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Country - Croatia
Sale and Purchase
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A. ACQUISITION OF REAL ESTATE
Applicable legislation
Transfer of title to real estate is generally governed by the law on property and other real rights, as well as the law relating to land registration.
Is the purchase of real estate assets by foreign investors subject to restrictions?
The purchase of real estate assets by foreign investors (natural persons or legal entities) is subject to reciprocity and to written consent from the Ministry of Justice.
This procedure is rather slow and complex. The applicant must enter into a preliminary purchase contract or a conditional purchase contract with the seller then file an application with the Ministry of Justice, together with the relevant documents, such as documents relating to the buyer, an excerpt from the land registry and confirmation from the cadastral office that the real estate is not classified as agricultural land, forest or similar but is classified as construction land or land which has already been developed. If the Ministry of Justice agrees that there are no obstacles to the proposed transaction, it will issue its consent. Such procedures normally take around one year, or even longer in some cases.
These restrictions can be avoided if a foreign investor forms a Croatian company.
Do different legal regimes apply to the transfer of title to different kinds of real estate (commercial, residential, manufacturing)?
No.
However, some real estate cannot be purchased by foreign investors, including agricultural land, forests and areas of natural beauty.
Do mandatory pre-emption rights apply to the sale of real estate assets?
According to the Obligations Act, a pre-emption right can be established in favour of a certain person for an indefinite period of time.
There are plans to allocate pre-emption rights to national government and local authorities in relation to certain Croatian islands, and where land is sold following an insolvency.
Is real estate registered?
If so, is this official information made available to the public?
The land register contains data on property rights and is administrated by the Land Register Courts (Municipal Courts). It includes information on the legal status of all real estate such as title, mortgages, encumbrances, easements, sales and purchases, usage rights and any pending disputes.
Municipalities also keep real estate cadastres containing technical information on land plots, buildings and plants.
All cadastral information is available to the public and there is a procedure under which copies can be obtained.
Both the real estate cadastres and the land registers are also available as Internet databases.
Is transfer of title recorded?
Can other related deeds (for example, preliminary sale agreements) be recorded?
Title and other rights to real estate are registered with the land registry. Title to real estate is acquired upon registration at the land registry.
As land registry records are not entirely up to date, due diligence should include the investigation of the cadastral registers.
Do buyers usually carry out due diligence?
If so, what due diligence is typically conducted and what is its timing (i.e. before or after contract execution)? Is there any protection for the buyer during the due diligence period (for example, an exclusive right to negotiate or buy)?
Whether due diligence should be conducted before purchase depends on the complexity of the real estate in question. The status of all real estate can be checked in the land register.
However, before the acquisition of larger, more complex properties (such as a shopping centre), investors should carry out due diligence covering building permits, leases and contracts. This would be carried out before purchase, typically after signing an agreement ("letter of intent" or "head of terms") providing the buyer with an exclusivity period.
Is title insurance available?
Although title insurance is not yet available at the Croatian market, some foreign insurance companies offer title insurance to foreign investors for real estate acquisition in Croatia. The availability of title insurance at the Croatian market is expected soon.
How are deals typically structured?
Real estate can be acquired either by a direct purchase in the form of an asset deal or indirectly by the purchase of shares in the company owning the real estate.
Share deals are generally more common but asset deals are not unusual.
In the case of a share deal the buyer acquires the shares in the company owning the property through a share purchase agreement (in the form of a notarial deed) and the entry of the share transfer in the company records (this is normally just a formality which will be completed on the same day).
In the case of an asset deal the title to the property is acquired upon registration with the land registry. This may take several days (and, in some very complex cases, several years).
The advantage of a share deal is that it allows land transfer tax to be avoided. This could be a significant advantage in the case of a large and expensive property since land transfer tax amounts to 5% of the market value of the land and any VAT payable. A further advantage is that in the case of a share deal no restrictions for foreigners (as in the case of an asset deal) apply.
B. STRUCTURE OF THE CONTRACT
Are there formal requirements regarding the content and structure of the sale and purchase contract?
The contract/deed of transfer must be made in writing according to article 377 of the Croatian Obligation Code. The deed must be authenticated by a public notary.
What is a typical contract like?
The content of the contract is negotiable.
However, essentials of a purchase agreement include: the precise identity of the real estate, details of the purchase price and a statement by the seller that he agrees to the transfer of ownership (clausula intabulandi).
What seller's warranties are provided under statute (for example, the state of the building, asbestos, etc.)?
Can they be excluded or varied by contractual agreement? Is there a deadline for claims to be made?
As many warranties as possible should be set out in the agreement. The law provides only a general provision on seller's liabilities in relation to material and legal defects. The liability period is two years.
The seller's liability can be excluded or limited by contractual agreement.
Are there implied warranties which all buyers receive?
No.
Are there any interests in real estate other than exclusive ownership?
If so, what are they?
Easements are rights allowing one landowner to use another's land. Easements are linked to the land and are binding on future owners of the property, whereas usufructs allow rights to be granted to specific individuals.
The right to reside is another personal right allowing the holder to live in a building owned by someone else.
The right to build allows the holder to erect and maintain their own building on someone else's land and is normally granted for a limited period of time, which would typically be agreed between the landowner and the builder.
C. PUBLIC LAW ASPECTS RELATED TO THE ACQUISITION OF REAL ESTATE
What are the most important areas of public law for an investor to consider when purchasing real estate?
If the property is being bought for the purpose of construction, or if it has already been developed, then the validity of all relevant permits should be checked. These include:
- zoning permits;
- construction permits;
- operational permits.
A new Act on Zoning and Building entered into force on 1 October 2007 with the aim of simplifying the complicated permits procedures.
A zoning permit (lokacijska dozvola) is issued for a specific property based on the zoning plan in force for that area. It gives approval for a proposed development, as specified in the application and attached plans.
A building permit (građevinska dozvola) or a verification of the main project (potvrda glavnog projekta) must be issued before a development project starts. The building permit and the verification of the main project (hereinafter together referred to as "construction permits") differ in the extent and contents of the documentation that has to be filed. Essentially most buildings will require a verification of the main project whereas a building permit is required for buildings defined by government resolution (buildings of importance for the state, such as roads, factories, hospitals etc., and buildings with an impact on the environment etc.) and if the environmental impact of a development territory concerns more than one country.
The construction permits are issued with reference to the architectural and technical plans, and to the various legal issues relating to the proposed building. They are valid for two years. If the title changes hands after a construction permit has been issued, then the new owner must make arrangements for its transfer.
An operational permit (uporabna dozvola) confirms the completed building's compliance with the parameters set out in the construction permit. A building cannot be occupied before an operational permit is granted.
Is the buyer of a real estate asset responsible for soil pollution or contamination of the building even if it is not caused by him?
The law provides general rules stipulating that a buyer assumes all risks related to a property when he becomes its owner. This implies liability for soil pollution or contamination of a building even if it was not caused by him.
A buyer must therefore protect himself from this liability by a contractual agreement with the seller, where the latter agrees that the soil is not polluted and that the building is free from contamination.
How can a buyer ascertain the possible uses of an area under the applicable zoning or planning laws?
Can uses be changed?
Urban plans determine the organisation and use of specific areas, and provide regulations for the protection and development of the country, counties, municipalities and cities. Urban planning documents include:
- the Planning Strategy and the Planning Programme for the Republic of Croatia;
- urban plans, including: plans for the County and the City of Zagreb; for areas of special interest; municipal and city plans; an urban zoning plan and a detailed zoning plan.
The use of an area can be changed by modifying the Detailed Zoning Plan (DPU - detaljni plan uređenja).
Is it possible to enter into specific development agreements with relevant public authorities in order to facilitate a project?
Can public authorities make a charge for this?
It has recently become more common to enter into specific development agreements with the relevant public authorities to facilitate, for example, the provision of access roads, etc.
D. TAXES RELATED TO ACQUISITION OF REAL ESTATE
Are there transfer taxes or sales taxes?
Land transfer tax is payable at the rate of 5% of the property's market value. The basis for calculating this is normally the purchase price, but if the tax authority considers that this is too low, then it is entitled to require tax to be applied on the market value.
If the buyer and seller are legal entities paying VAT, and buildings on the land were built after the introduction of VAT on 1 January 1998, then land transfer tax is payable only on the value of the land and any municipal utilities supplied to it.
Municipal utilities included in the tax base for the calculation of the land transfer tax include the communal zoning fee for the plot (naknada za komunalno uređenje zemljišta), which is set by the relevant public body.
There are a number of exemptions from land transfer tax, including where real estate owned by a shareholder forms part of a contribution of initial capital or capital increase into the company. However, if the seller is a legal entity, and therefore a corporate profit taxpayer, income from the sale of the property increases its taxable income (income tax rate is 20%). If the seller is an individual, the income is not subject to tax.
What are the normal transaction costs?
Fees include notarial and registration costs. In the case of an asset deal (without a solemnised document) the notary fee is approximately EUR 20 for certification of the seller's signature. In the case of a share purchase agreement (with a solemnised document) the fee is much higher and depends on the value of the deal.
The registration fee payable to the land registry is approximately EUR 40. In the case of a share deal, the registration fee payable to the court is no more than EUR 150.
How are transaction costs shared by the buyer and seller?
Usually the buyer pays the notary fees and transfer taxes; in larger transactions, this is subject to agreement.
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