(AG Real Estate) Relevant issue: Transfer of title to the construction projects

How to transfer the title to a construction project? Why the most simple sale of a construction project causes problems in practice? How shall we, at purchasing a construction project, acquire the rights arising from the building permit or obtain the building permit in our own name? What is the influence of „legal constructions“ on the transaction quality and necessity thereof due to non-existence and/or inconsistency of regulations?

Lately in practice there have been very frequent situations when investors make decisions to sell – alienate the real estate (construction) which building is under course (in other words, which building has not been completed yet) along with the building right for such a construction. Transfer of the title to a construction project and the building rights (sale of the construction for which the building permit was issued) is a legally possible and allowed transaction and in theory it may be performed on the grounds of a real estate sales contract.

However, this manner of construction projects trade is not frequent in practice. The reason for that is the fact that they do not automatically transfer the rights arising from the building permits issued in the name of the investor (seller of the construction project). In other words, the regulations do not in any way explicitly stipulate that by purchasing a construction project one automatically acquires the building right and the rights arising from the building permit. The consequence of such a transaction would be that the buyer (acquirer) of the construction, upon conclusion of the sales contract, shall have to start any administrative procedures necessary in order to get the building permit issued in his/her own name. This requires too much time and additional work for which, mainly, no one has spare time. Because of the same reason hardly ever is the title to the construction project and the building right transferred by inserting these rights in the form of the equity capital in the business company.

Smart solutions

Since the law does not provide in a clear and explicit manner either that the transfer of a construction project and the building right is possible, or that by such a transfer, according to the law itself, it is also possible to transfer any rights and liabilities arising from the building permit and the entire accompanying documentation, in practice most often is applied one of the two possible „indirect“ methods of acquiring a construction project and the building right:

• Acquision of the legal entity to whose name the building permit has been issued (or acquision of the legal entity who controls that legal entity), or
• Transfer of the building permit through settlement of the assets secured with a mortgage upon the construction project (cession of the building right).

The advantage of the mentioned modalities is that in the first case the building right may be acquired without issuance of the building permit, and in the latter the competent authority shall be obliged to issue to the acquirer the identical building permit, thus removing any legal ambiguities related to possibilities and conditions for the building permit issuance in the name of the acquirer.

Acquiring the ownership (or at least control) of a legal entity who is the bearer of the building right, and/or to whose name the building permit has been issued demands a particularly detailed study. Especially if taking into account that the mentioned transfer may be executed not only by transfer of the shares or stocks, but also by status changes such as a separation by formation, separation by acquisition or separation by acquisition along with separation by formation, as well as a merger by acquisition and a division by acquisition.

This modality of acquiring a construction project is possible and frequent in the cases when there exists a business company established precisely with the purpose of obtaining the building permit issued in its name, and/or wherever possible the status change is to be made, which final result would be (and most often it is) acquiring the ownership (or at least control) of the business company to whose name the building permit is issued and whose property the construction project basically is and the property which the transferer and the acquirer (most often the buyer and the seller) have defined as the property which is the subject of the sale.

However, in the cases when it is impossible or inappropriate to make acquisition of the legal entity (either due to the fact that the property of that legal entity, in addition to the building right and the construction project, also includes other property or due to the fact that the status change procedure is a relatively long lasting process), an indirect legal transaction is to be taken. Strictly speaking, in particular cases it is on the verge of a simulated legal transaction. The point is the cession of the building permit through settlement of the mortgage lender (mortgage over the construction project).

Totally simplified „legal construction“ of such a transfer is as follows:

This is, at the same time, the only by the law prescribed case when the authority which issued the building permit is obliged to issue, at the buyer’s demand, without postponement, the identical building permit in the name of the buyer and annul the old building permit.

Instead of conclusion

Neither this utmostly indirect manner of acquiring the title to the construction project has been fully regulated by the law, causing ambiguities of the less skilled or inexperienced jurists. One of such ambiguities is the matter of legal destiny of the certificate on works registration issued in the name of the original investor, and prior to the realization of the mortgage on the construction project.

This ambiguity occurred due to the obligation of issuance of the „identical“ building permit, containing also the time of the works commencement – handing in a registration form of the commencement of works performance. Following the logical fact that it is possible to start the works on a construction project only once, thus it is only once possible to hand in a registration form of works commencement on the grounds of one construction project. Obviously in this case there is no need for „repeated“ handing in the registration form of the commencement of works performance.

However, no one should be surprised if in practice certain „keen“ bank employees or lawyers engaged by a bank, require the proof that the registration form of the work commencement was handed in for the second time, thus conditioning the loan approval. The fact that they are not right means that the time will be wasted in vain.

Having in mind the expectations that in the near future the number of transfers of the title to construction projects will increase, hopefully the amendments of the law and other regulations shall enable the transfer of the title to a construction project and the building right. Thus the need for making the above described „legal constructions“ will disappear.

Author : Nenad Stanković

Senior Partner in Joksović, Stojanović&Partners

[email protected]

source : AG REAL ESTATE