements) or by reference to the BOMA Code. As a rule, the longer the term of the lease
          and the larger the leased area, the smaller the rental payments. It should be remembered, that
          Russian law allows for rental payments to be increased once a year only.

          Most of the newly constructed or renovated buildings (primarily offices and warehouses) are
          graded (“A” grade is given to the most valuable ones).

          In the case of retail shops, it is common for the rent of the property to have different values
          according to the positioning of the floor space – the area nearest to the front will be the most
          valuable. The rental values of the various areas will be added together to provide an overall
          rental value for the property.

          Investment properties are commonly referred to as being sold on a particular yield. This means
          that the investment return is calculated by reference to the capital sum required to buy the
          property. For example, where a property with an aggregate rent of £100,000 is sold for
          £2,000,000, it will have a yield of 5%. Conversely, the interest can be said to have been sold at
          a YP (years’ purchase) of 20.

          However, in the current financial situation it is absolutely necessary to perform financial due
          diligence investigations that address two major issues: the stability of long-term quality tenants
          and cash flow forecast.

18.       Financing - How is a real estate acquisition financed?

          The principal ways in which real estate acquisition is financed are:

          •      through the buyer’s own cash resources or general corporate banking facilities

          •      by using the capital value of the property to raise specific finance secured on
                 the property. A typical security package will involve the grant of a mortgage over
                 the real estate itself together with a supporting pledge over other assets of the buyer or
                 a guarantee by the third party

          •      Raising finance by bond issue (secured) or unsecured loan


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19.       Security over real estate - How is security over real estate created and protected?

          A security interest over land or other real estate objects is generally created through mortgage
          agreements between the parties. Both ownership and leasehold rights can be mortgaged.
          There are no restrictions contained in either the Land Code or the Civil Code on the grant of
          security over freehold or leasehold land. Rights to residential houses and apartments can
          also be mortgaged.

          The terms and conditions of a mortgage are governed by the Law on Mortgage which
          provides that completed buildings and other real estate may be mortgaged, but only together
          with the rights that the building owner has to the land underneath the building.

          When the property is mortgaged the mortgagor keeps the right to use it, however the mortgagee
          should agree to any subsequent disposal of the property. Additionally, it is common for
          the security package to also include a pledge over lease receivables and a pledge over the shares
          of the company – the owner of the property.

          Mortgages must be registered with the Registration Service. The mortgage agreement will
          only come into force when it is registered. If a mortgage agreement is not registered it will be
          null and void.

          If a breach of a secured obligation is significant, the mortgage can be enforced by the secured
          creditor. There are two methods of enforcement: (i) through the court, resulting in the secured
          property being sold at a public auction; or (ii) under an out-of-court enforcement agreement
          between the parties.

20.       Taxes and Costs - What are they and who pays them?

          Entering into a sale and purchase, lease or other agreement related to lands, buildings, and
          premises leads to payment of a minor registration fee for the registration of the agreement in
          the Unified State Register (currently circa 200 Euro). No notarisation is required (and
          consequently no notary fee is payable) when entering into real estate agreements unless the
          transaction is completed by way of a share transfer. In a share transaction, title to the shares is
          generally transferred upon notarisation.

          Value added tax (VAT) at the rate of 18% will also be payable on top of the purchase price or
          rent. There are exemptions from this rule: VAT is not payable on rent if the tenant is a foreign
          legal entity accredited in Russia and the law of its country of residence or an international
          agreement between Russia and such country contains a similar exemption for Russian
          companies.

          Profit from the sale of real estate in Russia is taxable at the rate 20%, as of 1 January 2009.




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                                             PART A

                                PARTIES AND INTERESTS

   1. Parties – Who can own real estate?

       In Spain any “legal person” may own real estate. That includes both individuals and
       any corporations and other legal entities. There are no specific general restrictions on
       the ability of persons to acquire real estate.

       Notwithstanding this, an administrative authorisation is needed for foreigners (non EU
       nationals) to become owners of real estate in Ceuta and Melilla, the Balearic Islands,
       Cádiz Bay, Gibraltar Strait and the frontiers with France and Portugal.

   2. Property – What property interests are currently sold?

       An investor may not only purchase the land itself or a complete building, but also other
       real property rights governed by Spanish law. Most property rights currently sold are
       property rights of enjoyment such as “Derecho de Superficie” or “Derecho de Vuelo”.

       The property right of enjoyment known as Derecho de Superficie offers the investor
       the right to build on someone else’s land and become the owner of the building for a
       maximum period of 75 years (when it is granted by a public institution) or 99 years (in
       other cases). It usually takes the form of long term lease where the building will
       ultimately revert to the owner of the land and offers a genuine real property right,
       which can be mortgaged, sold and transferred.

       On the other hand, Derecho de Vuelo offers someone the right to build one or more
       floors upon a building or a structure under the building itself and become the owner of
       those buildings/structures. This therefore gives rise to a condominium or horizontal
       property relationship between the owners of the various interests. This property right
       can be created in two different ways: (1) selling the whole asset and reserving the right
       or (2) granting the right whilst keeping ownership of the building and the land. In
       either case a real property right is created, which can be mortgaged, sold and
       transferred.

   3. Ownership – What types of ownership are there?

       Ownership of property falls into three categories in Spain: public domain, other public
       property and private property.

       Private property can belong to a single legal person or to a number of people.
       Although different forms of co-ownership can be found in Spain (mainly according to
       regional civil legislation), by far the most usual type is “pro indiviso” co-ownership,
       according to which the freehold ownership is jointly owned by several people at the
       same time, without partition.



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       As far as housing is concerned, two specific forms of co-ownership should be noted:
       property in condominium (very common in flats, apartments, etc.) and time-sharing
       (Multipropiedad), which has specific characteristics under Spanish law.

   4. Matters burdening or benefiting real estate – What matters can affect real
      estate?

       Common matters affecting real estate include:

        Matter                  Effect                      Example
        Rights in rem of Legal right to use and -               Usufruct (Usufructo): right to use
        use and          enjoy the real property of             another’s property for a time without
        enjoyment        another person.                        damaging or diminishing it.

                                                            -   Use and habitation (Uso y habitación):
                                                                right to use and dwell in the property of
                                                                another.

                                                            -   Encumbrances (Servidumbres): rights
                                                                which burden one piece of land and
                                                                benefit another.

                                                            -   Surface Right (Derecho de superficie):
                                                                right to construct or build on the land
                                                                that belongs to another person

        Liens (Right in Legal right or interest that -          Mortgage (Hipoteca): a lien against
        rem of guarantee) a creditor has in another             property that is granted to secure an
                          person’s property, lasting            obligation.
                          until a debt or duty that it
                          secures has been satisfied
                                                       -        Anticresis: a form of security pursuant to
                                                                which a creditor is given possession and
                                                                enjoyment (taking the fruits) of the real
                                                                estate. Its use remains very uncommon.

                                                            -   Retention of the title of property
                                                                (Reserva de dominio): the seller keeps
                                                                ownership of the real estate until the
                                                                purchaser has partially or totally paid the
                                                                price of acquisition
        Pre-emption             Priority over other people -    Purchase option over real estate (Opción
        rights                  in claiming land subject to     de compra): the right to buy a property
                                pre-emption.                    at a fixed price.
                                It results from co-
                                ownerships, lease           -   Right of redemption (Derecho de
                                agreements, local and           retracto): the right to buy a property
                                general planning                paying the seller the same price that it
                                regulations, public law, or
                                                                paid to a third party plus relevant


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                                from a contract, published       expenses
                                at the Land Registry in
                                order to be enforceable
        Prescriptive            Where a legal right over -       Ordinary Prescriptive Right: a user with
        rights                  land belonging to another        a fair title (justo título), i.e., someone
                                person is acquired due to        who acquired from a person with a
                                long usage
                                                                 legally transferable interest in good faith
                                                                 (buena fe) will acquire the ownership
                                                                 after 10 years (30 in cases of transfer
                                                                 otherwise than by a legal owner).

                                                             -   Extraordinary Prescriptive Right: the
                                                                 ownership will be acquired by
                                                                 possession for 30 years, without any
                                                                 other requirement.

                                                             -   Encumbrances (Servidumbres): certain
                                                                 rights can be acquired by making use of
                                                                 them for a period of 20 years

        Expropriation for A property may be subject
        public purposes to expropriation for public
                          or social purposes. The
                          owner is obliged to sell his
                          property provided that
                          public authorities give him
                          indemnities in return,
                          which cover his loss. Prior
                          to the expropriation, a
                          public investigation is
                          undertaken in order to
                          justify the expropriation


       In certain regions of Spain (Catalonia, Basque Country, Balearic Islands, Aragon,
       Navarre and Galice) there are some different rules and laws applicable to certain civil
       aspects of real estate acquisitions. This summary concerns only Spanish civil common
       law.

   5. Occupation of real estate – Who may occupy real estate?

       Real estate is usually occupied by one of the following categories of person:

        • Owners – those people who have one of the types of ownership mentioned in
          section 3

        • Holders of property rights of enjoyment – most commonly tenants, persons with a
          lease of the property or part of it. A distinction should be made between residential


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             leases and commercial leases, as tenants of residential leases have a statutory right
             to renew their leases for a maximum period of five years

          • Holders of concessions and any other contractual permissions including rights to
            occupy the property

          • Mere possessors

       Please also see our CMS Lease Guide

   6. Brokers – What is the broker’s role?

       The Real Estate Property Agent (referred to in Spain as Agente de la Propiedad
       Inmobiliaria) is a broker who is appointed to act as an intermediary for transactions
       related to real estate such as sales and purchases, lettings and exchanges, and receives
       payment in the form of commission paid by either one or both parties.

       The broker’s profession is regulated by Royal Decree number 1294/2007, 28th
       September. However, pursuant to Act 10/2003, 20th May, brokerage regarding real
       estate can be carried out by both estate agents and people who are not Real Estate
       Property Agents as long as they comply with the requirements set out in Decree
       number 1294/2007, as far as they are established to protect end-users or purchasers.

       The legal requirements to act as a Real Estate Property Agent in Spain are:

      •      to pass an official exam or obtain a degree and

      •      to become a member of at least one of the local Associations of Estate Agents
             existing in Spain

      The Real Estate Property Agent’s main purpose is to represent the parties. He puts
      potential buyers in contact with sellers, or potential tenants in contact with landlords.
      He can draw up sale agreements. He may handle funds for his clients if given
      appropriate powers and if his professional licence specifically mentions “handling of
      funds”.

       The Real Estate Property Agent also acts as an advisor, and has a duty to provide
       advice to his clients on the legality of the operation, applicable regulations and the
       feasibility of the project, which can include:

          • verifying the administrative state of the property (land for construction, building
            constraints, etc.)

          • verifying all information given to the parties (lease situation, validity of present
            leases, etc.)

          • informing the buyer of any defects in the property (parasites, etc.), within the limits
            of his professional responsibility and



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        • verifying the creditworthiness of the buyer

       Payment of the broker’s fee normally occurs on completion of a contract, or when a
       contract is unconditional, if later.
   7. Employees – What employment issues affect real estate acquisitions?

       In order to determine whether a real state acquisition may involve some employment
       issue, it is necessary to analyse whether the real estate transfer also implies the transfer
       of employment relationships, i.e. is there is an economic activity that is being carried
       out in the real estate that will be continued by the buyer.

       It is necessary to determine whether or not the transaction is a “transfer of business”
       according to Article 44 of the Spanish Labour Code. According to this provision, a
       transfer of business takes place when the transfer involves an economic entity which
       maintains its identity as a means of carrying on an economic activity.

       Spanish case-law has required, in particular, two elements to constitute a transfer of
       business. Firstly, the new employer must obtain effective ownership of the
       undertaking, business or part of the undertaking or business. Secondly, except in some
       specific cases, there must be a transfer of tangible assets, such as buildings and movable
       property that are necessary to carry out the activity.

       The principal aim of Article 44 is the protection of employees in order to guarantee the
       maintenance of their employment and their rights after the transfer. Consequently, the
       new employer is subrogated to the old employer in respect of employment and social
       security rights and obligations, including pension arrangements. For this reason, a
       transfer cannot be a ground for a dismissal and the employment contracts are assumed
       by the transferee which becomes the new employer.

       The buyer is obliged to take over the employment contracts entered into between the
       transferred employees and the previous employer, so maintaining the employees’
       working conditions.

       According to Article 44.3 of the Spanish Labour Code, in the event of transfers that
       occur through “inter vivos” acts, the transferee and transferor are jointly and severally
       liable for a period of three years for unsatisfied labour obligations, which accrued
       before the transfer.

       In relation to the formalities that must be respected if a transfer of business takes place,
       Article 44 establishes that the transferee and the transferor have the obligation to
       inform the employees’ representatives, sufficiently in advance, of the date of the
       transfer, the reasons and possible consequences and measures proposed in relation to
       the employees. In relevant cases consultation must take place with representatives of
       the employees.




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                                             PART B

                                   PROCEDURE AND TERMS

   8. Procedure- What are the steps in a sale and purchase transaction?

       Before entering into a sale contract, the parties to it need to follow several steps in
       order to obtain information about the property and negotiate an appropriate contract.

       A Letter of Intent setting out some of the essential terms can be adopted although such
       a letter is not governed by Spanish Law.

       The buyer will carry out a due diligence process in order to obtain information on the
       legal and environmental aspects of the transaction so as to finally determine the price
       and determine whether or not any guarantees are required from the seller.

       Once the buyer has assessed a price on the basis of the information obtained from the
       due diligence process, he will submit a tender for the property to the seller who could
       either accept the offer, reject it, or make a counter-offer to the buyer.

       At this point, the parties can enter into either a pre-contract or a definitive sale
       agreement, which can be signed either before a Notary Public or privately. Pre-
       contracts which are not notarised usually contain provision for the final legalisation of
       the sale agreement before a Notary Public.

       A pre-contract could adopt one of two possible forms:

        • A bi-lateral promise of sale and purchase

       A bi-lateral promise is a document according to which both parties undertake to sell
       and to buy, and by virtue of which the buyer gives a deposit to the seller (referred to in
       Spanish Law as “arras”). If the sale agreement is finally concluded, that deposit will be
       considered as part of the price of the property. Otherwise, if the buyer does not
       proceed to buy the property, he will lose that money. However, if the seller is in
       default, the seller must pay the buyer an amount equal to double the money he has
       previously received.

        • A purchase option

       Under a purchase option, the seller, referred to as grantor, undertakes to sell the
       property to the buyer, referred to as the beneficiary of the option, as long as the
       beneficiary exercises the option within the period of time stated in the agreement. The
       beneficiary pays a price for his right of option to purchase, which could be considered
       as part of the final price of the property in case he finally buys the interest. This
       purchase option may be registered with the relevant Land Registry. It is also
       commonly stated under this sort of agreement that once the beneficiary has exercised



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       his right of option, a bi-lateral sale agreement must be concluded and notarised before
       a Notary Public.


       A definitive private sale agreement completes the sale and purchase as a valid and
       enforceable contract. The parties usually undertake to notarise the private agreement
       because a public deed is a way to acquire the property and it is necessary in order to
       register the transfer of the property with the Land Registry.


       In order for the transaction to be public and for the new owner to get the protection
       from the Land Registry, the buyer should register the public deed which notarises the
       sale agreement with the Land Registry corresponding to the city, town or district where
       the acquired estate lies. Prior to registration, the buyer must pay the taxes which arise
       from the transaction.


   9. Other common contract terms – What other provisions does a real estate sale
      contract commonly contain?

       The clauses contained in a sale agreement will depend upon the type of contract
       adopted.

       Purchase option

       With regard to a purchase option, the provisions will cover:

        • the object of the agreement: any property (building, land, estate, building under
          construction etc.)

        • the term of exercise of the right starting on a certain date

        • the fee paid for the right granted to the beneficiary

        • the price payable for the property if the beneficiary exercises his right and whether
          the initial option fee is considered to be part of the purchase price

        • the notarisation of the final sale agreement before a Notary Public and the
          registration of the right to purchase granted to the beneficiary and

        • a restriction on the ability of the owner to sell, assign or burden the asset during the
          validity of the contract

       Bi-lateral sale agreement

       If a bi-lateral sale agreement is adopted, besides the object, the price and the terms of
       payment, the contract will also:




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        • deal with any conditions to be satisfied prior to completion or waived by the party
          having the benefit of them, together with the obligations of the parties to satisfy
          them

        • usually contain a prohibition on the assignment of the purchase agreement to a
          third party or temporary restrictions on the disposal of the real estate and

        • cover termination of the agreement in the event of breach of the contractual
          obligations. It is important for the seller to include a resolution provision in case of
          failure by the buyer to pay part of the price. This provision could also be registered
          with the relevant Land Registry


   10. Due diligence – What investigations does the buyer usually make?

       In order to have full information before committing to purchase a property or a
       company owning a property, the buyer should carry out certain investigations regarding
       both technical and legal matters affecting the property. These investigations,
       commonly referred to as the “due diligence” process, are undertaken by both legal and
       other technical advisors. A proper due diligence process may reveal matters that could
       lead the buyer to withdraw from acquiring the property.

       Regarding legal aspects, two important bodies in Spain are the Land Registry (Registro
       de la Propiedad) and the Administrative Cadastre (Cadastro), where a record of all
       matters related to every estate are kept. Appropriate searches of these registries
       therefore need to be made.

       Matters to be checked include the following:

        Legal questions                            Technical questions
           • Title of the property                    • Structure of the building
           • Matters burdening or benefiting the      • Soil          and        geological
                property                                  investigations
           • Type of ownership and related            • Compliance           with      any
                documents                                  applicable regulations (labour
           • Administrative authorisations                 regulation, public premises,
                (planning permissions, conformity          asbestos, termites,
                certificate, etc.)                         environment, etc.)
           • Position           regarding planning    • Environmental audit
                regulations                           • Compliance          with     LOE
           • Building and operating insurance             (Building     Regulation     Act
                                                                     th
                policies                                  3811999 5 November, or Ley
           • Rental situation                             de Ordenación de la
           • Current legal disputes                       Edificación 3811999 de 5 de
           • Works and maintenance on the                 Novembre)
                building



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       Generally a town planning certificate is obtained at contract stage in order to provide
       the buyer with information concerning any applicable planning restrictions and
       confirming, for example, the ability to build, rebuild or extend buildings on the land
       and whether or not any particular zoning regulations apply to it.

   11. Terms implied by law – What provisions are implied by Statute, Code or
       otherwise?

       According to the Spanish Law, a private sale agreement is completed with the sole
       consent of the parties thereto. This agreement, together with the material transfer of
       the property, becomes valid and enforceable between the seller and buyer, and effects
       the transfer of ownership of the property. Nevertheless, it is recommended to notarise
       a public deed before a Notary Public which is registered with the relevant Land
       Registry in order for the transaction to be enforceable against third parties. In addition,
       the notarisation implies a presumption of transfer.

       Pursuant to Spanish legislation, however, sometimes the legal status stated in a public
       deed is only effective as long as it is registered with the Land Registry, and
       consequently registration is essential. The most common case is the creation of a
       mortgage.

       The public deed should be drafted to reflect the undertakings and covenants contained
       in the private agreement, and in addition to any provisions specific to the sale, the deed
       must contain the following:

      •     the names of the parties, whose identities must be checked. The contract must state
            the companies’ or individuals’ names, the name and power of attorney of the
            individuals who act on behalf of the companies, as well as their legal status, their
            registered offices and their tax identification numbers. It will be necessary to state
            the NIE or identification number of any foreign individual

      •     the designation and description of the property and of the rights transferred,
            including a list of priority ranking of mortgages, contractual easements, town
            planning obligations, co-ownership regulations and rental status. An extract from
            the Land Registry issued not more than two days before the signature of the public
            deed should be attached to it

      •     the price at which the sale is to be made or how it is to be determined. It must be
            specified whether or not the price is paid in front of the notary and the origin of
            the sums of money involved and

      •     any special conditions of sale and the various charges attached to the building.
            Certain appendices are often required, such as those relating to the condition of the
            building, a certificate stating the risks of lead exposure issued within the past year
            (in the case of residential property located in a zone with a lead exposure risk) and a




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            certificate attesting the presence or absence of asbestos in certain developed
            buildings

   12. Registration and Notarisation of real estate – What are the basic requirements?

       The object and purpose of the Spanish Land Registry (Registro de la Propiedad) is the
       registration of contracts and acts relating to property and any other rights in rem on
       real estate, as well as the publication of the rights affecting real estate.

       The registration of the registrable interest in land is voluntary, so that the registration is
       declarative, save in some cases where registration is essential (for example in cases of
       the granting of a Mortgage).

       Formally, the registration of rights in the Land Registry must be done by means of a
       notarised public deed, or by an enforceable or authenticated deed granted by a judicial
       authority or by the government or any of its agents.

       Registrable interests comprise:

        • the Titles, which contain details of the transaction, constitution, grant, modification
          and extinction of rights in rem and description as usufruct, use, habitation,
          mortgage, encumbrances etc. with registered effects according to the Spanish
          Mortgages Law (Ley Hipotecaria)

        • a deed or certificate of new-building or new-development (Declaración de obra
          nueva de edificios en construcción)

        • a lease, sublease and/or assignment of real estate

        • option rights on real properties, fulfilling special requirements

        • judicial resolutions, which declare the legal inability or incapacity to run a business,
          or the absence, death or any other matter affecting the legal capacity of a person to
          dispose of real estate

        • administrative resolutions regarding building rights or the town planning status of
          buildings and

        • expropriation by a public administration

       Contracts for the disposal and acquisition of interests in real estate should be notarised
       by means of a public deed and must comply with certain formalities relating to
       execution, known as Public Deeds (Escrituras Públicas) – see also section 11.

   13. Disputes – How are they dealt with and resolved?

       Spanish Law distinguishes between the law applicable to obligations arising from a
       contract, the law applicable to the form of the contract and the law applicable to rights
       relating to real properties, so that:




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        • the obligations arising from a contract regarding real estate are governed by the law
          to which the parties have submitted themselves, provided that it has some kind of
          connection to the contract. Lacking any agreement on the matter, they will be
          governed by the lex rei sitae (the law of the property’s location; in case of a gift, the
          personal law of the donor applies)

        • possession, ownership and further rights relating to real properties, as well as their
          registration, are regulated by the lex rei sitae and

        • the form and formalities of contracts and legal acts are in principle governed by the
          lex loci actum (the law of the location where the contract is signed)

       By virtue of the principle of free agreement established in the Spanish Civil Code, the
       contracting parties may choose, in relation with a real estate matter, the method of
       dispute resolution they would prefer.

       However, according to the Spanish dispute resolution rules, only two options are
       possible: arbitration and judicial courts.

       If the parties include an arbitration clause in a contract, they can obtain a final and
       binding decision in much less time. The applicable arbitration law was passed on 26th
       December 2003. The law provides for more flexibility and for judicial intervention
       only in order to assist the arbitration.

       The law also allows a Court to disregard an arbitration agreement solely on the basis
       that the agreement does not comply with requirements concerning legal validity. Only
       the arbitrators can verify whether they have the capacity to resolve the dispute brought
       before them, and local courts are excluded from taking any such decision. The
       competent courts to execute an arbitration decision would be the Courts of First
       Instance relating to the property’s location.

       In Spain, however, it is more common to go to Court to resolve a dispute. Extensive
       reforms to the Civil Procedure Law over recent years have aimed at providing a more
       flexible procedure with reduced timeframes. The 2000 Code of Civil Procedure defines
       all the different types of Courts. The Court in which civil proceedings are commenced
       is the Court of First Instance. Decisions and judgements by these Courts can be
       appealed before the Provincial Court. In certain cases a further appeal may be brought
       before the civil division of the Supreme Court.

       In relation to territorial competence, Spanish law attributes actions in rem over
       immovable items, leases, eviction and horizontal property to the exclusive competence
       of the Spanish Courts according to the location of the property. In other cases, both
       parties can agree to submit to the Courts of another location, and, in the absence of
       any express agreement, the competent Courts are those of the jurisdiction of the
       residence of the defendant.




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                                             PART C

                        PERMITS INSURANCE AND ENVIRONMENT

   14. Permits – What permits are required for the use and occupation of real estate
       and are they personal?

       There are different types of urban licences. It is a complicated subject as these licences
       are regulated by autonomous community legislation and by local rules passed by the
       City Council. Consequently, there is no definitive approach in all cases. The use and
       occupation of real estate is always governed by the municipal planning rules applicable
       to the site.

       These authorisations whose names differ according to different local rules, comprise in
       general terms the following:

        • Works licence - it should be applied for before initiating works, and the object of
          this local authorisation granted by the City Council is to check that the project
          presented to the town hall does not infringe the urban planning and zoning rules
          applicable to real estate

        • Activity and installations licence - the object of this license granted by local
          authorities is to check that the installations and activities to be developed on the
          site as described by the applicant do not infringe municipal rules applying to that
          area

        • First occupation licence - this licence should be granted once construction of a
          commercial building is finished. It will be granted if the construction has been
          done according to the project presented and authorised by the works licence

        • Habitation certificate - this licence will be granted to housing constructions, once
          the municipality has investigated that the construction complies with the applicable
          legislation (safety, hygiene, health, environment, noise, etc.)

        • Functioning licence - this licence will only have to be obtained if the activity
          developed on the site is considered a “classified” activity. Spanish legislation
          considers classified activities to be those that may be considered inconvenient,
          unhealthy, harmful or dangerous (housing is not considered as such). The object of
          this licence is to check that the installations and works in the building have been
          executed in accordance with the conditions stated in the activity licence, and to
          check that the activity developed on the site does not infringe the urban,
          environmental and security legislation

       In general, the buildings cannot be opened until the last licence has been granted.
       Licences are valid as long as no modification is made in the building and as long as the
       activity authorised in that building is operated under the conditions stated in the
       licence. Therefore, the validity of the licence is conditional upon the observance of its
       conditions. The licence may expire if the activity is suspended for a period of time
       (approximately 3-6 months, depending on the local rules, except for housing) if the



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       activity does not comply with the conditions, or if the activity does not comply with the
       urban, environmental and security rules. For these purposes, the General Services of
       Inspection of the City Council have the ability to inspect the building and the activity
       carried on in the building at any time.

       These licences are not personal and they may be transferred. Usually, notification of
       the transmission of the licence should be made to the Public Administration which
       granted it.

   15. Insurance and Risk – What insurance will the parties effect and when does the
       insurance risk pass at the time of sale?

       Insurance is generally the responsibility of the owner of the property and is often an
       obligation owed to a bank which grants a mortgage. When a lease has been granted on
       the property, the terms of the lease will provide for which party has responsibility to
       insure and bear the costs of such insurance. The tenant will generally insure the
       contents of the property belonging to the lessor and in some cases certain parts of the
       property for which the tenant is contractually responsible.

       Under the horizontal property regime, the community of owners often effect a
       buildings insurance policy to protect the structure and fixtures and fittings of the
       property in the event of damage or destruction by any of a comprehensive list of
       insured risks, such as storm, lightning, fire, water damage, etc.

       Generally, buildings are insured for the reinstatement cost rather than the reinstatement
       value. Property owners may take out a single insurance policy for one particular
       property or a block policy governing several properties. Insurance policies are
       transferred with the property unless the parties otherwise agree. Where a sale is taking
       place, timing of the transfer of risk is normally prescribed by the sale agreement.

       As risks associated with construction works have major financial consequences, the
       following insurances may (and the first of them must) be taken out in order to
       guarantee compensation derived from defective construction:

        • 10 year insurance cover provided by the promoter in order to cover all the
          responsibilities from material damage caused by defective construction relating to
          the foundations, structure and associated elements of the building

        • 3 year insurance cover provided by the promoter in order to cover any
          compensation due to damage caused by defective construction relating to
          construction elements or installation which make the property unsuitable for
          occupation and

        • 1 year insurance cover provided by the builder in order to cover material damages
          derived from defective construction relating to the completed elements of the
          building. This annual insurance is sometimes substituted by the buyer retaining an
          amount equivalent to 5% of the total cost of the construction



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   16. Environmental – What are the common environmental issues?

       The Spanish Government stipulates the basis of the national environmental legislation
       and the different Autonomous Communities may develop it, dictating regional
       regulations more strict than the State regulations. They also have the power to
       administer and enforce such legislation. Consequently, there are differing rules
       according to the location of the property.

       In principle, a company or person causing environmental damage will be liable for such
       damage. This means that a company in charge of the management of the property will
       be liable for any environmental damage. However, depending on the nature of the
       environmental damage caused (e.g. soil contamination, waste water, groundwater
       contamination, chemical and hazardous materials storage, etc) Spanish legislation
       makes certain distinctions within the general rules. In most cases, Spanish law
       establishes a system of joint and several responsibility between the owner of the real
       state and the entity in charge of its management, or between the present and past
       owners of the real estate. This joint and several responsibility arises inasmuch as there
       is no accurate evidence as to which person or entity has caused the environmental
       damage. Environmental risks and the liability regime should therefore be governed by
       relevant representations and warranties stated in the contract of purchase.

       EU Directive 1996/61/CE has already been implemented in Spain by Law 16/2002,
       July 1st, on Integrated Pollution Authorisation (amended by Law 27/2006 of July 18th).
       The activities contemplated in such Law will have to be authorised by October 30th
       2007. The conditions for granting the integrated pollution authorisation are not settled
       at the moment; the Public Authorities will determine the allowable levels for air
       emissions, water discharges, noise, waste management procedure, etc. and other
       relevant environmental matters.

       EU Directive 2003/87/CE, October 13th, establishing a scheme for greenhouse gas
       emission allowance trading within the Community has been implemented in Spain by
       Royal Decree 1866/2004, September 6th, which approved the National Plan of
       Emissions, and by Royal Legal Decree (Real Decreto-Ley) 5/2004, August 27th, on
       Commerce with greenhouse gas emissions rights. This means that those activities
       included in the Annexes of this legislation are subject to emission allowance trading.

       In relation to asbestos, the use of different types of asbestos is forbidden under
       Spanish legislation by virtue of a Ministerial Order dated December 7th, 2001,
       enforceable since June, 2002. Nevertheless, products containing asbestos installed or
       functioning before that date may continue to be used until they need to be replaced.

       An environmental audit of environmental risks is highly recommended, and
       environmental liability regulated by representations and warranties in the purchase
       contract.




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                                             PART D

                                      FINANCE AND TAXES

   17. Pricing/Valuation – What sets the price / valuation of real estate?

       The purpose of the valuation is to determine market value of the relevant property.
       The market value is the average price that can be obtained for a property to be sold, at
       the date of the valuation, be it a flat (apartment), house, plot of land, block of flats
       (apartment building), leisure centre, industrial or commercial premises, an office, hotel,
       clinic, castle, etc.

       In Spain, the parties which have an interest in the transaction usually hire the services
       of a valuation expert (Tasador). Hiring a Tasador is not compulsory under Spanish
       Law and the parties may appoint an independent third party who is not so qualified.
       Valuation fees of experts are mainly based on the amount of time estimated to carry
       out the valuation and not on a scale according to the value of the property to be valued.

       Each valuation is performed after inspecting the property. When pricing a property,
       the professional will take into consideration several factors such as the location of the
       property, its type and condition, surface area and date of construction, the legal and tax
       situation, applicable planning regulations, the occupation of the property and
       comparison with similar properties. A valuation report will contain a description of any
       works carried out, the location and surroundings of the property, its legal and town-
       planning status, the market sector, comparison points used, an estimate and
       conclusions.

       The property expert may use several methods to carry out a property valuation, such as
       the comparison or analogy method or the revenue method or a mixture of them.

       The most common method of valuation in Spain is the comparative or analogy
       method. The professional analyses similar transactions made in the same area in
       respect of buildings with similar characteristics.

       The income method is also commonly used and is based on the actual annual income
       received on which a particular yield is applied depending upon the location and
       characteristics of the property. The analysis of the lease enables a determination of the
       potential income and the detailed provisions of the contract (such as duration,
       guarantee of payment, etc) are also taken into consideration.

       With regard to the valuation of real estate from a town planning point of view, Royal
       Legislative Decree 2/2008 20th June determines special rules which are applicable for
       this purpose and notwithstanding that local town halls are responsible for issues
       concerning town planning, these valuation rules are applicable throughout all of Spain.

   18. Financing - How is a real estate acquisition financed?




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       The principal ways in which a real estate acquisition is financed are:

        • Through the purchaser’s own cash resources or general corporate banking facilities

        • By using the capital value of the property to obtain specific finance secured on the
          property mainly by a mortgage or a charge in favour of the lender. As in every civil
          law jurisdiction, security is specific to an asset. The mortgage will invariably be
          governed by Spanish law when the property in question is situated in Spain,
          irrespective of the law which governs the accompanying loan documentation

        • Leaseback - the sale of a property with the intent, or with the express option, that
          the seller may lease the property from the buyer immediately upon the sale

        • Project finance contracts, where a loan agreement is entered into by a special
          purpose company, which secures the payment of the loan by means of securities
          such as a pledge over the credit rights of the company, a pledge over the accounts
          of the company or a pledge over the shares of the company owning the real estate

   19. Security over real estate - How is security over real estate created and protected?

       Security granted over real property usually relates to the building being financed for
       acquisition purposes or to the company owning a property. This security will give the
       lender the benefit of rights over the building or the company.

       The most common security granted over property is the mortgage (Hipoteca). Two
       formal requirements must be fulfilled for granting a mortgage: (1) the completion of
       the mortgage deed (título constitutivo), a notarised public deed and (2) the registration
       of the deed granting the mortgage in the relevant Land Registry in order to be
       enforceable against third parties. A mortgage can be granted at any time by contract
       while the mortgagor is the owner of the relevant property. This usually constitutes an
       effective and enforceable security for a loan.

       Spanish law will govern the mortgage when the property is in Spain, and as with most
       documents governed by Spanish Law, especially those requiring notarisation, the
       documents will need to be in Spanish although foreign parties may have a translation.
       The same property may be burdened by several mortgages. A mortgage recorded at
       the relevant Land Registry has priority, as of the date of registration, over any
       subsequently arising real estate charge or subsequently recorded mortgage. A mortgage
       is effective only as long as the underlying debt is valid; after satisfaction or cancellation
       of the debt, the mortgage is no longer effective.

       Other security granted over real estate is the antichresis, in which the mortgagee retains
       possession of the mortgaged property and takes the fruits (such as the rental income
       from leases) of the property in lieu of interest on the debt. Its use remains very
       uncommon, unless it is designed as a procedure added to a mortgage.

   20. Taxes and costs - What are they and who pays them?



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       Generally, please refer to our CMS transaction costs guide as to the nature and
       amount of the taxes and costs.

       The main tax on acquisitions is stamp duty, which is applicable to public deeds
       involving valuable consideration recordable at the Land Registry. The tax rate for
       stamp duty ranges between 0.5% to 1% (depending on each Autonomous Community
       Region) and is fully compatible with value added tax (VAT). Stamp duty must be paid
       by the buyer within 30 working days from completion of the public deed.
       Nevertheless, the rate can be increased to 2% in cases where VAT exemption is
       waived. Stamp duty tax is payable by the buyer.

       The following activities relating to immovable property are subject to VAT:

        • The supply by a developer of either developed land or land in the process of being
          developed for building purposes is taxable at the following rates:

              • the standard rate (16%)

              • the reduced rate (7%) for residential dwellings, including their appurtenances
                and

              • the special reduced rate (4%) for officially subsidised dwellings

        • All supplies of buildings by finance leasing companies carried out as a consequence
          of the exercise of a purchase option, and the supply of buildings for their
          immediate renovation for resale by the buyer are taxable at the relevant VAT rate

        • The supply of construction works (with or without being provided with the
          construction materials), under a contract concluded between a contractor and a
          developer, in respect of construction or renovation, for such buildings in which
          more than 50% of the built surface corresponds to residential dwellings, is taxable
          at the reduced VAT rate (7%)

        • The letting of immovable property by an entrepreneur is subject to VAT when the
          immovable property in question is a commercial building, business premises or
          factory

        The supply of rural or undeveloped land, the transfer of land to land development
        boards (Juntas de Compensación), allocation of land made by such boards and the
        second and successive supply of buildings are VAT exempt, and they are
        simultaneously subject to transfer tax at the rate of 6%-7% of the purchase price
        (depending on each Autonomous Community). VAT exemption can be waived when
        the buyer is a VAT entrepreneur, entitled to full deduction on such input VAT.

        In addition, there is a local tax chargeable on any gain realised on urban land. Tax is
        charged on the cadastral value on the land at rates/coefficients fixed by Local
        Councils. The tax charge is normally insignificant but prior consultation with the local
        Council concerned is recommended. This tax is normally payable by the seller within




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        30 working days of transfer of ownership, although in the case of inheritance, this
        period is extended to six months and the tax is payable by the acquirer.

        During the due diligence process carried out prior to the acquisition, the buyer will pay
        the costs for any valuations and surveys of the physical state of the property and any
        environmental audits.

        The seller will pay the commission of any land agent or broker employed to find a
        purchaser. The terms of the purchase contract may provide for the costs to be paid in
        a different way.

        Finally, the buyer will pay the Land Registry fees associated with the registration of the
        transfer to the buyer and any notary fees payable.




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                                               PART A

                                     PARTIES AND INTERESTS

   1.         Parties - Who can own real estate?

              Any natural or legal person may own real estate. Bodies which do not qualify as
              legal persons, such as partnerships, cannot own real estate.

              Owners of commercial real estate include private developers, insurance
              companies, pension funds, banks and other financial institutions, private or public
              property companies as well as the Swiss confederation, the cantons and local
              authorities.

              There are certain restrictions preventing foreign nationals or companies from
              owning real estate in Switzerland which do not, however, apply to commercial
              property (i.e. property which is used to conduct a business).

   2.         Property interests - What types of property interests are there?

              Property in Switzerland is either owned or leased. There is a certain restriction in
              Switzerland on how long leases can be to the extent that “eternal” leases are not
              permissible. Ownership or leasehold title will be acquired depending on the
              circumstances of the acquisition transaction.

              Ownership is a real right (a right in rem) whereas leasehold is a personal right
              (right in personam). The ownership of an apartment in a building, similar to the
              North American condominium interest, is governed by special provisions. Title
              to land must be registered at the Land Registry on completion of a purchase; a
              lease may also be registered.

              Property interests which exist in Switzerland include:

              •         Ownership (such as sole ownership, joint ownership, co-ownership incl.
                        condominium) – the best and most common legal title in land

              •         Possession

              •         Options and pre-emptions – rights to buy or first refusal

              •         Easements and real estate charges

              •         Leases

              The parties must make it clear whether the fixtures and fittings at the property are
              to be removed prior to the sale or are to form part of the purchase. Essential
              elements which cannot be removed without destroying, damaging or changing the
              real property are integral parts (Bestandteile) of the property. The ownership of
              such elements is transferred with the ownership of the real estate itself.
              Accessories to the property (Zubehör), i.e. fittings which can be removed without
              difficulty, are also transferred with the real property and belong to its owner
              unless the parties agree otherwise.



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              The ownership of land extends upwards in the airspace and downwards below the
              ground as far as there is an interest in utilising ownership rights. Accordingly,
              ownership extends to structures on or beneath the land and the airspace above it.

   3.         Ownership - What types of ownership are there?

              Title to ownership interests will be registered at the Land Registry.

              Legal ownership of property in Switzerland includes the following forms:

              •         Sole ownership

              •         Joint ownership

              •         Co-ownership

              •         Condominium

              Land may be held on trust by a legal owner for a beneficiary. The beneficial
              ownership is of a purely contractual nature, however, and the beneficiary has no
              right in rem, but only a contractual claim against the legal owner. It is possible to
              note in the Land Register that a Swiss property is held in trust for a foreign
              beneficiary, giving the beneficiary protection against breach of trust and in case of
              bankruptcy of the trustee.

   4.         Matters burdening or benefiting real estate - What matters can affect real
              estate?

              Common matters affecting real estate include:-

                       Matter                           Effect                              Example

               Easements               Rights which burden one piece of land          A right of way; a
                                       and benefit another piece of land or a         right to deposit
                                       third party. To be valid and enforceable       rubbish; a right to
                                       as rights in rem, some types of                light; a right to use
                                       easements need to be registered on the         pipes and cables;
                                       Land Register.                                 usufruct; right of
                                                                                      habitation; superficies
                                       The most important types of easements
                                       include:-

                                       •   usufruct (Nutzniessung): entitles the
                                           beneficiary to possess and use the
                                           property, including its fruits, but not
                                           to dispose of it in a manner which
                                           could harmfully affect the substance
                                           of the ownership right




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                       Matter                           Effect                           Example

                                       •   right of habitation (Wohnrecht):
                                           non-transferable right of an
                                           individual beneficiary to reside in a
                                           building

                                       •   superficies (Baurecht): transferable
                                           right of the beneficiary to construct
                                           buildings on the property; these will
                                           belong to the beneficiary for a
                                           period of up to 100 years

               Real estate charges     Duty of the owner of a specific             Duty to repair a
               (Grundlasten)           property to perform a positive promise      fence; duty to supply
                                                                                   wood

               Statutory restrictions Real estate may in addition be burdened      Restriction with
               on use                 by (i) public law provisions (such as        regard to the size of
                                      zoning and building laws or safety           the building;
                                      regulations) and (ii) private law            restrictions with
                                      provisions governing the relations           regard to noise
                                      between neighbours

               Contractual             Express or implied promises which can       Positive: a covenant
               restrictions            be positive or restrictive. Such            to take specific noise
                                       restrictions are personal and may not       protection measures.
                                       burden the land after the person who
                                       gives the covenant no longer owns the       Restrictive: a
                                       property                                    covenant not to use
                                                                                   the land for a
                                                                                   particular purpose
                                                                                   (e.g. a pub)

               Adverse possession      Due to the existence of the Land            Acquisition of
               and prescriptive        Register, the acquisition by long usage     ownership by a non-
               rights                  of a legal right over land belonging to     owner who is
                                       another person is of rather limited         wrongly listed in the
                                       practical importance in Switzerland.        Land Register,
                                       However, a person wrongly listed as         provided there has
                                       beneficiary of a right in rem in the Land   been no challenge as
                                       Register may acquire the legal right over   to his right for 10
                                       the land based on his good faith            years


   5.         Occupation of real estate - Who may occupy real estate?

              Real estate is usually occupied by one of the following categories of person:

              •         Owners – those persons with the best legal title in land




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              •         Beneficiaries of an easement – persons entitled, based on a right in rem
                        (e.g. usufruct or right of habitation), to occupy the property

              •         Tenants – those persons with a lease of the property or part of it. It is
                        possible for any number of leases to be created in relation to the same
                        property, so creating a chain of interests (although the first lease may
                        limit the number of subsidiary leases that may be created)

              •         Persons entitled to occupy the real estate based on contractual
                        permissions. These rights are personal to the person to whom they are
                        granted and are not capable of being transferred to a third party

              Please also see our CMS Lease Guide

   6.         Brokers - What is the broker's role?

              Estate agents and brokers play an important role. Their involvement in a property
              transaction is, however, not a prerequisite. They are employed by any party to any
              transaction involving real estate. Their role may include any of the following
              tasks, namely:

              •         acting for a seller to find a buyer for a sale property, including marketing
                        the property for sale

              •         acting for a landlord to find a tenant for a property, including marketing
                        the property

              •         acting for a buyer to find a property to buy

              •         acting for a tenant to find a property to lease

              •         acting for any party to a transaction drafting and negotiating heads of
                        terms

              •         preparing heads of terms for documenting and liaising with lawyers

              •         valuing a client’s existing and target properties

              •         day to day management of property owned by clients, including
                        managing maintenance programmes and landlord and tenant work

              •         project management of development of new buildings or refurbishments
                        and

              •         negotiating rent reviews of existing properties

   7.         Employees - What employment issues affect real estate acquisitions?




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              Typical employment issues which may be relevant to real estate transactions
              include the transfer of undertakings, redundancies and changing terms and
              conditions of employment.

              Transfer of undertakings – Article 333 Swiss Code of Obligations (CO)

              Article 333 CO, which deals with the question of how business transfers affect
              employment agreements, is likely to be the most significant employment issue.
              Article 333 CO applies when a business (or part of a business) is transferred from
              one party to another. This might occur, for example, in the case of the sale of a
              shopping centre having its own management and security staff. The broad effects
              of article 333 CO are that:

              •         with effect from completion of the transfer, the employment agreements
                        of the employees working in the respective business transfer to the buyer
                        (who becomes their new employer), unless the employees object to such
                        transfer

              •         accrued continuity of employment is preserved

              •         employees transfer with their existing terms and conditions intact and

              •         employees’ representatives must be informed and consulted about the
                        transfer

              Redundancies

              Redundancies may arise on the closure of a business or part of a business or
              where there is a reduction in the number of employees required. In particular with
              regard to collective dismissals, care should be taken to ensure that the
              redundancies are carried out in a procedurally correct manner.

              Changing terms and conditions of employment

              An employer may decide to change or harmonise terms and conditions of
              employment on the acquisition of a new business. This is possible, in principle,
              and can be imposed by the employer by means of a notice of termination pending
              change of contract (Änderungskündigung).




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                                               PART B

                                   PROCEDURE AND TERMS

   8.         Procedure - What are the steps in a sale and purchase transaction?

              Sale and purchase agreements are negotiated and agreed by the representatives
              (often lawyers) of the seller and the buyer. The seller’s lawyers will usually collate
              all information relating to the property and send it to the buyer’s lawyers together
              with a draft sale and purchase agreement.

              However, real estate portfolios are often sold through a bidding procedure
              prepared and guided by specialised companies (e.g. KPMG Real Estate,
              PriceWaterhouseCoopers Real Estate Consulting, Sal. Oppenheim Group).

              The buyer’s lawyers consider and suggest amendments to the draft sale agreement
              and at the same time will undertake general due diligence investigations (see
              section 10).

              It is common for the sale and purchase agreement to provide for a deposit of a
              small percentage of the purchase price at the signing of a declaration of intent.
              This letter of intent precedes the signing of the actual sale and purchase
              agreement in front of the notary public.

              If the seller is a foreign registered company, generally the buyer will require an
              opinion letter from an approved lawyer practising in the same jurisdiction
              confirming that the company is properly incorporated, has power to sell and has
              carried out appropriate authorisation procedures.

              The contract for the transfer of ownership requires a specific form which is a
              prerequisite of its validity. In particular, the sales contract must be in writing and
              requires a public deed by a notary public. The parties are not, therefore, bound by
              the agreement before a public deed has been duly established by the notary, which
              requires a meeting in person of the authorised representatives of the seller and the
              buyer with the notary public.

              The formally valid contract leads to rights and obligations between the seller and
              the buyer. Ownership of the property, however, does not transfer automatically
              upon completion of the sale and purchase agreement. In order to complete the
              transaction, the seller has to file the transfer of ownership with the Land Registry.
              The buyer becomes the owner of the real property once the transfer is registered
              on the Land Register.

   9.         Other common contract terms - What other provisions does a real estate
              sale contract commonly contain?

              An agreement for the sale and purchase of land must contain all essential terms
              and conditions and must be concluded in the form of a public deed.

              Real estate sale contracts often contain a disclaimer of all warranties. The buyer
              will therefore only have the benefit of statutory warranties which are compulsory




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              and cannot be waived. Furthermore, exclusion and limitation of liability clauses
              are only valid if the seller did not deceive the buyer as to any defects in the
              property.

              Usually, the purchase price becomes due when the transaction is registered on the
              Land Register. It is important for the seller that at this moment the purchase price
              is fully paid or at least secured. This can be done by a covered bankers’ check or a
              payment letter issued by a bank (Zahlungsversprechen). A very common form of
              payment of part of the purchase price is for the buyer to assume the obligations
              arising from an existing loan which has been secured by a mortgage on the real
              property.

              In case of default, the seller is also entitled to establish a statutory mortgage (for
              the purchase price) on the property sold. The registration of such mortgage needs
              to take place within three months of transfer of ownership.

              Real estate sale contracts usually contain a clause as to who is liable to pay relevant
              charges and taxes. Often the notary fees and Land Registry fees (Notariats- und
              Grundbuchgebühren) and, if any, the property transfer taxes
              (Handänderungssteuern) are paid equally by both parties. The immovable
              property gains tax (Grundstückgewinnsteuer) is payable by the seller.

              Provisions relating to value added tax will be included where relevant to ensure
              that the agreed tax position is preserved between exchange and completion.

              Contracts for sale of property subject to occupational interests such as leases will
              include clauses to cover ongoing management matters, and provide for
              apportionment of occupational income and outgoings on completion of the
              transfer of ownership in the property.

              If the property being sold is in the course of construction, the contract for sale
              will incorporate provisions dealing with the obligations of the seller to construct
              in accordance with an agreed specification.

   10.        Due Diligence - What investigations does the buyer normally make?

              Switzerland has a developed system of Land Registers and there is a legal
              presumption that the entries in the Land Register are true and correct. Due to this
              fact, a potential buyer can obtain most of the essential information about a
              particular property from the relevant Land Register file for that property.

              Further enquiries will focus on information which cannot be obtained from the
              Land Register file, such as environmental matters and existing lease agreements.

              Where the buyer intends to construct buildings on the land, he will try to ensure
              that the intended construction and use of the buildings is in accordance with the
              applicable zoning and construction laws as well as other public law regulations,
              such as environmental laws.




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              Where the property is subject to leases, the terms of the relevant lease contracts
              need to be considered carefully to ensure they are not contrary to the buyer’s
              intentions for the property.

              Before a public deed is made for the real estate sale contract, the buyer’s lawyers
              usually report their due diligence findings to their client, raising any matter of
              particular importance or concern.

   11.        Terms implied by law - What provisions are implied by Statute, Code or
              otherwise?

              The following terms are implied by law:

              Warranty with regard to title transferred

              This means a warranty by the seller that no third party, for reasons of a legal
              nature which already existed at the time of the conclusion of the sale contract,
              may deprive the buyer of the property purchased. Since, however, the Land
              Register protects a buyer acting in good faith with regard to the entries in the files
              of the relevant real estate, the role of this warranty is extremely limited. Once the
              buyer is registered in the Land Register as the new owner, he is protected against
              claims of third parties which were not registered. The buyer does not, therefore,
              have to revert to the seller.

              Warranty against defects

              The seller is liable vis-à-vis the buyer both for the express warranties made and
              for defects in the property purchased. Warranty claims regarding defects in a
              building must be brought against the seller within five years after the acquisition
              of title.

              It should be noted with regard to warranties that agreements for the sale of real
              property often contain a clause which excludes the obligation to warrant. Such a
              disclaimer of warranties is valid unless the seller has fraudulently concealed the
              defects.

   12.        Registration and Notarisation of real estate - What are the basic
              requirements?

              The contract for the transfer of ownership, or indeed any other rights in rem in
              real property in Switzerland, require a specific form which is a prerequisite of their
              validity. In particular, the sales contract must be in writing and requires a public
              deed drawn up by and signed before a notary public. The parties are therefore not
              bound by any agreement until a public deed has been duly established, which
              requires a meeting in person of the authorised representatives of the seller and the
              buyer with the notary public. The exact manner in which the contract document is
              authenticated is governed by cantonal law.

              If several real properties in different locations in Switzerland are sold at the same
              time by a corporate seller, it might be possible to transfer them in a single public
              deed (Vermögensübertragung).




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              All plots of land in Switzerland must be registered in the Land Register and details
              recorded on cadastral maps. There is no centrally kept Land Register in
              Switzerland. The Land Registers are kept by the relevant cantonal authorities.
              Every piece of land has its own file which contains information about the land,
              ownership, easements, options and pre-emptions, real estate charges, mortgages,
              etc.

              There is a legal presumption in Switzerland that the entries in the Land Register
              are true and correct. This means that if an entry in the Land Register is false or
              incomplete for any reason, a party relying in good faith on such entry is fully
              protected by law. Only the encumbrances registered are binding on such a party,
              and the person registered is deemed to be the owner.

   13.        Disputes - How are they dealt with and resolved?

              Swiss law permits, in principle, certain freedom of contract and the parties must
              give careful thought to which law they want to govern the contract, in which
              jurisdiction they would prefer that any disputes are resolved and what method of
              dispute resolution (such as court proceedings, arbitration, reference to an
              independent expert or a mediation process) they would prefer. However, this
              freedom of contract is not absolute, and there is not always a choice with regard
              to the applicable law and relevant jurisdiction.

              When choosing a method of resolving disputes, the parties will have regard to
              various issues, namely the domicile/nationality of the parties and the governing
              law and any relevant statutory limitations which may inhibit such choice. In
              addition, it needs to be ensured that awards can be enforced in the relevant
              jurisdiction.




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                                               PART C

                       PERMITS, INSURANCE AND ENVIRONMENT

   14.        Permits - What permits are required for the use and occupation of real
              estate and are they personal?

              Swiss public law provides for detailed rules with regard to the development of
              land. Zoning law (which is governed by federal, cantonal and municipal law) as
              well as building regulations (enacted by the cantons) need to be complied with.

              Applications to obtain a construction permission must be made to the competent
              municipal authority. Plans and documents must be submitted which show that the
              specific project complies with the zoning and building regulations in force. For
              developments that are likely to cause significant environmental impact, an
              Environmental Examination will need to be made, explaining the likely
              environmental impact of the development (Umweltverträglichkeitsprüfung).

              The project will be published in the local official gazette and affected third parties
              will be given the opportunity to object to the project. Within the time limit laid
              down by the relevant regulation, the competent municipal authority must either
              grant or reject the construction permission; this decision can be appealed against
              by interested parties. A permission to develop the land will be issued provided the
              project is in accordance with all relevant regulations.

              The construction permission is limited in time and the owner of the real property
              has to start the execution of the approved project within the set deadline. The
              permission is not necessarily granted to the owner of the land. If the beneficiary is
              a third party, however, the landowner must give his approval in writing for the
              filing of an application to obtain a construction permit.

              Since the construction permission is, in fact, a confirmation of the authority that a
              particular project complies with the requirements of public law, the decision
              benefits not only the original applicant, but also its possible legal successors (e.g.
              the purchaser of the real property).

   15.        Insurance and Risk - What insurance will the parties effect and when does
              the insurance risk pass at the time of sale?

              Before a sale is contemplated, insurance is generally the responsibility of the
              owner of the property. In the absence of any contrary contractual provisions, the
              risk passes to the buyer when he is given possession of the real property.

              In most cantons there is a mandatory public building insurance. The protection by
              this insurance (which covers damages due to fire, weather-related perils and
              earthquake) is not affected by the transaction and the new owner becomes liable
              to pay for its premiums from the date the transaction is completed.

              For further risks and a more comprehensive cover, the owner of a real estate will
              consider additional private insurance.




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   16.        Environmental - What are the common environmental issues?

              Swiss federal law as well as cantonal law are relevant in the field of environmental
              protection. The detailed zoning laws play an important role in this area. The
              construction of new buildings is subject to detailed environmental regulations. In
              order to control the possible detrimental effects of large new developments on
              the environment, an Environmental Examination, i.e. a detailed assessment of the
              project’s likely future environmental impact (Umweltverträglichkeitsprüfung), is
              required before a construction permission can be issued.

              As a general rule, the environmental law in Switzerland is based on the “polluter
              pays” principle (Verursacherprinzip): the person who spilled, released or
              discharged a substance will normally be liable for any ill-effects it causes and has
              to pay for the damage. However, future owners and occupiers may also become
              liable for contamination already present at the real estate when they acquire it.

              Real estate may be contaminated as a result of current and former uses. Based on
              the federal law on contamination (Altlasten), the authorities can require a
              remediation of such contamination at any time, and not only on the occasion of
              an application for a construction permission. The costs for such measures are
              usually to be borne by the actual owner. Accordingly, a relevant search with regard
              to such contamination needs to be made prior to the purchase of a real estate,
              since a potential contamination of the building or the soil may considerably
              influence the price of an object and may lead to substantial additional costs.

              Newly built as well as existing buildings must fulfil certain conditions in order to
              obtain a construction permission. With regard to air pollution, the specific
              emission limits set by law must not be exceeded. In case an inspection shows that
              the emission standards are no longer met, the owner will be set a deadline for the
              modification or the replacement of the system.

              Acquisition due diligence may involve the appointment of environmental
              consultants to consider documentary information and to carry out a site visit or, if
              necessary, to undertake further intrusive investigations. Due to the serious
              possible effects of environmental issues, it is important to identify potential
              problems early so that there can be negotiation on price, the need for and scope
              of any remediation and/or the need to put in place protection in respect of any
              existing contamination related losses that may arise in the future.




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                                                    PART D

                                          FINANCE AND TAXES

   17.        Pricing/Valuation - What sets the price/valuation of real estate?

              Pricing of real estate investments is a combination of the aggregate rent being paid
              by occupational tenants of the property and the value that investment buyers
              consider that a property of the specific type and location is worth at the time of
              valuation taking that income into account.

              The rent for a particular property is likely to be assessed by multiplying the area of
              the property by the market rental value which will take into account factors such
              as the location of the property, its type and condition, and the length of the lease
              term.

              The discounted cash flow (DCF) method is generally used in conjunction with
              other valuation methods (in order to test the plausibility of its results). It equates
              the value of the real estate with the sum of all discounted cash flows the owner
              can expect in the future. The discounted cash flow method usually considers the
              future costs and earnings within a projected period of 10 years. For the period
              thereafter, a terminal value (the presumed resale value at the end of the projection
              period) is determined. The value of the real estate will thus be computed based on
              the total discounted cash flows during the 10-year period plus the terminal value
              discounted to the valuation date.

              Investment properties are often referred to as being sold on a particular yield (e.g.
              5% of the purchase price), meaning the investment return that will be gained from
              the capital sum which is necessary to purchase the property.

              Apartments and one-family houses are often valued according to the “hedonic
              method” which is based on the prices paid for such property and a statistical
              procedure. The market value of a real property is thus calculated by software
              taking into account factors such as location, expanse, age, etc.

   18.        Financing - How is a real estate acquisition financed?

              The principal ways in which real estate acquisition is financed are:

              •         Through the purchaser’s own cash resources or general corporate
                        banking facilities

              •         By loans secured by mortgages
                        Most residents in Switzerland acquiring real property finance their real
                        estate acquisition through a loan from a bank or insurance company.
                        Usually, loans of up to 80% of the market value of the property will be
                        granted. The loan will be secured by mortgages over the property. The
                        remaining part of the purchase price will have to be paid from other
                        sources. In case of commercially used property, the expected profit from




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                        the relevant business undertaken will be an additional important factor
                        for the lender.
                        Loans secured by mortgages will be with floating interest rates or fixed
                        interest rates. These two types of loans can also be combined in order to
                        diversify the risks of the future developments of the capital market.

              •         Leasing / sale and leaseback

                        Such agreements usually provide for amortisation payments by the lessee
                        as well as an option of the lessee to buy the property at the end of the
                        contractual term.

              •         Raising finance by bond/debenture stock issue

   19.        Security over real estate - How is security over real estate created and
              protected?

              A fixed security interest over land is generally given by means of a “mortgage”.
              Such mortgage securities may be established either in the form of an actual
              mortgage (Grundpfandverschreibung) or a mortgage note (Schuldbrief). Mortgage
              notes are negotiable instruments and may thus be transferred to a third party
              upon delivery whereas mortgages can only be transferred by means of a written
              assignment.

              Unlike mortgage notes, mortgages may be used to secure not only existing, but
              also future debts. The debtor is not necessarily the owner of the real property.

              A “mortgage debenture” or “debenture” which incorporates a full range of
              charges over all of the assets of the borrowing company is not available as a
              security with regard to real property in Switzerland. This is due to the fact that
              movable goods (with the exception of cattle) can only serve as a security if they
              are transferred to the pledge keeper.

              Mortgages and mortgages notes are established based on a pledge agreement
              (which must be notarised) and need to be registered in the Land Register in order
              to be valid. The registration is relevant for the priority and the rank of the
              mortgage in relation to other mortgages on the same real property.

   20.        Taxes and Costs - What are they and who pays them?

              Generally, please refer to our CMS transaction costs guide as to the nature and
              amount of the taxes and costs.

              For the establishment of a public deed for the real estate sale contract, notary fees
              are payable. In addition, there is a Land Registry fee associated with the
              registration of the transfer to the buyer. These costs vary from canton to canton.
              In practice, the notary fee and Land Registry fee (Notariats- und
              Grundbuchgebühren) are often evenly paid by both parties. The same applies
              with regard to property transfer taxes (Handänderungssteuern) which vary




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              between around 1% and 3% of the sales price, depending on the canton in which
              the property is located; some cantons have recently abolished this tax.

              The immovable property gains tax (Grundstückgewinnsteuer) is levied on sales of
              private real property and is payable by the seller. Gains realised on business
              property, on the other hand, are in most cantons subject to the normal income tax
              and there is no liability for an immovable property gains tax.

              In some cantons, a real property object tax (Liegenschaftsteuer) is due which
              usually varies between around 0.5% and 2%. This tax is levied in addition to the
              normal income and capital tax.

              Value added tax (VAT, standard rate 7.6%) is usually not payable on the sale or
              leasing of real property. In certain circumstances, however, the statutory
              exemption from the VAT regime may be waived.




CMS Legal Services | May 2011                                                                     296

				
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