Real Estate 2023 Comparisons

Besides the Constitution of the Republic of Slovenia, which lays down basic principles of private ownership, the main law governing real estate is the Law of Property Code, which prescribes the main rules regarding property rights. The Law of Property Code is supplemented by the Land Register Act and the Real Estate Cadastre Act, which govern real estate records.

In addition to general sources of real estate law, certain specific laws govern particular types of real estate. Such laws include:

• the Housing Act;
• the Protection of Buyers of Apartments and Single Occupancy Buildings Act;
• the Agricultural Land Act;
• the Act on Forests;
• the Water Act;
• the Nature Conservation Act; and
• the Cultural Heritage Protection Act.

In a broader sense, rules relevant to real estate are also prescribed in the Spatial Management Act and the Building Act, which govern spatial planning and construction, as well as in general sources of civil law, such as the Obligations Code.

In the past year, the real estate market in Slovenia has been impacted by rising inflation and increases in interest rates. These factors have resulted in price increases in real estate transactions, which is a trend that began a few years ago, and a reduction in the number of real estate transactions, which is a more recent trend. Nevertheless, the most pronounced trend in all segments of the real estate market is ESG (environmental, social, and governance). 

The coronavirus pandemic no longer has a direct impact on the real estate market, but rather an indirect impact through the aforementioned rising inflation and increases in interest rates, both of which were influenced by the coronavirus pandemic. 

Among the most significant real estate deals in Slovenia in the past year are the leasing out of multiple hotels in Ljubljana by Equinox on 20-year terms, with cumulative rent exceeding EUR125 million. A significant real estate complex in Ljubljana has been acquired by Boscarol, the combined purchase of which exceeded EUR35 million. Another notable of real estate complex in Ljubljana intended for development was acquired by Corwin for a purchase price of around EUR25 million.

Although modern technologies in financial services, such as blockchain, decentralised finance and similar, are present in the Slovenian real estate industry, their impact cannot yet be considered as disruptive nor is it expected to become disruptive to these services in the next year.

Conversely, proptech has had a significant impact on the real estate industry, most significantly through online marketplaces for short-term housing leases (eg, Airbnb, Booking). The emergence of such online marketplaces resulted in increased interest from investors in the purchase of real estate in order to lease it short term. The use of such online marketplaces decreased during the coronavirus pandemic, which resulted in an increase of real estate available for long-term lease and sale on the Slovenian real estate market. These coronavirus-related effects on the use of online marketplaces for short-term housing leases have since diminished, and it is expected that online marketplaces will continue to impact the real estate industry in the next year.

In Slovenia, a reform in the taxation of real estate has been a long time coming. The ruling political parties have announced in the coalition agreement the introduction of a wealth tax, which would encompass reform in the taxation of real estate. Reform in the taxation of real estate is a measure that has long been proposed by international organisations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).

According to the Slovenian Ministry of Finance, different versions of proposals for reform in the taxation of real estate are currently being prepared. It is likely that real estate, in which the owner lives, will not be taxed, but each additionally owned real estate will be. The rate of taxation is not yet known, but it has been suggested that it could range from 0.1% to up to 1% of the value of the real estate per year. The reform in the taxation of real estate is intended to limit investment and speculative purchases and force owners of empty real estate to put it on the market.

It must be noted, however, that the reform in the taxation of real estate has proven to be, time and again, a difficult political compromise to achieve. Therefore, it is possible that the reform will not be adopted immediately. A similar reform was enacted in 2013, but was repealed by the Slovenian Constitutional Court.

In accordance with the Law of Property Code, the following categories of property rights can be acquired: ownership right, lien, easement (encompassing both easements in rem and personal easements), encumbrance and building right.

A non-accessory land charge can no longer be established as it was widely abused by the debtors and was omitted from the Law of Property Code. Land changes established before 5 November 2013 have remained in effect. 

The principle of numerus clausus applies to categories of property rights. No different property rights may be created at the will of the parties. The principle of numerus clausus is somewhat alleviated in case of easements in rem, the subject matter of which is not precisely prescribed.

The transfer of title of real estate is primarily governed by the Law of Property Code, the Obligations Code and the Land Register Act.

In addition to the above-mentioned laws, which are generally applicable to the transfer of title of real estate, regardless of the type, additional specific laws apply to the transfer of title of particular types of real estate, which prescribe restrictions in the transfer of title of these types of real estate. Such laws are, inter alia:

• the Agricultural Land Act and the Act on Forests, which regulate pre-emption rights of specific beneficiaries, who have priority when purchasing agricultural or forest land, as well as a specific procedure for the sale of agricultural and forest land;
• the Water Act, which prohibits the sale of state-owned water land;
• the Nature Conservation Act and the Cultural Heritage Protection Act, which prescribe special protection regimes and restrictions on transfer of title of real estate designated as natural and cultural monuments; and
• the Spatial Management Act in connection with implementing regulations of the municipality or the state, which provide for pre-emption rights of the municipalities or the state over land plots which are of special importance.

For the proper transfer of title to real estate a binding sale and purchase agreement, a land register permission and an entry in the land register is required. The land register records transfers of title. Entry in the land register is a constitutive element in the transfer of title.

The Land Register Act prescribes the principle of reliance on the land register data. In accordance with it, anyone who acts honestly in legal transactions and relies on the information entered in the land register should not suffer adverse consequences as a result. The land register is kept electronically and is publicly accessible. Considering the foregoing, title insurance is not common in daily transactions. In large transactions, however, foreign buyers who want to mitigate all risks during the pre-registration period or cover transaction-specific matters might seek title insurance.

The limitations in governmental office functionality and in-person availability for document signing or notarisation that existed during the coronavirus pandemic have resulted in certain new processes or procedures for the documentation and completion of real estate transactions. Most notably, the latest amendment to the Notariat Act envisages a comprehensive digitisation of notarial services. The amendment enables remote access to notaries and remote drafting of notarial deeds, video-electronic identification through a direct secure video link with the notary, and simplifies data retrieval by electronic link to official records, registers and public books. The described provision of digital notarial services will be possible when technical requirements are ensured.

The aim of real estate due diligence is to thoroughly inspect the real estate to reduce and mitigate uncertainties. Besides legal due diligence, acquisition of real estate frequently also requires performance of technical or environmental due diligence. 

The manner and scope by which buyers carry out real estate due diligence depends heavily on the objectives of the transaction. On one hand, the acquisition of an income-producing property like a shopping centre requires the buyer to examine existing lease agreements and each tenant’s rental payment history. On the other hand, the acquisition of greenfield intended for real estate development requires the buyer to examine the zoning. Regardless, due diligence always involves a review of public records (land register, land cadastre, etc).

A due diligence activity specific to the acquisition of real estate in Slovenia is the examination of potential ongoing restitution proceedings, which is a legacy of the former collective ownership system.

The scope of representations and warranties in commercial real estate transactions depends on the characteristics of each individual transaction. Nevertheless, representations and warranties may include confirmation that:

• the parties have authority to enter into the agreement;
• there are no title defects;
• there are no rights of third persons;
• there are no unpaid taxes related to the real estate;
• there are no pending litigation, expropriation and restitution proceedings related to the real estate; and
• there is no environmental contamination.

As a result of the coronavirus pandemic, no significant additional representation and warranties have developed which would persist in post-pandemic transactions.

In the event of the seller’s misrepresentation constituting a breach of agreement, the buyer is entitled to demand that the breach of agreement is remedied, that the purchase price is proportionally reduced or that the agreement is rescinded. At the same time, the buyer may claim reimbursement of damages. By way of contractual regulation, the parties often set a cap on the maximum amount of compensation and agree on de minimis, granting damages only if the claim exceeds a certain amount. As security for these remedies, payment of a certain proportion of the purchase price is sometimes held back or is held in escrow. Although representation and warranty insurance is available, it is not commonly used.

The general statutory expiry period for representations and warranties is six months as of handover. Considering that this period is relatively short, it is occasionally contractually prolonged.

In addition to property law, construction law, spatial planning law and environmental law, the main sources of which were specified in 1.1 Main Sources of Law, investors also ought to consider finance and tax law. Investors seeking to purchase or develop an office building should also monitor whether new legislation on business leases shall be adopted.

Under the polluter pays principle, prescribed by the Environmental Protection Act, the person who is responsible for soil pollution or contamination is responsible for undertaking the measures necessary for the rehabilitation of the environment. Therefore, the buyer who did not cause the pollution or contamination is generally not liable for incidents which occurred while the relevant assets were held by the previous owner.

Nonetheless, if environmental damage occurs and, after its occurrence but before its remediation, the polluter disposes of the real estate on which it carried out certain types of environmentally burdensome activities, the agreement by which it disposes of the real estate must include a provision to the effect that the person acquiring such real estate will also assume the remediation; otherwise, the contract is null and void.

The permitted use of real estate is determined by the state and local authorities under the spatial planning regulations. Permitted use of a specific land plot can be most reliably ascertained by obtaining location information from the competent local authority. Permitted use can also be ascertained through online public spatial data information systems. Conclusion of specific development agreements with relevant public authorities is possible to a limited extent (see 4.6 Agreements with Local or Governmental Authorities).

In accordance with the Spatial Management Act, owners may be expropriated on the condition that expropriation is essential to attain the public benefit, and that the public benefit pursued is in proportion with the interference with private property. Owners need to be either awarded damages or compensated in kind with a real estate of same type and quality. 

Before the expropriation procedure commences, the expropriation beneficiary must make an offer to the owner to purchase the real estate. If the sale and purchase cannot be agreed, the expropriation beneficiary may submit a request for expropriation, with which the expropriation procedure is commenced. The expropriation procedure is conducted by the administrative unit, which decides on the expropriation and the compensation.

Besides the above-mentioned generally applicable provisions of the Spatial Management Act on expropriation, the provisions of specific legislation concerning expropriation, such as the Investment Promotion Act and the Water Act, may be applicable in particular cases.

Asset deal transactions are taxed either by the real estate transaction tax (RETT) or VAT. If the transaction is not subject to VAT, RETT amounting to 2% of the value of the real estate is to be paid by the seller. Payment of RETT may contractually be shifted to the buyer. Differently, in the case of sale of real estate owned by a taxable person identified for VAT purposes, VAT amounting to either 22% or 9.5% is applied instead of RETT in cases enumerated by the law or by choice of the parties (see 8.1 VAT). 

Both asset deal transactions and share deal transactions may be subject to corporate income tax (CIT) if the seller is a legal entity, or income tax on capital gains if the seller is a natural person. As regards CIT, any profit (or loss) from the deal counts towards the total profit of the legal entity. Corporate income is taxed at 19% of the legal entity’s profit. As regards income tax on capital gains, natural persons are taxed based on capital gains and the capital holding period. The tax rate, which first amounts to 25% of the difference between the value of the capital at the time of disposal and the value of the capital at the time of acquisition, decreases over the years of ownership, ie, it amounts to 20% after five years of ownership and 15% after ten years of ownership. After 15 years of ownership, the transaction is exempt from tax on capital gains.

The above-mentioned taxes are also triggered by partial ownership transfer.

Foreign investors are classified into the following groups as regards the possibility of acquiring real estate in Slovenia.

• Foreign investors that can acquire real estate without legal restrictions: legal entities and citizens of the EU, OECD and EFTA. Some additional cases are foreseen for natural persons, eg, Slovene status, inheritance.
• Foreign investors that can acquire real estate on the basis of a legal transaction, inheritance or decision of a public authority, under the condition of reciprocity: legal entities and citizens of candidate countries for EU membership.
• Foreign investors that cannot acquire real estate or can only acquire it based on inheritance under the condition of reciprocity: legal entities and citizens from all other countries that do not fall into any of the groups listed above.

The restrictions described above are somewhat alleviated, as it is possible for foreign investors to obtain real estate through legal entities established countries with no legal restrictions applicable to them.

However, under currently valid foreign direct investment screening, a foreign investor (ie, any investor outside of Slovenia) must notify the investment to the ministry responsible for the economy if it, inter alia, acquires the right to dispose of real estate essential for critical infrastructure or real estate located near such infrastructure. The ministry decides whether such an investment is approved, sets the conditions for its implementation, prohibits or cancels it. In practice, due to the vagueness of the diction on proximity to critical infrastructure, almost all real estate transactions are notified, most of them on a "just in case" basis. 

Current mechanism ceases to apply on 30 June 2023. The proposal which is to replace the current mechanism does not include the above-mentioned provision under which foreign investors must notify the ministry of the investment if they acquire the right to dispose of real estate essential for critical infrastructure or land and real estate located near such infrastructure.

Acquisitions of commercial real estate are in many cases financed by both debt and equity, whereby the ratio between the two depends on the characteristics of each individual acquisition. Nevertheless, in order to acquire debt financing from lenders, investors are usually required to ensure sufficient equity. Large real estate portfolios or companies holding real estate are often financed by syndicated loans of different lenders, which may be not only Slovenian lending institutions, but also foreign. 

The most typical security created by commercial real estate investors borrowing funds to acquire or develop real estate is a mortgage. A special type of a mortgage, which is also very common, is a maximum mortgage, where all existing and future claims arising from a specific business relationships are secured by the same mortgage on real estate up to a specific amount. In addition to mortgages, security is sometimes also given in the form of pledges on movable property, securities, company’s business shares, receivables and bank deposits, guarantees, etc.

Generally, there are no restrictions on granting security over real estate to foreign lenders nor are there restrictions on repayments being made to foreign lenders under a security document or a loan agreement. However, EU restrictive measures against Russia have caused standstills in the possibility of making repayments to Russian banks and financial institutions.

Under the Law of Property Code, loan agreements, the claim of which is secured by security over real estate (ie, mortgage), need to be either notarised or, in case of directly enforceable mortgages, concluded in form of a notarial deed. In this respect notarial fees are payable according to official notary tariffs. Furthermore, mortgages need to be registered in the land register, whereby a registration fee is payable. Enforcement of security over real estate is done by way of court proceedings or, in certain cases, with a notary’s assistance, in which court or notary fees are payable. In addition to the aforementioned fees, no taxes or stamp duties are payable on the granting and enforcement of security over real estate.

The applicability of legal requirements that must be complied with before an entity can give valid security over its real estate assets, such as “financial assistance” rules and “corporate benefit” rules, depends on the entity granting security.

As regards public limited companies (d.d.), financial assistance (ie, legal transactions by which a public limited company procures for an advance payment or loan or another legal transaction with a similar effect for the benefit of a future shareholder) is in general prohibited under the Companies Act. Transactions entered into in breach of these rules are null and void. It is also prohibited that a public limited company returns (or pays interest on) a contribution to a shareholder.

As regards limited liability companies (d.o.o.), such companies may generally provide financial assistance in relation to the acquisition of their share(s) or shares in any holding company of that company, provided that capital maintenance rules and solvency rules are considered. 

In respect of capital maintenance limitations, under the Companies Act, a limited liability company is prohibited from making payments to its shareholders or making a legal transaction with a similar legal effect (eg, guarantee with its assets for the loan of the shareholder or any other group company except its own subsidiaries) to the extent that this would prevent the preservation of its minimal lawfully allowed share capital, actually registered share capital and tied-up reserves.

In relation to provision of upstream security, certain risks may arise within the borrower’s group in relation to potential personal liability of management of the group companies. Namely, the Companies Act provides for relatively strict rules regarding the obligations of the management of group companies in case of so-called harmful instructions.

In the event of borrower default, the lender may achieve enforcement of its security over real estate against the defaulting borrower through court proceedings. Since loan agreements are usually concluded in the form of directly enforceable notarial deeds, the borrower in such case does not need to first initiate litigations proceedings, but rather can directly initiate enforcement proceedings. The law prescribes no additional steps that must be taken to give priority to the lender’s security interest over real estate over the interest of other creditors. In certain limited cases, real estate can also be sold in an out-of-court sale with a notary’s assistance. 

If only enforcement proceedings are necessary, official statistics show that the average time needed to successfully enforce and realise on property security is 2.7 months. Differently, if litigation proceedings also need to be initiated, the average time needed to successfully enforce and realise on property security significantly increases and is likely to exceed 12 months.

There are no ongoing restrictions on a lender’s ability to foreclose or realise on collateral in real estate lending that would be implemented by governmental entities in response to the pandemic. 

In principle, earlier rights defeat later rights. Nevertheless, existing secured debt can be subordinated both by agreement and under the law. By way of agreement, creditors can allow subordination of their existing secured debts to later debts of other creditors. A note of subordination in favour of another mortgagee can be registered in the land register. 

Moreover, under the Companies Act, a shareholder of a limited liability company who made a loan to the company at a time when the shareholder knew or should have known that the company was facing financial and/or economic difficulties may not enforce a claim for the repayment of the loan against the limited liability company in bankruptcy or compulsory settlement proceedings. A bankruptcy court will consider whether the shareholder, acting as a good manager, should have provided its own capital to the company instead of giving a loan. Under such circumstances, the loan is considered to be part of the company’s bankruptcy estate. Repayments of such loans made during the year prior to a company’s bankruptcy must also be returned to the bankruptcy estate. Similar rules apply to shareholder loans to public limited companies, where the shareholder holds more than 25% of the voting rights.

Under the Environmental Protection Act, lenders cannot be held liable for pollution of real estate by merely holding or enforcing security over such real estate. Theoretically, however, a lender could be held liable for any pollution of real estate caused by it.

Under the Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act, security interests created by a borrower in favour of a lender may be set aside or annulled, if they were established in the look-back period and if, at that time, the debtor was insolvent and further objective and subjective conditions were satisfied. The objective condition is satisfied if the debtor’s actions resulted either in the decrease in the net value of its assets, resulting in reduced payments to creditors other than the (benefited) person, or if the other (benefited) person acquired more favourable payment conditions for its claim against the debtor. The subjective condition is met if, at the time of the debtor’s actions, the other (benefited) person knew (or should have known) of the debtor’s insolvency.

Security interests created by a borrower in favour of a lender, which may be set aside or annulled are only those made in a look-back period starting from 12 months prior to the day of filing of the motion for bankruptcy and ending on the day on which the bankruptcy proceedings are initiated. The look-back period is extended to 36 months if the other (benefited) person received assets of the company without being obliged to provide consideration, or if it was only obliged to provide consideration of a small value.

In Slovenia, the transition from LIBOR is regulated by the Market in Financial Instruments Act, which implements Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.

Transition away from LIBOR had the biggest impact on loans in Swiss francs, which are common in Slovenia. In accordance with the Commission Implementing Regulation (EU) 2021/1847 of 14 October 2021 on the designation of a statutory replacement for certain settings of CHF LIBOR, CHF LIBOR was substituted by Swiss Average Rate Overnight (SARON) in all agreements connected to CHF LIBOR. The substitution of CHF LIBOR in loan agreements was made directly on the basis of the aforementioned Regulation and did not affect any other contractual and related rights and obligations of the parties to loan agreements.

In Slovenia, spatial planning and zoning is governed by the Spatial Management Act, which envisages a system and hierarchy of spatial planning acts. Spatial planning acts either take the form of spatial strategy acts or spatial implementation acts, and are adopted at a state, regional and municipality level. 

Accordingly, the state is responsible for the adoption of a spatial planning strategy for Slovenia and a thematic and regional actions programme, constituting strategy acts, as well as national spatial plans, regulations on the most appropriate variant and national spatial development plans, which serve as implementation acts. Likewise, the state and local municipalities adopt regional spatial strategies, which are strategy acts. Lastly, municipalities adopt municipal spatial strategies as strategy acts, as well as municipal spatial plans and municipal detailed spatial plans as implementation acts. 

On a general level, the design, appearance and method of construction of new buildings or refurbishment of existing buildings is regulated by the Building Act and the Spatial Management Act. On an individual level, the design, appearance and method of construction is controlled in the process of issuing of the building permit. In this process, the competent administrative unit or the Ministry of Natural Resources and Spatial Planning in case of large-scale construction projects considers, inter alia, if:

• the intended construction is in accordance with the implementing zoning regulations;
• the constructed or reconstructed building will meet the essential requirements; and
• the intended construction will not prejudice the rights of third parties and the public interest.

If the above conditions are fulfilled, the responsible authority will allow such construction.

Regulatory competences in spatial management are hierarchically divided between the state and municipalities. As regards the regulation of the development and designation of use of individual parcels of real estate, the competences generally lie with municipalities. Municipalities are, however, bound by hieratically higher spatial planning acts.

In order to obtain entitlements to develop a new project or to complete a major refurbishment, an investor has to obtain a building permit. The building permit is issued by the territorially competent administrative unit or – in certain cases – by the Ministry of Natural Resources and Spatial Planning. In the administrative procedure for the issuance of a building permit, third parties have the right to participate and may potentially object to or comment on the intended construction. Such third parties are, inter alia, the owner of the land plot subject to construction or the holder of another property right over such land plot, the owner of the neighbouring land, as well as other persons, if they demonstrate that their rights and legal interests are likely to be affected by the proposed construction.

A decision issued by an administrative unit in the issuance of a building permit may be appealed against. The rights to appeal is granted to the investor as well as third parties, which have the right to participate in the said procedure (see 4.4 Obtaining Entitlements to Develop a New Project). The right to appeal the decision issued by the Ministry of Natural Resources and Spatial Planning is only limited to an administrative dispute procedure. 

A public utility charge is payable in respect of any planned development. The amount of the charge depends on the scope of available public utility infrastructure, whereas generally, connection to the available public utility infrastructure is mandatory. 

Instead of paying part of the public utility charge, an investor can – to a limited extent – agree with a local municipality that the investor will, instead of the municipality, construct the public utility infrastructure for the land on which the investor intends to build. After the infrastructure is constructed, it is transferred to the ownership of the municipality free of charge. Such agreements are common practice.

Restrictions on development and designated use are enforced by the inspection services, which supervise the implementation of the regulations in the field of spatial planning and construction. Inspection services serve to prevent the illegal construction of buildings and their use without the required permits. 

Generally, all entities, including foreign entities, that have legal capacity, can hold real estate assets, although restrictions described in 2.11 Legal Restrictions on Foreign Investors need to be observed. In any case, the predominate type of entity used to acquire real estate is the limited liability company (d.o.o.) followed by the public limited company (d.d.).

Limited Liability Company

A limited liability company is a legal person whose shareholders may be one or more (but up to 50) domestic or foreign legal and natural persons. The shareholders are not responsible for the company’s liabilities. A limited liability company is formed by a memorandum of association, which may be in the form of a notarial deed or on a special physical or electronic form. The procedure for establishing a limited liability company depends on whether it is a one-person limited liability company or a multi-person limited liability company and whether the share capital is paid in cash or in kind.

Public Limited Company

A public limited company is a company whose share capital (capital stock) is divided into shares. The shareholders of a public liability company are not personally liable; rather, liability is held by the company itself. A public limited company may be set up by one or more domestic or foreign natural or legal persons that adopt statutes (memorandum of association), which must be drawn up in the form of a notarial act. The company is established when the founders take over all the shares. The founders may pay up the shares in cash or by means of contributions in kind. The main advantage of public limited companies is that they are able to be listed on stock exchanges.

A limited liability company is required to have capital that amounts to at least EUR7,500, whereas a public limited company is required to have minimum share capital in the amount of EUR25,000.

No specific governance requirements apply to investment in real estate as such, save that each company must be registered for any activity it pursues. The general requirement to act with the diligence of a prudent businessperson must be complied with.

Annual entity maintenance and accounting compliance costs depend heavily on the type of entity as well as the real estate investments themselves, and therefore cannot be estimated at a general level.

The most common type of agreement that allows a person, company or other organisation to occupy real estate for a limited period of time without buying it outright is a lease agreement; a similar effect may be achieved by personal easements (ie, usufruct, use and apartment easement) as well as the building right, which is a right to own a built structure above or beneath the real estate of another person, and in effect comes close to ownership.

Slovenian law differentiates between different types of leases depending on the subject of the lease. The Obligations Code prescribes general rules applicable to all lease agreements. In addition to and/or instead of the general rules, mandatory provisions are prescribed by the Housing Act for leases of residential buildings and the Agricultural Land Act for leases of state- or municipality-owned agricultural land. In the past, leases of business buildings and business premises were also regulated by the Business Buildings and Business Premises Act; however, this Act was repealed and continues to apply only to lease agreements concluded before 19 June 2021.

In principle, rents and lease terms are freely negotiable. However, the Housing Act applicable to leases of residential buildings, designates rent as usurious if it exceeds the average market rent in the municipality for the same or a similar category of housing by more than 50%. Furthermore, in accordance with the Agricultural Land Act, lease terms of state- or municipality-owned agricultural land cannot be less than ten years (or 15 or 25 years for specific types of agricultural land). The regulation of rents and lease terms was enacted as a result of the coronavirus pandemic, however, its validity has since expired.

Length

The length of lease term for business premises is typically agreed as a fixed period of between one to ten years (for offices) or between five and twenty (for facility, warehouses and retail). Extension options are also often agreed. In the past, fixed term leases were far more common in comparison to indefinite lease terms, because the latter had to be terminated through court proceedings in accordance with the Business Buildings and Business Premises Act. Although this Act was repealed and (new) indefinite period lease agreements for business premises are no longer required to be terminated through court proceedings, fixed term lease agreements are still more common.

Maintenance and Repair of Real Estate

In accordance with the Obligations Code, the landlord must maintain the condition of the subject of the lease during the entire lease term and, if necessary, repair it. The landlord is obliged to reimburse the tenant for maintenance costs incurred by the tenant. However, the costs of minor repairs caused by the normal use of the subject of the lease and the costs of its use are borne by the tenant. Although the parties are free to set different terms of lease on maintenance and repair, in most cases the parties follow the statutory regulation. Nevertheless, in triple net leases, which are common in commercial (specifically sale and lease back) transactions, the burden of maintenance and repair is shifted the to the tenant.

Frequency of Rent Payments

Rent is mainly paid on a monthly basis. Different frequencies of rent payments are uncommon.

Coronavirus Pandemic Issues

Newer post-pandemic commercial lease agreements commonly contain specific clauses relating to the pandemic. Lease agreements that contain force majeure clauses either explicitly include the pandemic as a force majeure event or expressly exclude it, with the latter being more common.

In the case of fixed-term leases for a shorter period of time, the rent payable will normally remain the same for the entire duration of the lease term, with the rent being increased, if so agreed between the parties, alongside the prolongation of the lease term. Conversely, fixed-term leases concluded for longer periods of time commonly include rent variation systems, such as rent indexation, graduated rent or rent linked to turnover. It is expected that in the new inflation-influenced reality, even the short- to mid-terms leases will contain indexation clauses.

On one hand, if the rent is to be changed or increased, the determination of new rent is usually regulated by the lease agreement itself. In the case of rent indexation, the rent will be adjusted according to the changes in the chosen index. For graduated rent, the rent will be raised gradually by a specified amount after a certain period of time. For rent linked to turnover, the rent will be adjusted according to the tenant’s turnover. On the other hand, if the determination of the new rent is not regulated, the new rent is usually negotiated in view of the average market rent applicable to the type of real estate.

Generally, VAT is not payable on rent. However, in accordance with the Value Added Tax Act, the parties to the lease agreement may under certain terms opt into the VAT system, thereby enabling the deduction of input VAT.

Although not mandatory under the law, the parties to the lease agreement commonly agree that the tenant will pay a security deposit to the landlord, which is usually determined in the amount of a few monthly rents. For commercial leases, security deposits are sometimes replaced with the procurement of a bank guarantee by the tenant to the landlord as security for fulfilment of the tenant’s obligations under the lease agreements. In certain cases, the landlord and the tenant will agree to split the fit-out costs (sometimes against a rent-free period, and sometimes not).

In accordance with the Obligations Code, the costs of maintenance and repair (also) of common areas are the burden of the landlord. However, commercial lease agreements commonly shift the costs of maintenance of common areas used by several tenants, such as parking lots and gardens, to the tenants, and divide the costs proportionally between them.

The utilities and telecommunications costs arising solely from the business operations of the tenant are typically borne by the tenant, even if invoiced to the landlord. The utilities and telecommunications costs related to the common services and infrastructure are typically allocated proportionally to each tenant.

The person responsible for paying the costs of insuring real estate that is subject of a lease can differ depending on the subject of the lease. For instance, for leases of residential buildings, it is most common that insurance is procured and paid for by the landlord. Similarly, for leases of commercial buildings, the landlord usually procures insurance for the subject of the lease, covering fire, storm, hail, water damage, etc. However, the costs are commonly shifted to the tenants as part of the operating costs. Also, the landlord’s insurance policies do not usually cover all risks, eg, tenant’s property or interruption of business, which are in turn insured by the tenants themselves. Nevertheless, in triple net leases, which are common in commercial sale and lease back transactions, all costs of insuring the real estate that is the subject of a lease are borne by the tenant.

Since most business insurance policies did not expressly cover the coronavirus pandemic, which resulted in the interruption of business, it has proven to be difficult for tenants to recover rent payments and other costs.

Generally, the parties to a lease agreement are free to agree on restrictions on the use of the subject of the lease. There are no specific regulations and/or laws regarding restrictions on how a tenant uses the real estate, whereas provisions of law operate with the term “ordinary use” in different contexts. For this reason, restrictions are commonly regulated contractually. Statutory provisions governing the prevention of restriction of competition must be complied with.

The Obligations Code prescribes that, if the tenant made any alterations to the subject of the lease, it is obliged to return the subject of the lease to the landlord after the lapse of the lease term in the same condition as it was before. The tenant may remove the improvements it has made to the subject of the lease, provided that it is possible to remove them without damage to the subject of the lease. Nevertheless, the landlord may retain the improvements if it compensates the tenant for their value. In lease agreements, this matter is typically regulated in detail.

As described in 6.2 Types of Commercial Leases, specific provisions prescribed by the Housing Act apply for leases of residential buildings and specific provisions prescribed by the Agricultural Land Act apply for leases of state- or municipality-owned agricultural land. Previously, leases of business buildings and business premises were also regulated by the Business Buildings and Business Premises Act. The intervening coronavirus legislation also made distinctions between asset classes and, for instance, regulated measures applicable solely to leases of business buildings and business premises.

Upon commencement of bankruptcy proceedings, the insolvent debtor acquires the right to terminate lease agreements concluded before the commencement of the insolvency proceedings by giving one month’s notice, notwithstanding the general rules laid down by law or contractually on the right to terminate the lease agreement. The exercise of the right of termination is without prejudice to the right of the other party to the lease agreement to claim from the insolvent debtor compensation for damage suffered as a result of the exercise of the right of termination.

It is common for the parties to the lease agreement to agree that the tenant will pay the landlord a security deposit, which serves as security to protect against failure of the tenant to meet its obligations. For commercial leases, security deposits are sometimes replaced with the procurement of a bank guarantee by the tenant to the landlord. Other forms of security are also possible, subject to agreement between the parties.

Per se, the tenant does not have a right to continue occupying the relevant real estate after the expiry or termination of a lease. If the tenant continues to use the real estate after the expiry of the lease term and the landlord does not object to such use, a new lease is deemed to have been concluded for an indefinite period. Accordingly, upon expiry of the lease agreement, the landlord needs to at least object to the continuous use of the real estate, should such use occur.

Moreover, if the landlord wants the real estate to be vacated against the will of the tenant, it must generally obtain a judgment ordering the tenant to vacate the real estate and enforce the judgment in enforcement proceedings. The need to obtain such judgement may be avoided if the lease agreement is concluded in form of a directly enforceable notarial deed, in which case the landlord may turn directly to enforcement proceedings.

Unless otherwise agreed, the tenant may generally sublease the subject of the lease or otherwise grant its use to another person, however, only if such transfer of leasehold interest does not cause damage to the landlord. In practice, lease agreements commonly prohibit subleases or demand the landlord’s consent for the sublease.

Lease agreements concluded for an indefinite period of time can be terminated by way of notice, which either party may give to another, observing the notice period. However, since most lease agreement are concluded for a fixed term, the ordinary termination rights are excluded. A lease agreement concluded for a fixed term is terminated upon expiry of the lease term.

The Obligations Code also grants both the landlord and the tenant extraordinary termination/withdrawal rights. The landlord may, under the law, terminate the lease agreement:

• if the tenant, even after being reminded by the landlord, uses the subject of the lease in breach of the agreement or its purpose, or neglects to maintain it, and there exists a risk of significant damage to the landlord;
• if the tenant fails to pay the rent within 15 days of the landlord’s request to do so; and
• if the tenant subleases the subject of the lease without the landlord’s permission when required to do so.

Conversely, the tenant may withdraw from the lease agreement:

• if the necessary repairs of the subject of the lease impede its use to a significant extent and for a prolonged period of time;
• if the subject of the lease has a defect that cannot be remedied at the time of handover; and
• if the subject of the lease is partially destroyed or damaged.

In addition, the tenant may terminate the lease agreement if the disposal of the subject of the lease results in the transfer of the lease to the new owner of the real estate. A range of additional termination options is usually contractually granted to both parties of the lease agreement.

A lease is not required to comply with registration requirements or particular execution formalities. Nevertheless, lease agreements may, but do not need to be entered in the land register, which bears the effect of publicity. For the entry in the land register to be possible, the owner of the real estate needs to grant the tenant a land register permit that requires notarisation of the landlord’s signature, for which notarial fees are payable, and a registration fee needs to be paid.

The tenant may be forced to leave the leased premises in the event of default even prior to the date originally agreed if the landlord terminates the lease agreement. 

If the tenant fails to comply with its obligation to vacate the leased premises, the landlord must generally obtain a judgment ordering the tenant to vacate the real estate and enforce the judgment in enforcement proceedings. The need to obtain such judgement may be avoided if the lease agreement is concluded in the form of a directly enforceable notarial deed, in which case the landlord may directly initiate the eviction in enforcement proceedings. 

If only enforcement proceedings are necessary, official data states that average time needed to successfully achieve enforcement is 2.7 months. However, if litigation proceeds are also necessary, the average time needed for successful enforcement significantly increases and may even exceed 12 months. No eviction moratoriums or related restrictions were enacted as a result of the coronavirus pandemic.

As described in 2.9 Condemnation, Expropriation or Compulsory Purchase, owners of real estate may be expropriated under certain conditions. The decision ordering expropriation may also order that lease agreements connected with the real estate being expropriated are to be terminated. In such case, the tenant needs to be either awarded damages or compensated in kind depending on the subject of the lease.

In construction agreements, the most common price clauses are either (i) unit prices, where the price of works is determined by the unit of measurement of the agreed works applied to the actually implemented quantities of work, or (ii) fixed (lump-sum) prices, where the price is set as a total price for the entire scope of works. Construction agreements also commonly include a “turnkey” clause, in accordance with which the contractor independently undertakes to jointly execute all the works necessary for the construction and use of the entire building. At the same time, the agreed price also includes the value of any unforeseen and excess works but excludes the price impact of any missing works. Fixed price clauses are also common as they allow for a shift of the price-change risk (up to 10% increase in price of elements) to the contractor.

Responsibility for the design and construction of a project is split between the contractor and the project designer. The contractor and the project designer may be responsible for defects in the structure, which occur due to the building not being constructed in accordance with the design or the professional code of conduct, as well as the defects in the solidity of the structure, which is stricter, as the liability for defects in the solidity of the structure extends over a period of ten years after handover and acceptance. 

If there is a defect in the project design, the project designer is liable. If the defect is due to the special nature of the site, the designer is liable, as it must take the relevant site conditions into account. However, the contractor may also be liable if it should have detected the defect due to the special nature of the site if it acted diligently. In the case of a defect in the material, the designer is liable if it has included inappropriate materials into the building design. The contractor may also be liable for a defect in the material if the correct material was planned but the contractor used the wrong material. For defects in the manner of execution, liability lies with the contractor.

Construction risk is managed, to a certain extent, through the appointment of a construction supervisor. The construction supervisor is responsible for the supervision of construction works so as to ensure that the statutory requirements are complied with, that preventive action is taken and that defects are prevented in a timely manner.

The contractor is also obliged to take out insurance against liability for damage in connection with its activity. The liability insurance must cover liability for damage caused to the investor or to a third party in connection with the performance of the contractor’s activities and must cover damage caused by negligence, fault or default of the contractor and its employees, up to an annual sum insured of EUR50,000. The investors commonly request that their contractors conclude insurance policies with higher insurance sums. 

In addition to the foregoing, construction agreements commonly require that the contractor delivers bank guarantees, either for good performance, return of the advance payment or remediation of defects during the warranty period.

Construction contracts commonly foresee contractual penalties for delays in the execution of works. The contractual penalties are typically foreseen not only in case of delays in the completion time, but also penalise delays to (certain) interim milestones. 

It is common for investors to seek additional forms of security to guarantee the contractor's performance on a project. The most common forms of security are (different) bank guarantees, bills of exchange, enforcement notes, parent company guarantees, retained amounts, etc.

Although possible, it is very uncommon for contractors and/or designers to encumber real estate in the event of non-payment by the investor. Such encumbrance would be possible only upon explicit agreement between the contractor/designer and the investor as the owner of real estate and would need to be perfected in the land register. In such case, removal from the land register would be possible based on a deletion permit issued by the contractor/designer.

Where a building permit had to be obtained before the commencement of the construction project, it is also necessary to obtain a use permit upon its completion. A use permit is a decision issued by the administrative unit authorising the use of the building. In certain more complicated constructions, a successful technical inspection is also one of the conditions for obtaining the use permit. In instances of certain specific commercial uses, additional permits may also be required. 

VAT is payable in certain (but not all) sale and purchases of real estate. The sale and purchase of real estate is taxed with VAT only if the seller is a taxable person identified for VAT purposes. Moreover, VAT may be applied depending on the type of real estate being transferred and whether the parties opt into VAT treatment of the transaction.

As to types of real estate being transferred, the supply of land is exempt from VAT, however, the supply of (empty) building land is subject to VAT. Furthermore, the supply of buildings or parts of buildings and land on which the buildings are located is also exempt from VAT, unless the supply is made before the buildings or parts of the buildings are occupied or used for the first time, or if the supply is made before two years have elapsed from the beginning of the first of use or first occupancy. Nevertheless, if the buyer is also a taxable person identified for VAT purposes with the right to deduct input VAT, the parties may opt into VAT treatment of the transaction, even though the supply would otherwise be exempt from VAT.

VAT must be paid by the buyer. However, the buyer may deduct the amount from input VAT and demand reimbursement from the state, making the transaction tax neutral. Conversely, if the parties opt into VAT treatment of the transaction, the reverse charge system applies.

The general VAT rate is 22%. A lower VAT rate of 9.5% is applied to supplies of apartments, housing and other buildings intended for permanent residence, and parts of buildings, if they are part of social policy.

If VAT is not payable on the sale and purchase of real estate, real estate transactions are subject to real estate transaction tax (see 2.10 Taxes Applicable to a Transaction).

There are no methods which could be used to mitigate tax liability on acquisitions of large real estate portfolios.

There is no annual tax specific to holding of business premises. However, payment of an (annual) compensation for the use of building land is required. This compensation is generally payable in respect of the following areas:

• towns and settlements of urban character;
• areas designated for residential and other complex construction; 
• areas for which a spatial implementation plan has been adopted; and
• other areas equipped with water and electricity utility networks.

The exact areas for which the compensation should be paid, the criteria for determining the amount of compensation and the applicable exemption are determined at the municipality level. The person liable for payment of this compensation is generally the direct user of the land or building or part of the building.

Natural persons are obliged to pay tax on rental income, which is payable by the landlord. The rate is 25% from the income from renting out real estate, reduced by standard costs of 10% or actual costs. If a natural person rents out real estate as a business activity, these incomes can be considered as income from the activity, which go into the tax base for the annual assessment of income tax. 

Natural persons also pay tax on capital gains in connection with the disposal of real estate. The law provides for several exemptions, the most important being disposal after 15 years of ownership. Even otherwise, the tax rate, which first amounts to 25% of the difference between the value of the capital at the time of disposal and the value of the capital at the time of acquisition, decreases over the years of ownership, ie, it amounts to 20% after five years of ownership and 15% after ten years of ownership.

Meanwhile, legal entities pay corporate income tax (CIT), which amounts to 19% of their profits.

A 15% CIT withholding is provided for rent income if paid to a non-resident stemming from real estate located in Slovenia, unless the lease is provided by the business unit of the non-resident in Slovenia, in which case it is paid to this business unit.

Per see, there are no tax benefits from owning real estate. Still, depreciation of real estate is taken into account in the assessment of tax (see 8.4 Income Tax Withholding for Foreign Investors for decrease of the rate of the tax on capital gains as well as consideration of costs in the tax base for tax on rental income).