Real Estate 2019 Comparisons

Last Updated April 30, 2019

Contributed By DLA Piper Italy

Law and Practice

Authors



DLA Piper Italy has a market-leading real estate offering, with an international multidisciplinary team of lawyers that can serve client needs globally across the real estate sector. The firm has more than 750 real estate lawyers operating in more than 40 countries around the world, serving clients in key real estate markets, with strongly established teams in the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA Piper works with clients through all stages of the real estate life cycle, including planning, acquiring, finding, developing, leasing, completing, trading and divesting. Working through this cycle, it offers the following services: financing; acquisitions and disposals; asset management; construction; cross-border investment; development; fund formation; joint ventures; leasing; litigation; planning, zoning and environmental issues; public private partnerships; REITs; restructuring; and tax. The team works alongside investors, lenders, developers and managers on every aspect of their real estate activities.

The main sources of real estate civil law are the Italian Civil Code, Law No 392/1878 (the Tenancy Law) for commercial leases, and Law No 431/1998 for residential leases. For zoning law, on the other hand, the main sources are primarily the Constitution, several national laws and a variety of regional laws.

Commercial transactions in the Italian real estate market (ie, not including residential transactions) reached approximately EUR8 billion in 2018. The overall real estate market experienced a slowdown, with investments in the sector decreasing by approximately 20%. However, considering that in 2017 it hit an all-time record, this decrease is not particularly concerning. The office, residential, and logistics property markets have remained healthy and in the latter case kept growing. Also, alternative asset classes (senior housing and student accommodation in particular) are still experiencing steady growth (though the relevant markets are underdeveloped in comparison with the UK and continental Europe). The NPL and UTP stock is still significant and several foreign investors have continued to target the Italian market, particularly in light of the turmoil recently experienced by large banking groups (MPS and more recently Carige).

Another significant trend is the ever-increasing gap between Milan and the rest of Italy. Milan's real estate market is now relatively close, given its reduced size, to that of other key European cities such as London, Paris, and Frankfurt. Yet it is more appealing than these other markets because pricing in Milan is still relatively cheap. As Brexit looms over Europe, and political instability spreads in other countries, Milan is still considered a relatively safe haven for foreign investors. The real issue, in any case, remains the lack of modern, sophisticated products – a widespread concern which becomes even more critical in Italy.

On 31 January 2019, representatives of the standing government submitted to the house of representatives (camera dei deputati) a new project of law limiting the possibility to open retail units to the public on any given Sunday. The proposed reform limits the number of Sundays where retail units may be open to the public to 26, and is addressed in particular to shopping centres and large retail structures. There are exceptions under discussion: one entails more flexibility for retail units in historical centres and the other sets the threshold for retail units to bypass the general prohibition on opening on Sundays/bank holidays (the threshold relates to the size of the unit and the number of citizens in the relevant municipality). According to the same proposal, e-commerce deliveries will be prohibited on Sundays and there will be a general ban on retail units opening between 10pm and 7am. Thus far, the reaction to said project of law has been mostly negative due to the impact it may have on the employment (layoffs are expected) and turnover of shopping centres.

Property rights under Italian law include the following:

  • absolute freehold or full ownership (piena proprietà), which is the right to fully and exclusively enjoy and dispose of the property;
  • right to build or surface right (diritto di superficie), which is the right to build and maintain a building on or underneath a third party's property, granted for a specific period of time;
  • beneficial interest (diritto di usufrutto), which is the right to enjoy a third party's real estate for a specific period of time. This cannot be longer than the lifetime of the beneficiary if they are an individual, or more than 30 years if the beneficiary is a legal entity;
  • right of use (diritto d'uso e di abitazione), which is the right to use real estate in order to meet the needs of the person holding the right and those of their immediate family; and
  • long lease (diritto di enfiteusi), which is the right to enjoy a property owned by a third party with faculties similar to those granted to the full owner.

Property rights, including the right of full ownership of real estate, may be co-owned by two or more persons, companies and/or other legal entities.

Co-ownership also exists in the form of condominiums.

The transfer of title to real estate is generally governed by the Italian Civil Code, with supplementary provisions relating to town planning, building, cadastral compliance, notarial laws and taxation. The general legal regime for the transfer of title is the same, irrespective of the property's use. Shorelines, beaches and waterways (such as harbours, waterfalls, lakes, rivers and other stretches of water defined as 'public' by the applicable law) are part of the natural domain (demanio naturale), and title to these assets cannot be transferred.

The deed of transfer must be made in writing and authenticated by a public notary in order to be filed in the Real Estate Register (Conservatoria dei Registri Immobiliari). The transfer of title is effective immediately upon the signing of the sale agreement. Preliminary contracts must take the same form as the final deed of transfer, and therefore must also be in writing. 

Real estate is registered in the Cadastre Register, which is held by the municipality in which the property is located and consists of the Land Cadastre, in which undeveloped land is recorded, and the Building Cadastre, in which buildings are recorded. Both land and buildings must be registered and are then attributed a 'cadastral income'. The Building Cadastre distinguishes between buildings according to their planning designation and use (such as office space, residential property, warehouses, parking lots, shops, etc) and attributes a value to them, known as the cadastral income, which forms the basis for calculating the municipal property tax (IMU).

Although it is not a requirement for the validity of a transfer, deeds are usually filed with the Real Estate Register held by each municipality, in order to prevent possible conflicts with future buyers and third parties. The register records information relating to the property, including sales and purchases, mortgages, easements and rights of use, as well as any pending disputes. Even preliminary agreements relating to an existing property or to a property under construction can be registered in order to protect the buyer from any subsequent filing of third parties' rights or a second sale of the same asset. This protection stops one year after the completion date specified in the preliminary agreement and, in any event, three years after the registration of the preliminary agreement. The Real Estate Register is accessible to the general public.

Foreign insurance companies have only recently started to offer title insurance in Italy, but this is still not common practice.

The parties to a transaction usually enter into an agreement such as a letter of intent or a head of terms, providing the potential buyer with an exclusivity period in which to carry out due diligence.

Due diligence is undertaken in relation to technical, commercial and legal issues by the purchaser's professional advisers on, inter alia: title; building permits; leases; contracts relating to the property; and corporate documentation regarding the target company (in case of a share deal). A notarial report listing the transfers of title over the past 20 years (the term relevant for adverse possession) and any in rem prejudicial filings (eg, mortgages, lawsuits affecting the property, easements, and obligations stemming from zoning instruments) is necessary to obtain legal evidence on the actual title to the property and relevant encumbrances.

Upon completion of due diligence, assuming the results are satisfactory, the parties negotiate the terms and conditions of the transaction. Often, the parties agree to enter into a preliminary agreement specifying certain conditions and/or pre-closing covenants which must be fulfilled prior to the completion of the transaction and the signing of the final deed.

According to statutory law, the seller guarantees that it has the title to the real estate property, and that the property is free from any third-party rights and any defects. Moreover, the seller has to declare:

  • that the factual cadastral situation of the asset is aligned with the one registered with the relevant cadastre;
  • the list of the building titles; and
  • whether it used a real estate broker.

Such declarations are mandatory inclusions in a notarial deed of conveyance.

Traditionally, the rules applicable to the defects warranty set out in the Italian Civil Code (ie, the warranty that the property was free from defects) were deemed applicable in the case of breaches of the representations and warranties included in a sale and purchase agreement. These rules set forth that the buyer has to notify the seller of any breach of the warranties within eight days of the relevant discovery. A one-year statute of limitations applies from the date the buyer takes possession of the property. These provisions may lead to the termination of the purchase agreement and to a full refund of the purchase price.

According to current market practice, the parties include additional representations and warranties (limited, as the case may be, by the knowledge acquired by the buyer during the due diligence process) and agree to depart expressly from the set of rules included in the Italian Civil Code in relation to warranty defects.

Contractual remedies have been introduced envisaging either special indemnities to remedy breaches already in place or loss indemnification procedures in the event of misrepresentations. This indemnification structure is aimed at preventing the termination of a sale and purchase agreement once the transfer of title has been consummated.

The parties also agree to have longer final time limits to lodge a claim and to activate a claim in a sale and purchase agreement.

In addition to civil law matters regarding, inter alia, the verification of the seller's title, lease agreements (which under Italian law remain in place until the transfer of title), the existence of possible encumbrances over the property and the existence of a condominium or of a consortium with reference to the property, the following matters of public law should be verified by the buyer:

  • the zoning and town planning provisions: the general master plan (piano regolatore generale) and the related implementation rules (norme tecniche di attuazione, NTA) show the permitted use of the area in which the property is located;
  • building permits and licences: the buyer should ensure that the structure of the property complies with the original building permits;
  • fitness for use: all properties require a certificate (certificato di agibilità) confirming that certain health and safety requirements have been met;
  • fire prevention provisions; and
  • trade licences, if any.

If the parties agree to transfer not only the property but also the corporate vehicle owning such property, all the other corporate, contractual and tax aspects of the target company need to be reviewed.

Under Italian law, a buyer is responsible for the necessary remediation and safety work relating to soil pollution and/or environmental contamination, even if the person who originally caused the contamination or pollution is liable to pay damages. The authorities may, at their discretion, require either party to carry out remedial measures.

The general master plan and town planning rules, as well as local laws, provide a description of permitted uses in different areas of a city. In order to determine the permitted use of a property, a town planning designation certificate (certificato di destinazione urbanistica) can be requested from the municipality. Developers normally enter into development agreements with the relevant public authorities, under which they will usually undertake to carry out certain public works, such as providing roads, parking spaces, green areas, etc.

Expropriation is possible, but only where specific permission is granted in accordance with the law, as set forth in the Presidential Decree of 8 June 2001 No 327. In general, expropriation is only allowed if it is in the public interest. In such cases, the state must pay compensation to the parties involved.

The sale of commercial (ie, not residential) property between two VAT entities is generally exempt from VAT, except in the following cases:

  • where a seller is the developer of a new property, or is the company that carried out renovation works, and the sale occurs within five years of the completion of the works; or
  • where a seller opts, in the sale and purchase agreement, to apply VAT to the sale and purchase.

For all sales subject to VAT, two different and alternative mechanisms may apply:

  • the ordinary regime, which requires a seller to issue an invoice charging VAT, applies where the seller is the developer or the renovating company; or
  • the reverse charge mechanism, which applies when a seller opts in the sale and purchase deed for VAT to apply. Under the reverse charge regime, the seller issues an invoice without VAT. The buyer then 'writes' into that invoice the rate and amount of the applicable VAT and registers it in both its input and output VAT registers. The result is a VAT-neutral transaction.

VAT is applied at the rate of 22% or at the reduced rate of 10% in the case of properties that have been subject to significant renovation works.

Both in cases where the sale and purchase are subject to VAT and in cases where they are exempt, cadastral tax at a rate of 1%, mortgage tax at a rate of 3% and registration tax of EUR200 are payable. Mortgage and cadastral taxes are reduced to an overall 2% if one of the parties is an Italian real estate investment fund (REIF). VAT can often be recovered, although this can take up to two years.

In the case of residential properties, the sale between two VAT entities is ordinarily VAT exempt, unless:

  • a seller is the developer of a new property, or is the company that carried out renovation works, and the sale occurs within five years of the completion of the property; or
  • even after five years from the completion of the abovementioned works, the sale is carried out by the company that built/renovated the property, and the seller opts, in the sale and purchase agreement, to apply VAT. VAT in this case would be applied under the reverse charge mechanism.

VAT on residential buildings is applied at a rate of 10% (22% in the case of luxury buildings).

If the sale is exempt from VAT, registration tax is payable at a rate of 9%, and cadastral and mortgage taxes are payable at fixed rates of EUR50 each. Otherwise, registration tax, mortgage and cadastral taxes are applied at the fixed amount of EUR200 each.

Property transfer tax, notary fees and the legal costs for the implementation of the sale and purchase agreement are usually paid by the buyer, with the exception of any legal costs incurred in connection with the cancellation of existing encumbrances on the property, which are paid by the seller. Agency fees are usually between 1% and 3% of the property value.

In the case of a share deal, the transaction is out of the scope for VAT and registration tax is payable at the fixed amount of EUR200, regardless of the percentage of ownership acquired. No stamp duty is payable. Financial transaction tax (Tobin Tax) applies in the case of a purchase of shares in an Italian resident joint stock company, even if the purchaser and the seller are not Italian residents; the tax is levied at a rate of 0.2% on the agreed price. No Tobin Tax is due on the purchase of quotas in an Srl (limited liability company).

There are no restrictions on foreigners investing in real estate in Italy. However, where an investment is carried out by way of the purchase of shares in a corporate vehicle, certain restrictions may be imposed by the Foreign Ministry (Ministero degli Esteri).

Acquisitions of commercial real estate in Italy are generally financed by means of bank loans.

The Italian government has also tried to encourage overseas investments in the real estate market through the enactment of the so-called 'Decreto Sblocca Italia' (Law Decree 133/2014), which simplifies the regulation of real estate investment trusts (so-called SIIQs).

Similarly, the same decree has introduced new regulations aimed at removing barriers for foreign funds and insurance companies looking to invest in loans in Italy.

Italian real estate finance transactions are guaranteed by an extensive security package that covers all the assets and receivables of a borrower and particularly all values related to a property, such as: the mortgage over the property; assignment of rental receivables in connection with the property; pledge over the borrower's share; pledge over bank accounts; assignment of receivables arising from commercial agreement and insurances; and a loss payee clause over insurance policies.

Pursuant to the Italian Banking Act and Decree No 53/2015, the granting of all forms of loans on a professional basis to the public (both clients and non-clients) – including loans over real estate – is reserved for certain qualifying entities.

Lending activity in Italy could also be performed (under certain conditions and restrictions) by entities other than financial intermediaries, such as insurance companies, alternative investment funds (including credit funds and debt funds) and securitisation vehicles.

According to Italian laws and regulations, lending activity falls within the scope of the abovementioned reserve when it is carried out on a professional basis; this requirement is triggered when the activity is potentially expected to be carried out on an organised basis. This requirement is not triggered when the lending activity is a one-off transaction.

It is important to consider that the Italian authorities apply the principle of prevalence of substance over form.

With regard to Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), given the size of such new US regulation and the related transition period in respect of its entry into force, we are still waiting to see the effects and the impact that the abovementioned legislation will have on the real estate investment.

In relation to mortgages to be established over real estate assets, the following fees and taxes are payable:

  • notaries' fees are payable in fairly substantial amounts in respect of any security document executed as a notarial deed;
  • nominal stamp duty (usually at a rate of EUR16 per foolscap sheet);
  • registration tax:
    1. of EUR200 if the grantor is securing its own obligations or the mortgage is required by law; or
    2. equal to 0.5% of the secured amount, if securing third-party obligations (if the borrower is granting his own obligation, no registration tax is due); and
  • mortgage tax is payable at 2% of the secured amount.

In actuality, no payment is due for registration taxes, mortgages and cadastral taxes, stamp duties, governmental duties and all the other taxes and duties if the so called 'substitute tax' is applied. The 'substitute tax' is an umbrella tax currently at a rate of 0.25% (for business entities) of the principal amount of the loan. 

'Substitute tax' can be applied provided that:

  • the loan has an original contractual duration of at least 18 months;
  • the loan is granted by EU-incorporated banks, Italian branches of EU-incorporated banks or Italian banks;
  • the facility agreement is executed in Italy; and
  • the lender opts for the application of the substitute tax provided for under Article 15 of Presidential Decree no. 601/73.

Any entity must comply with the provisions of the Italian Civil Code in order to grant valid security over its real estate assets.

It must be taken into account that, for instance, if security is granted by an entity belonging to the same company group as the borrower, the granting of such security has to be justified by an actual interest of the grantor which might be the ultimate corporate benefit of its group.

If the security is granted directly or indirectly by a joint stock company (società per azioni) to any of its shareholders or third parties to purchase its shares (so-called financial assistance), a specific procedure shall be followed. For limited liability companies (società a responsabilità limitata), financial assistance is prohibited by law under any circumstances.

In the case of default by a borrower, the acceleration of a loan and the enforceability of the relevant security are regulated by the provisions of the facility agreement and the security documents; the judicial steps of, and the formalities for, the enforcement of the relevant security are set forth under the Italian Civil Procedure Code, whose provisions are mandatorily applied.

In certain cases mandatorily provided for by the law, even secured debt ranks junior to certain categories of indebtedness (eg, certain taxes).

In general, the subordination of a debt is contractual: loan agreements usually provide for pari passu covenants. Insofar as the enforcement of security is concerned, under Italian law the holder of a first-ranking, duly registered security benefits from priority rights, which are opposable to other creditors. However, such priority applies in case of the enforcement of the security – something which, in the absence of intercreditor agreements, may not depend upon the initiative of the secured creditors as any creditor is entitled to attach the assets of a debtor.

In a bankruptcy scenario, the secured debt keeps its priority but the enforcement of the security is no longer available (and enforcements in process are interrupted) as the sale process is managed by the receiver in accordance with the rules set forth by the bankruptcy law.

Under Italian law (Legislative Decree No 152/2006), the entity liable for the pollution of a real estate property is the polluter.

An owner of the property who is not responsible for the pollution can perform the remediation activities as an 'interested party'.

Depending on the timing, size and nature of the security interest, security constituted over a debtor's assets may be void in the case of bankruptcy. Voidance must be declared by a court decision, upon the initiative of the receiver, who must file a specific demand.

The granting of security in violation of the rules provided for by the Italian bankruptcy law may also imply liabilities of the secured creditor to the extent criminal aspects arise in relation to the bankruptcy procedure.

At this stage of the transition period for the LIBOR, the market is following the LMA (Loan Market Association) suggestions. Please note that the change of the reference rate has an impact on, amongst other things, the exercise of the lender's voting rights in such respect and the financing documentation, in both cases for the implementation of such amendments in the relevant financing documentation.

From the documentation point of view, while we are still waiting for the issuance of an official guide by the LMA, we are currently including in the financial agreements certain 'safeguard provisions' in order to allow a flexible replacement of the reference rate in case of LIBOR's disappearance.

Strategic planning and zoning is ruled by the general principles established by state laws and moreover by regional laws which, in compliance with the mentioned national principles, establish detailed legislative provisions to be fulfilled in the relevant region. According to these national and regional laws, local authorities establish their strategic plans and therefore their zoning schemes.

See 4.1 Legislative and Governmental Controls Applicable to Strategic Planning and Zoning, above.

The building titles are issued or, in case of notices of commencement of building works, received and checked by the competent municipalities. If the real estate asset concerned is subject to a cultural or landscape lien, the issuance of a building title may require prior approval of the project from the relevant authority. In order to obtain a building title, the project has to fulfil legal provisions regarding many different matters, such as zoning, fire prevention, legal distances, and health and hygiene issues.

Except where the zoning schemes provide for the prior approval of an implementation plan, the execution of new construction or refurbishment building works only requires a building title to be obtained. Depending on the category in which the project is classified (new construction, major refurbishment or minor refurbishment) and on the applicable regional regulations, the title is issued by the competent municipality following the technical analysis of a dossier filed by the interested party, or is directly filed by the interested party and simply received and checked by the competent municipality.

Third parties with a specific interest that deserves protection may file a lawsuit before the competent Administrative Court asking for an annulment of the building title.

In some cases, the issuance or the filing of a building title must be preceded by the approval of an implementation plan. Within this plan, the operator is required to sign a town planning agreement which regulates the obligations regarding the implementation of the related public infrastructure works.

National and regional legislation, in line with the principles laid down by the European Commission, tends to discourage free land consumption and to encourage redevelopment processes and urban regeneration.

Three types of corporate vehicle are mainly used for investments in real estate in Italy:

  • società a responsabilità limitata (Srl), which includes the sub-type società a responsabilità limitata semplificata (Srls);
  • società per azioni (SpA); and
  • limited partnerships (Società in accomandita semplice), which include both unlimited liability partners (soci accomandatari) and limited liability partners (soci accomandanti).

Both Srl and Srls are limited liability companies whose corporate capital is divided into quotas (with no face value) rather than shares.

SpAs are limited liability companies whose corporate capital is divided into shares with the same face value.

Società a Responsabilità Limitata (Srl)

The minimum corporate capital required to set up an Srl is fixed at EUR10,000. If the Srl does not have corporate capital of at least EUR10,000, however, contributions-in-kind are not permitted; an amount corresponding to 1/5 of the net income resulting from the relevant financial statements must be allocated to a special legal reserve until the net worth of the company reaches at least EUR10,000.

Società a Responsabilità Limitata Semplificata (Srls)

The corporate capital required to set up an Srls can be between EUR1 and EUR9,999. No corporate entity can qualify as a shareholder of an Srls.

Società per Azioni (SpA)

The minimum corporate capital required to set up a SpA is fixed at EUR50,000.

Società a Responsabilità Limitata (Srl)

Considerable flexibility may be reflected in the by-laws of an Srl, and voting and profit rights can generally be freely allocated. The directors are responsible for day-to-day business decisions. The company can be managed by either a sole director, a plurality of directors (acting jointly or severally) or by a board of directors.

The appointment of a control body or of an external auditor is mandatory if:

  • certain thresholds relating to assets, turnover and the number of employees are exceeded for two years;
  • the Srl is required to prepare consolidated financial statements; or
  • the Srl is the controlling entity of a company which is subject to mandatory accounting control.

Unless the contrary is stated in the articles of incorporation, the Srl will be audited by a sole statutory auditor.

Società a Responsabilità Limitata Semplificata (Srls)

The management of this type of company may be entrusted to external directors. The by-laws of an Srls must comply with the template by-laws issued by the Ministry of Justice.

Società per Azioni (SpA)

It is possible to create different categories of shares with different rights. There are generally no restrictions on how voting and profit rights are allocated, and it is possible to create individual shares with multiple voting rights.

An SpA can be managed in any of the following ways:

  • by a sole director or a board of directors appointed by the shareholders' meeting;
  • if the company's articles of association provide for this, the company can be managed by a supervisory board and a management board. The shareholders appoint the supervisory board, which then appoints the management board. The supervisory board comprises shareholders and the board of statutory auditors, and the shareholders retain a degree of control over the management board (two-tier system); and
  • if the company's articles of association provide for this, the company can be managed by a board of directors appointed by a shareholders' meeting and an executive committee of the board (two-tier system).

The appointment of statutory auditors is mandatory. Shareholders may choose to appoint a board of statutory auditors comprising either three or five permanent members.

Società a Responsabilità Limitata (Srl) and Società a Responsabilità Limitata Semplificata (Srls)

Total corporate and accounting costs for an Srl are normally around EUR12,000, plus the cost of internal and external auditors. An Srls usually avoids having auditors in order to save compliance costs.

Società per Azioni (SpA)

The annual corporate and accounting costs for an SpA is approximately EUR20,000, plus the costs of internal auditors (between EUR10,000 and EUR15,000) and external auditors (EUR10,000-15,000).

Italian law differentiates between property leases (locazione) and business branch leases (affitto di azienda). Property leases are used for residential or commercial premises and are governed by the general provisions of the Italian Civil Code.

In relation to non-residential leases, certain distinctions apply to hotels and other premises used for activities involving contact with public users and consumers.

Mandatory provisions regulate the landlord/tenant relationship in favour of the tenant, including: provisions relating to the term of a lease; automatic renewal upon expiry; rent increases; the tenant's right to carry out activities involving contact with the public, etc. Any deviation from these in the lease contract which is less favourable to the tenant is considered invalid, even if explicitly accepted by the tenant.

Non-residential lease agreements (eg, for offices, retail space and hotels) providing for a yearly rent greater than EUR250,000 may not be subject to the mandatory provisions of the Tenancy Law. In other words, for such leases, parties are free to agree to terms which depart from the mandatory provisions of the Tenancy Law, which are generally to the benefit of the tenant.

If the leased assets are a going concern or business branch (azienda or ramo d'azienda), as defined under Italian law, the abovementioned rules of the Civil Code do not apply and the parties are free to contract as they wish.

Italian law also recognises a contract for granting free use of a premises (comodato), whereby the use of an asset can be granted free of charge for a specific purpose over a set period of time.

The relevant energy performance certificate (APE) must be attached to any new lease agreement (whether affecting a property or a branch of a business) or sub-lease (but not to a renewal).

It is possible to identify different types of commercial leases in respect of the object of the lease agreement, such as industrial, office, and retail property or hotel.

The minimum term for leases of industrial, office and retail property is six years, and nine years for a hotel. If premises are used for activities involving contact with the public, tenants are entitled to be indemnified for the loss of goodwill on termination of the lease. This amount is equal to 18 times the last monthly rent paid (21 times in the case of a hotel). If the premises are let within a year to a tenant carrying out the same or similar activities as the former tenant, a further indemnity of the same amount is payable to the former tenant. The payment of this indemnity to the tenant is a condition precedent for the surrender of the premises to the landlord. The indemnity is not due if:

  • the tenant decides not to renew the lease contract;
  • the tenant decides to exercise a break option;
  • the lease contract is terminated due to the tenant's breach of the contract; or
  • the lease contract is terminated in the context of a winding-up procedure.

If the premises are used for activities involving contact with the public, the landlord must offer the tenant the opportunity to purchase the premises on the same terms and conditions as any other potential buyer, and the tenant has the right to take a new lease on the premises once the initial lease has expired.

A tenant is not usually allowed to sublet or to assign a lease without the landlord's prior consent unless the lease is assigned or the premises are sublet to a third party as part of an ongoing business carried on by the tenant at the premises.

Retail leases may have turnover rents where all or part of the rent is determined by the store's profits.

The terms of a property lease are governed by the mandatory provision of the Tenancy Law.

In any case non-residential lease agreements (eg, for offices, retail space and hotels) providing for a yearly rent greater than EUR250,000 may not be subject to the mandatory provisions of the Tenancy Law

Furthermore, if the leased assets are a going concern or business branch (azienda or ramo d'azienda), the abovementioned rules of the Civil Code do not apply and the parties are free to contract.

Length of Lease Term

The Tenancy Law provides for a minimum term of six years for commercial leases (except where the activity to be carried out in the premises is temporary) and nine years for hotel leases. For residential leases, the minimum term fixed by law is four years, save for leases entered into to satisfy temporary needs or in relation to tourism activities. Parties are free to agree to longer leases, but if a lease term is less than the legal minimum then it is regarded as void and the term is automatically fixed by law.

When the initial period of a lease expires, the contract is automatically renewed on the same terms and conditions for another term unless either party gives notice not to renew at least 12 months (or 18 months in the case of hotels) before the end of the initial term.

When the initial period of a lease expires, a tenant is free to decide not to renew the lease. The landlord can only refuse to renew in very limited circumstances, such as an intention to use the premises itself, to demolish and rebuild, or to refurbish the building in order to comply with certain regulations. At the end of the second term there are no restrictions on the landlord's right to refuse a renewal.

It is not possible to enter into a lease contract with an initial term of more than 30 years.

In relation to business branch leases, parties are free to negotiate the terms of a lease.

Maintenance and Repair of the Real Estate Actually Occupied by the Tenant

The Italian Civil Code distinguishes between ordinary and extraordinary maintenance. Generally, a tenant is responsible only for minor repairs and ordinary maintenance.

Frequency of Rent Payments

The frequency of rent payments is freely negotiable between the parties.

Italian law provides for rents to be adjusted annually by a maximum of 75% of the variation in the ISTAT index (a measure of consumer price inflation) for non-residential leases, although 100% of the variation may be applied – if agreed by the parties – to non-residential leases having an initial term that exceeds the minimum term provided for by law. In a business branch lease, the parties are free to agree to the percentage of variation of the ISTAT index.

Turnover rents and stepped rents (where rent changes over time to reflect increasing benefits for the tenant or the investment made by the tenant in the premises) are also permitted. It is advisable to specify in a lease contract the express reasons for any rent increase.

See 6.5 Rent Variation, above.

Non-residential leases are exempt from VAT, unless a landlord opts for the VAT (at a 22% rate) regime to apply and states this explicitly in the contract.

The general principle is that tenants can be charged for the full cost of anything done for their benefit, while anything done partly or solely for the benefit of a landlord must be partly or entirely paid for by the landlord. It is advisable to define in the contract what kind of expenses are to be charged to the tenant. 

Registration tax (imposta di registro) is payable on the signing of a lease contract and is charged at 1% of the total anticipated rent for the duration of the lease, or 1% of the annual rent if it is to be paid on an annual basis. The law provides for payment of registration tax to be split equally between the parties.

In business branch leases registration tax is usually paid by the tenant.

Generally, a landlord is obliged to ensure that the premises remain fit for their normal and agreed use. 

Expenses for any common services provided by the landlord are paid by tenants on a pro rata basis.

The costs of utilities are usually paid by tenants.

Many leases contain a clause requiring a tenant to take out an insurance policy covering any damage caused to third parties or to the property as a result of their activities on the premises. The insurance policy for the building itself is usually taken out by the landlord.

Leases usually specify the permitted use of particular premises and a tenant is not entitled to modify this.

It is generally provided that a tenant may alter or improve the real estate with the prior consent of the landlord; in such a case, the tenant may also be entitled to be compensated for such improvements. Leases usually also provide that the landlord can require the tenant to remove any additions and improvements at its own cost at the end of the lease.

Lease agreements are generally divided into non-residential leases (eg, for offices, retail space, hotels etc), which are mainly governed by Law No 392/1978 (the Tenancy Law), and residential leases, which are mainly governed by Law No 431/1998. The Italian Civil Code applies to both categories.

According to the Italian Insolvency Act, a landlord may not terminate a lease agreement due to a tenant's insolvency. A specific procedure set out under the Italian Insolvency Act applies instead.

The Tenancy Law sets out certain limitations to cash deposits (up to three monthly rent instalments), while bank guarantees may cover higher amounts.

A tenant is not entitled to continue occupying a real estate after the expiration or termination of a commercial lease, and the landlord may obtain a court order to recover possession if the real estate is not vacated on time. The landlord may apply for a holdover indemnity.

According to market practice, leases usually contain specific termination clauses (such as the failure to pay one or more rent instalments, failure to provide the agreed security, breach of the consented use, etc).

If a tenant defaults and does not return the premises once the lease contract expires or is terminated, the landlord can obtain a court order to recover possession.

Local authorities have certain rights to acquire property on a compulsory basis, and this includes property held under leases.

The price for a construction project can be agreed by the parties using different mechanisms. The price can either be:

  • fixed in advance by the parties, if the price is intended to be a fixed lump sum which refers to the entire work (so-called turnkey agreements);
  • determined on the basis of separate prices for certain parts of the works (in which case the total cost is therefore only determined on completion of the works); or
  • agreed on a 'costs plus fee' basis, where the constructor is paid based on the duly evidenced costs borne in connection with the realisation of the project in addition to a pre-agreed fee.

The responsibility for the design of a given project usually lies with the designer appointed by the principal. The ensuing liability may, however, remain with a contractor if it has also been entrusted with the design phase.

The principal usually manages the construction risk of a project development (such as the increase of relevant costs) by obtaining proper representations and warranties from a contractor in relation to the feasibility of the project as the terms and conditions set out in the construction contract. Construction contracts provide for performance bonds and/or retainers over the advanced payments of the consideration.

An owner is entitled to penalties in the event that the milestones or completion dates agreed in the construction contract are not met.

There are two main categories of sureties related to construction projects: guarantees related to the development phase (eg, performance bonds), and legal guarantees over the defects of the realised work once it has been completed and positively tested.

Customarily, contractors and/or designers are entrusted to perform their activities in relation to a real estate property which is owned by the principal; therefore, the latter is the only subject entitled to use the property as collateral. With specific reference to the design, if the principal fails to fulfil its payment obligation vis-à-vis the designer, the latter retains the economic rights to exploit its intellectual property output.

According to the specific features and characteristics of a property, a property may be inhabited and used only upon issuance of a fit-for-use certificate and a fire prevention certificate.

The sale of commercial properties between two VAT entities is generally exempt from VAT, except in the following cases:

  • where a seller is the developer of a new property or is the company which carried out renovation works, and the sale occurs within five years of the completion of the property; or
  • where a seller opts, in the sale and purchase agreement, to apply VAT.

In the first case, VAT is due under the ordinary regime, which requires the seller to issue an invoice charging VAT. If the seller opts for VAT application, the reverse charge mechanism applies. VAT would be applicable at the rate of 22% unless the property has been subject to significant renovation works (in such a case, VAT would be applicable at the rate of 10%). Recovery of VAT may take up to two years.

For the reverse charge mechanism, see above.

If the sale and purchase are within the scope of VAT (either taxable or exempt), cadastral tax at a rate of 1%, mortgage tax at a rate of 3% and registration tax of EUR200 are payable. Mortgage and cadastral taxes are reduced to an overall 2% if one of the parties is an Italian REIF.

In case of residential properties, the sale between two VAT entities is ordinarily VAT exempt, unless:

  • a seller is the developer of a new property, or is the company that carried out renovation works, and the sale occurs within five years of the completion of the property; or
  • even after five years from the completion of the abovementioned works, the sale is carried out by the company who built/renovated the property and a seller opts, in the sale and purchase agreement, to apply VAT (VAT would be applied under the reverse charge mechanism).

VAT on residential buildings is applied at a rate of 10% (22% in the case of luxury buildings).

If the sale of a residential building is exempt from VAT, registration tax is payable at a rate of 9%, while cadastral and mortgage tax are payable at fixed rates of EUR50 each. Registration tax, mortgage and cadastral taxes are applied at the fixed amount of EUR200 each if the sale is subject to VAT.

Each side will normally pay its own legal costs. RETT and notary fees are usually paid by a buyer, save for legal costs incurred in connection with the cancellation of existing encumbrances on the property, which are paid by the seller.

For acquisitions of commercial properties by REIFs and SIIQs, the rates of cadastral tax and mortgage tax are halved to 0.5% and 1.5% respectively.

The contribution to REIFs and SIIQs of a plurality of real estate properties mainly leased is out of the scope of VAT and subject to fixed cadastral, mortgage and stamp duty.

Any owner with an interest in immovable property is subject to a municipal tax, composed of two sub-taxes: the unified municipal tax (imposta municipale unica, IMU) and the tax for communal services.

The tax for communal services is composed of the communal services tax (tassa per i servizi indivisibili, TASI) and the waste or garbage tax (tassa sui rifiuti, TARI).

TASI is a tax applied for the purpose of paying the indivisible services provided by the municipality (public illumination, road maintenance, municipal registers, public security, etc), and is due by both a landlord and tenant (the municipality decides the portion to be paid by the tenant, within a range of 10-30%). TASI is applied on the same taxable basis as IMU.

An investor may derive income from letting property, either directly or by means of dividends or distributions made by a corporate vehicle or fund. Tax on rental income may vary substantially, depending on the structure of the investment.

Where the property is held by an Italian corporate vehicle, if the real estate is leased to tenants, any rental income generated is subject to corporate tax (IRES) at a rate of 24% and regional tax (IRAP) at the ordinary rate of 3.9% (this can be increased depending on the relevant region).

Taxable income of a real estate company for IRES purposes is the net revenue after the deduction of costs, as shown in the annual profit and loss account. Roughly all costs relating to the activities of a company can be deducted, including interest (as long as this exceeds interest receivable) up to an amount equal to 30% of EBITDA. Interest due on loans aimed at purchasing real estate properties for 'letting' that are secured by mortgages over the same properties is not subject to the 30% threshold and is therefore fully deductible.

The taxation of dividends distributed to shareholders depends on the nature of the shareholder. The dividends effectively distributed by a company in favour of a foreign individual are generally subject to a withholding tax of 26%, with the right to request a tax refund equal to 11/26 (42.307%) if a definitive tax has been applied on the same income abroad.

On the other hand, the dividends distributed by a company to another company are generally subject to a withholding tax of 1.2%. Exemption from Italian withholding tax under the Parent Subsidiary Directive may apply.

In the case of investment without a permanent establishment in Italy (owning Italian real estate does not automatically give rise to a permanent establishment in Italy), the income derived from letting property is subject to IRES, payable at a rate of 24%. 95% of the gross income derived from letting is taxable and no depreciation or other costs can be deducted.

Italian REIFs are not subject to IRES or IRAP.

SIIQs are not subject to IRES and IRAP on income from letting property, or on the dividends paid by another SIIQ, if those dividends relate to letting property.

Tax on capital gains deriving from the sale of real estate properties may vary according to the structure of the investments.

Profits on the sale of property realised by an Italian corporate vehicle are subject to IRES at the ordinary rate of 24%, regardless of how much time has lapsed since acquisition. The profit is the difference between the book value of a property at the time of the sale (as reduced by depreciation) and the agreed purchase price. In some cases it is possible to spread the liability for tax on capital gains over a period of five years.

Capital gains realised from the sale of property are also generally subject to IRAP at a rate of 3.9%, unless the sale occurs outside the normal activities of the company.

In case of sale of the participation into the Italian vehicle, capital gain is subject to Italian taxes at a rate of 26% on 100% starting from 2019. Double tax treaties in force between Italy and the country of residence of a foreign investor may provide for exclusive taxation in the country of residence of the foreign investor.

Financial transactions tax (Tobin Tax) is payable (at a rate of 0.2% on the agreed price) by the purchaser of shares in an Italian resident joint stock company, even if the purchaser and the seller are not Italian residents.

Capital gains derived from the sale of real estate directly owned by a foreign investor without a permanent establishment in Italy are not subject to IRES if the property is sold more than five years after its acquisition. If the sale occurs within five years, IRES applies at a rate of 24%. Since depreciation is not permitted in the absence of a permanent establishment, taxable gains comprise the difference between the acquisition cost at the time of purchase and the price agreed for the sale of a property.

Capital gains from the sale of property owned by an Italian REIF are included in the fund's net income and taxed at the level of the investors when the income is distributed.

In the case of sale of the participation into the Italian fund, capital gain would be, in principle, exempt from taxation in case the foreign investor is resident in a white-listed country.

Capital gains from the sale of real estate by a SIIQ are included in the taxable income for IRES and IRAP purposes.

Italian corporate vehicles and Italian partnerships are allowed to deduct real estate depreciation, while direct investment from abroad is not granted with any deduction.

DLA Piper Studio Legale Tributario Associato

Via della Posta 7
20123
Milan
Italy

+39 02 8061 81

+39 02 8061 8201

info@dlapiper.com www.dlapiper.com
Author Business Card

Law and Practice in Italy

Authors



DLA Piper Italy has a market-leading real estate offering, with an international multidisciplinary team of lawyers that can serve client needs globally across the real estate sector. The firm has more than 750 real estate lawyers operating in more than 40 countries around the world, serving clients in key real estate markets, with strongly established teams in the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA Piper works with clients through all stages of the real estate life cycle, including planning, acquiring, finding, developing, leasing, completing, trading and divesting. Working through this cycle, it offers the following services: financing; acquisitions and disposals; asset management; construction; cross-border investment; development; fund formation; joint ventures; leasing; litigation; planning, zoning and environmental issues; public private partnerships; REITs; restructuring; and tax. The team works alongside investors, lenders, developers and managers on every aspect of their real estate activities.