Real Estate 2020

Last Updated April 14, 2020


Law and Practice


NKO Partners is a leading law firm that provides the full scope of commercial law services, with offices located in Belgrade, Serbia, and Podgorica, Montenegro. The firm, now counting 20 professionals, was founded in 2008 by lawyers with extensive experience in commercial law in the region, and who have led the largest and most complex M&A and privatisation transactions since economic and political transition began in the former Yugoslavia. NKO Partners provides the full range of corporate and commercial legal services to its diverse portfolio of clients, which includes the largest international investors in the market, promising start-up companies, public and private sector clients, non-profit institutions and governments. In the real estate practice area, the firm has extensive experience representing international and local investors both on the buying and selling side, as well as developers, in all stages of real estate transactions while advising in connection to the structuring of transactions, project financing, negotiations, due diligence, zoning and construction as well as regulatory aspects in specific industries. Currently, NKO Partners is advising on major real estate deals in Serbia, including Belgrade Waterfront, the largest real estate development project in the Balkan region, covering 1.8 million square metres and comprising a complex of several luxury residential, commercial and hotel properties along the Belgrade riverside.

The main source of real estate law in Serbia is the Law on Property Relations, which provides for different categories of property rights. Still, the following laws govern specific aspects of real estate property rights and are worth mentioning: the Law on Public Property, the Law on Real Estate Transfer, the Law on Mortgage, the Planning and Construction Law, the Law on Agricultural Land and the Law on Forests.

In the last 12 months the Serbian real estate market continued to grow, characterised by increasing development activity within the industrial and logistic sector as well as in retail warehouse, shopping centre, residential and public investments. The positive trend in high-value real estate investments is mostly triggered by incentivised foreign direct investments.

Belgrade Waterfront is certainly the most significant current urban development project in Serbia and the Balkan region, covering 1.8 million square metres. The new city hub developed by Eagle Hills consists of the construction of a complex of several residential, commercial and hotel properties that will create an entirely new outlook of the Belgrade riverside area.

At the moment, disruptive technologies seem generally foreign to the local real estate market and it is not likely that the recent emergence of blockchain, decentralised finance, proptech and other disruptive technologies will have a significant impact in the local jurisdiction in the next 12 months.

Currently there are no proposals for reform of the legal framework in Serbia that would significantly impact investment ownership or development. In the last couple of years there were numerous and significant changes in the real estate legislation pertinent to land cadastre procedures, permitting, conversion of land use right to ownership and restitution that created many practical issues that still need to be resolved in order to ensure full and efficient implementation of said novelties. For instance, these changes introduced a “one-stop shop” and an integrated procedure for the issuing of all development-related permits aiming at creating conditions for an investment-friendly business environment.

Most recently, in February 2020, the Law on the Construction and Reconstruction of the Line Infrastructure Facilities of Special Importance was adopted. This lex specialis is foreseen to expedite infrastructure projects of national importance such as highways and subways. Furthermore, additional amendments to the many times revised Planning and Construction Law and the Law on Conversion of Land Use Right to Ownership were adopted in February 2020 but these do not introduce substantial reform novelties.

Real estate property rights that can be acquired are ownership title, long-term land lease (up to 99 years), easement and mortgage. In addition, there is a land use right over state-owned construction land that is in the process of conversion into ownership after a series of changes of relevant legislation. The use right represents a left-over property right from the restrictive regime applicable to construction land in the past when private entities were denied ownership title. Land use right entitled the holder to use and construct, while it was not transferrable as such, but only along with transfer of ownership over structures located therein. Depending on circumstances pertinent to the holder of the title, conversion of land use right into the ownership can be performed free of charge or with compensation.

Transfer of title over real estate is generally regulated by the Law on Contracts and the Law on Transfer of Title over Land. Other relevant laws regulating specific aspects of transfer of title are the Law on State Survey and Land Registry, the Public Property Law, the Law on Agricultural Land and the Planning and Construction Law.

Save for categorisation between construction and agricultural land, Serbian legislation does not provide for another distinction by land type, therefore the same general rules apply to transfers over residential, industrial, offices, retail or other property. It is worth mentioning that in the case of transfer of agricultural land, there is a statutory pre-emptive purchase right of neighbouring parcels’ owners. In such a case, the seller of agricultural land is obliged to make an offer to the neighbouring parcels’ owner that is identical to the offer made to a potential buyer.

In Serbia, there is a constitutive registration system, meaning that the modus acquirendi of real estate rights is registration of property rights with the Cadastral Land Registry, the unification of which has been recently completed and which exists as the sole land registry. Registration of title may be done on the grounds of notarised sale and purchase agreement or final court or administrative decision. It is mandatory for the sale and purchase agreement to contain complete and accurate identification of acquired real estate property as well as the seller’s consent for registration of acquired title in the name of the buyer (clausula intabulandi). In practice, prior to contract notarisation, the notary public will verify whether the agreement represents valid legal ground for the title transfer and registration. Subsequent to notarisation, it is the task of a public notary to forward the agreement to the Cadastral Land Registry for recording the title transfer. Title insurance is not common in Serbia.

It is common practice for buyers to perform legal due diligence prior to acquiring real estate property and thus timely detect any potential issue or risks related to the legal regime of targeted property. Review of publicly available data held by the Cadastral Land Registry, which is also accessible online, is the first step in the due diligence process. The Cadastral Land Registry provides complete data on the legal status of all registered real estate as well as technical information. In the case of acquisition of large properties, a more detailed due diligence is performed and it is not uncommon to additionally collect information from the registry on historical data and previous transfer of title as well as request official information from relevant authorities in connection to potential restitution claims from previous owners. In the case of a development project, the due diligence process includes obtainment of the zoning document issued by municipal authorities that outlines permitted use and parameters for development, and may point out expropriation risk should, for example, the property or its part be designated for public infrastructure. Zoning plans of various levels are also accessible online.

Representations and warranties provided under the sale and purchase contract may differ a lot from one transaction to another and supplement those provided under statute, which mostly relate to targeted property features allowing regular or intended use. Sellers’ representations and warranties usually pertain to the title over targeted property, encumbrances, third-party rights, possession of the property, legal proceedings, authorisation of transaction, contamination, payment of taxes and other costs, etc. In the case of misrepresentation by the seller, the buyer has the following statutory remedy rights: (i) the right to claim repair or replacement, (ii) the right to request a price decrease and (iii) the right to unilateral contract termination. In addition, the buyer has the right to claim damages caused by a seller’s misrepresentations.

The most important areas of law when an investor is considering purchasing real estate are laws regulating property rights, construction, zoning and tax laws. If an investor intends to acquire state-owned construction land, regulations stipulating the process and terms of lease are of essential importance as these are not freely negotiable and the investor has limited influence on the content as well as the timing of steps prescribed for the entire process to be completed.

The existence of reciprocity is also relevant for a foreign investor without a local subsidiary when intending to acquire real estate for its business operation in Serbia. Official information confirming reciprocity is issued by the Ministry of Justice. This does not apply to agricultural land as this type of land cannot be acquired by a foreign entity.

It is noteworthy that other regulations that can be decisive when considering Serbia as an investment location include the Law on Direct Investments, double taxation treaties and bilateral investment treaties.

As a final point, the rights that are acquired in the moment of registration of the foreign investment cannot be revoked or diminished due to subsequent change in regulation. Similarly, property acquired as part of a foreign investment cannot be nationalised or expropriated unless otherwise required by public interest established in accordance with the law and subject to compensation adequate to the market value of the property.

The legal responsibility for soil pollution or environmental contamination in Serbia is based on the polluter pays principle, thus the buyer cannot be held responsible for pollution or contamination that he did not cause. Environmental representations and warranties by the seller are now frequently integrated in large real estate transactions, while misrepresentation entails a buyer's right to seek remedy, claim damages and, if contractually agreed, claim penalty for the breach of the contract.

A buyer may ascertain the permitted uses of land by obtaining a document called Information on location (zoning document) from the local authorities in charge of planning and construction. It is issued on the basis of a corresponding planning document and includes data on possibilities and limitations for the development of specified cadastral parcels.

It is possible for an investor to enter into a development agreement with the relevant public authorities in order to facilitate a project on undeveloped construction land and finance provision of infrastructure that is lacking; eg, access road, water supply or electricity connection. In such cases, the land development contribution that is obligatory and payable by the investor for public infrastructure would be decreased by the value of the investor’s funds allocated for equipping the land. It is common in practice for investors to enter contracts with public authorities and finance zoning plans necessary for the development of locations targeted for their investment, thus securing timely realisation of projects.

Real estate property, land and buildings may be subject to expropriation only in the case when public interest for expropriation is determined and against a compensation that cannot be lower than the market value and that is, in principle, paid in cash. Public interest is determined by the law or the government’s decision in cases of construction of facilities intended for public infrastructure, education or public health; for the needs of exploitation of minerals or protection of the environment; or in cases of natural disasters, etc. Recently, in February 2020, a special law for line infrastructure facilities was enacted, accelerating construction and reconstruction for nationwide important infrastructure projects, including a specially designed expropriation process with shorter deadlines.

Expropriation may lead to a change of ownership over expropriated property to the benefit of an expropriation beneficiary or, in the case of partial expropriation, it may constitute easement or lease for a maximum three-year period. Upon expiry of a lease or easement, full ownership is returned to the owner.

Upon determination of the public interest, a decision on expropriation is enacted by local authorities in a process initiated by the beneficiary and subject to securing funds for expropriation compensation. The final expropriation decision represents legal grounds for recording changes in the relevant Cadastral Land Registry. The process is followed by the conclusion of an agreement determining the amount of expropriation compensation and the payment schedule, which is directly enforceable and does not require initiation of a lawsuit.

The purchase and sale of real estate as an asset or through a share deal are subject to different tax regimes. A transfer of real estate through assets deal is taxed with 2.5% property transfer tax or VAT in certain cases. On the other hand, share deals are not subject to transfer tax.

VAT applies to the first transfer of ownership and a general 20% rate applies except for the transfer of residential buildings, when a 10% rate applies. VAT may also apply to subsequent transfers when (i) the buyer and the seller are both registered for VAT at the moment of ownership transfer, (ii) the sale and purchase agreement provides that VAT will be applied to the transfer of ownership over buildings, and (iii) the buyer is entitled to fully deduct calculated VAT.

The seller of shares or real estate property is obliged to pay capital gains tax on the difference between the selling and purchase price. Capital gains are subject to 15% tax for residents and 20% for non-residents unless the rate is reduced under an applicable tax treaty.

Contracts for both transactions must be certified by a notary public and the amount of the notarisation fees is calculated by reference to the transaction value, usually borne by the buyer. Although the seller is designated as a statutory taxpayer, the sale transfer tax is customarily borne by the buyer.

Save for agricultural land that cannot be owned by foreign legal entities, a foreign investor can purchase real estate in Serbia subject to cumulatively fulfilling the following conditions: (i) reciprocity existence – meaning that a Serbian entity may acquire land and buildings in the country in which such foreign entity is established, and (ii) the real estate is used for the business operations of the foreign entity. The Ministry of Justice may confirm the existence of reciprocity based on a request filed by a foreign investor. In practice, if a foreign investor has some form of legal presence in Serbia (eg, limited liability company, representative unit), it is considered that real estate is used for business purposes.

In practice, a restriction imposed for the acquisition of agricultural land by foreign legal entities may be resolved by incorporating a local subsidiary that will acquire the land.

Acquisitions of commercial real estate are commonly financed by bank loans as a traditional source of finance, whereas borrowers need to fulfil strict criteria set by lending policies, such as pre-signed lease agreements for commercial properties. Alternatively, financing may be done through equity. Both financing options are equally used for the financing of acquisitions of large real estate portfolios. Moreover, financing through syndicated loans is accessible for massive investment projects when large financial packages are required. For instance, European Bank for Reconstruction and Development (EBRD)-financed projects are quite common in practice, where a portion of the loan is financed by EBRD while the remainder is syndicated to commercial banks.

Commercial real estate investors borrowing funds to acquire or develop real estate are typically required to provide a catalogue of securities to the financing party and these are commonly listed in the financial agreements, thus representing precondition for disbursement of funds. Security instruments include primarily mortgages, bank guarantees, pledges over movable property, shares, receivables and promissory notes. It is noteworthy to state that a mortgage may be constituted over land, buildings as well as structures that are under construction based on a valid building permit.

There are no restrictions on granting security over real estate to foreign lenders. The Mortgage Law does not provide for any qualification criteria pertinent to a mortgage creditors’ origin. Repayments by a local investor to a foreign lender are made in line with the underlying loan or security contract and are permissible if made in compliance with foreign exchange rules and subject to registration of a cross-border transaction with the National Bank of Serbia and a general restriction providing that such loans cannot be repaid prior to the expiry of 12 months as of disbursement thereof.

The granting of securities is subject to costs associated with the notarisation of mortgage and pledge agreements by a notary public and administrative fees imposed for registration with the Cadastral Land Registry. Enforcement of security through court proceedings entails court administrative charges, while a specific type of mortgage registered with the Cadastral Land Registry may be enforced through extrajudicial process.

In general, the applicable tariff depends on the value of the transaction and the value range is not material. For instance, the registration of a mortgage securing a claim exceeding EUR500,000 is subject to a fee of approximately EUR1,400 payable to the Cadastral Land Registry and this is the maximum fee charged for mortgage recordation. A notary public tariff prescribes the costs and compensation, which vary depending on the type and value of the transaction, while capping the maximum amount of the fee charged by notaries public at approximately net EUR5,100. Nevertheless, the cost span for extrajudicial mortgage enforcement is difficult to estimate given that it varies on a number of elements and market conditions.

In the regular course of business, there are no specific legal requirements that must be complied with before an entity can give valid security over its real estate assets. In other transactions, statutory restrictions provide for a qualified majority in the approval process when encumbering assets worth 30% or more of the total asset book value expressed in the latest annual statement. Additional requirements may be imposed based on internal guidelines.

It should also be pointed out that limited liability companies and joint stock companies cannot provide, directly or indirectly, any financial assistance to their shareholders, employees or third parties for acquiring company shares, including granting securities over real estate.

If a borrower is in default, the lender may initiate enforcement either before the court or in an extrajudicial process. In both cases it is necessary for the mortgage to be duly registered with the Cadastral Land Registry as directly enforceable.

There are no prescribed formalities before a lender initiates a court enforcement procedure, although sending a warning letter is quite common. Once the enforcement procedure is started, the sale of encumbered property is done through auction and is organised and co-ordinated by a designated enforcement officer.

If the lender opts for extrajudicial process, there are a few actions to be completed prior to realising the sale, which primarily relate to sending warning notifications and registration of the sale (ie, initiation of the enforcement) with the Cadastral Land Registry. An extrajudicial sale is not possible upon the expiry of 18 months as of registration and then the borrower may only proceed with the court enforcement.

In practice, banks have tested both options and currently tend to opt for a judicial process delegated to enforcement officers. Regardless of the type of enforcement, the borrower who initiated the sale of mortgage property does not have priority over creditors who have been registered earlier.

There is one specific case when it is possible for existing secured debt to become subordinated to the newly created, contrary to the generally applicable priority of debts earlier secured by a mortgage. A mortgage that is still registered with the Cadastral Land Registry and that relates to a secured debt that has been paid and thus ceased to exist may be transferred to a new creditor or as security for another claim of the earlier creditor, up to the amount of a registered mortgage. This transfer is possible within three years from the date the initially secured debt ceased to exist and may be initiated by the property owner. Nevertheless, it is also possible for creditors to deprive the property owner of this possibility and register adequate restriction in the Cadastral Land Registry.

In line with the applicable legislation, the lender holding or enforcing security over real estate cannot be held liable if he did not cause any pollution of the real estate.

If the borrower becomes insolvent, the registered mortgage created by a borrower in favour of a lender continues to exist. All claims become due and payable as of the opening of bankruptcy proceedings. The lender may recover secured debt only within bankruptcy proceedings with priority treatment but cannot commence separate enforcement proceedings over assets of the insolvent borrower. If debt is secured 60 days prior to the opening of bankruptcy, the lender loses the status of secured creditor and the mortgage is deleted from the registry based on the actions of the bankruptcy administrator. In such a case, the general rules pertaining to creditors in bankruptcy proceedings apply.

The forthcoming expiry of the London Interbank Offered Rate (LIBOR) index is expected to have a negligible effect on the Serbian market, thus no effect on lending activity is foreseen.

The rules applying to strategic planning and zoning are set by the law and comprise the classification of different types of spatial planning and zoning documents as well as a split in responsibilities between authorities of a different hierarchical level. For instance, the Spatial plan of the Republic of Serbia is made upon an initiative of the government for the territory of the Republic of Serbia and represents a basic planning document, while all other planning documents, on subordinated regional and city level, must comply with it. The process of initiating, preparing and enacting is strictly regulated by the law, while a public review and presentation of plans is prescribed. Moreover, all enacted plans are publicly available in the Central Registry for Planning Documentation, which is freely accessible online.

Legislative and governmental controls that typically apply to the design, appearance and method of construction are provided under the Planning and Construction Law, which further stipulates the legal regime of construction projects and the necessity to obtain a construction licence for execution of work. Furthermore, the law sets strict rules as to the eligibility and licensing of designers and contractors that are involved in providing technical documentation and execution of works, which are further detailed in the by-laws enacted by relevant Ministries.

Construction inspectors are vested with the authority to ban and even order a demolition of structures that are erected in breach of regulations and technical documentation. Finally, upon completion of all the works, newly built structures are inspected by licensed companies that verify whether all technical norms and standards are satisfied for the start of use. This process is mandatory for obtaining a occupancy permit.

The development of individual parcels is approved by the Ministry of Construction, Transport and Infrastructure for facilities like highways, railways, stadiums, nuclear facilities, oil and gas processing facilities, and power plants. Other authorities responsible for approving construction and issuing of a construction permit are autonomous province and municipal authorities.

An investor obtains an entitlement to develop a new project based on a construction permit. In order to obtain a construction permit, the investor must hold appropriate legal title over land intended for further development and a relevant spatial plan must provide or allow the construction of planned structures. A construction permit issuing authority examines whether the stated criteria are satisfied in the approval process, which is designed as an integrated procedure encompassing all the steps necessary from starting to finalising a construction project and granting the occupancy permit. Moreover, permits are publicly available and published online. Third parties with legitimate interest may express their objections either by using the available legal remedies against the relevant decisions of authorities or by addressing the relevant inspections; eg, report the building of illegal structures or a lack of safety measures at the construction site.

The right to appeal against an authority’s decision pertinent to a construction process exists, save in cases where the decision is enacted by the relevant ministry or autonomous province, when it may be contested in an administrative dispute initiated before the administrative court. Each decision enacted by the public authorities includes advice on the legal remedy, including the deadline for submission thereof.

In order to facilitate a development project, an investor may initiate and conclude an agreement with the local authorities in order to finance the production of certain types of spatial plans or the construction of missing public infrastructure.

Restrictions on development and designated use are enforced by construction inspectors, who are authorised to ban any further construction process as well as to order the demolition of structures or impose other types of measures.

Investors may in principle use all of the existing types of entities in the Serbian legal system to hold real estate assets: limited liability company, joint stock company, general partnership and limited partnership. However, the limited liability company represents the preferred legal form and is most commonly used by investors. A limited liability company has a simple corporate governance structure, with only the owner and single director as corporate bodies, but can also accommodate more complex enterprises depending on the specific requirements.

A memorandum of association is a constitutive document for all types of entities, including a limited liability company, and it is subject to notarisation. All entities are subject to mandatory registration with the Companies’ Registry held with the Agency for Business Registries, which takes up to five working days as of the submission of all the relevant documents. The registered name of any company must contain an indication of the legal form: d.o.o. or doo for a limited liability company, a.d. or ad for a joint stock company, o.d. or od for a general partnership, and k.d. or kd for a limited partnership.

A limited liability company may be incorporated by a sole shareholder and there are no limitations as to the maximum number of shareholders. Joint stock companies may be incorporated by one or more legal entities and/or individuals as shareholders and the basic capital is divided into shares. In addition to the memorandum of association, joint stock companies are required to have articles of association. There is a distinction between public and private joint stock companies. The transfer of shares in private joint stock companies is done through a notarised contract, while the Law on Capital Markets applies to the transfer of shares in public joint stock companies.

In the case of partnerships, there is no responsibility limitation for partners and no minimum share capital prescribed. General partnerships are founded by a minimum of two individuals, while limited partnerships have at least one fully liable general partner (komplementar) and at least one limited partner (komanditor) with limited liability.

In order for an entity to be fully operative, regardless of the legal form, a permanent bank account with a local bank needs to be opened.

The minimum share capital for a limited liability company is less than EUR1 (RSD100) and the minimum share capital for joint stock companies amounts to approximately EUR25,500 (RSD3,000,000), while there are no minimum capital requirements set for general and limited partnerships. With respect to limited liability companies, share capital may be contributed in cash or in kind and it does not have to be paid upfront but within five years as of the date of the memorandum of association.

There are no special governance requirements that apply to any entity used for real estate investments.

There is no unique nor fixed cost prescribed for annual entity maintenance and accounting compliance, regardless of entity type or business activity. Still, if there is no business activity nor staff employed, the costs are similar for all entities and relate to complying with minimum accounting requirements and symbolic rental costs, which in aggregate do not exceed EUR5,000 per year.

A lease agreement is a commonly used legal arrangement for a person or a legal entity to occupy and use real estate for a limited period without buying it. The general provisions of the Law on Contracts apply to commercial leases as there are no specific lease-related regulations enacted so far.

There is no differentiation of leases based on the purpose of use of real estate, such as a commercial lease or residential lease. Permitted use is commonly defined in the lease agreement itself. Given the fast-growing office and retail market in Serbia, there is a need to regulate common terms for commercial leases and supplementing the existing general lease rules set by the Law on Contracts, which has been the case in nearby jurisdictions.

Rents and other lease terms are freely negotiable and reflected in the lease agreement. Application of the general rules set by the Law on Contracts exists in the case when the lease agreement is silent. In the event that the premises are leased by the state or public authorities through auctions, the starting rent is determined by the tax authorities. Similarly, the tax authorities determine the rent in the event of a direct agreement.

The typical elements of a lease – including the lease term, rent, service charges, frequency of rent payments, and right to sublease – are all freely negotiable. Lease agreements may be concluded for a definite or indefinite period of time. A fixed lease is terminated upon expiry of the lease term or in the event of default by one of the parties and if default cannot be remedied. Leases entered for an undefined period of time may be terminated unilaterally in line with the lease terms and subject to prior termination notice. Termination notice is usually given 30 days in advance, although the law provides for an eight days prior notice if the lease agreement lacks this element. Commercial leases are commonly entered for a fixed time period, ranging from one to five or more years, and may provide for automatic prolongation for another rental period.

Rent is usually payable in advance on a monthly level, while different arrangements, such as advance quarterly rent payments, are not rare. Minor maintenance-related costs are payable by the tenant, versus investment maintenance and major repairs, which are borne by the landlord. There is a tendency to shift all maintenance-related costs to tenants.

In order to mitigate the risks associated with the fluctuation of foreign exchange rates, the rent in lease agreements is usually expressed in euros and rent payments in euros are allowed.

Variation of the rent greatly depends on the contractual agreement between the parties and the type of premises that is subject to rent. In general, the rent initially agreed in office lease agreement remains unchanged during the entire lease period and might be renegotiated in the case of prolongation of the lease term. Agreeing on turnover rents, progressive rents and indexation clauses is becoming quite common for shopping malls and retail leases. Although there are no general rules pertinent to variable rent, it will usually mirror standard terms and conditions set by shopping mall operators and uniformly apply to all tenants.

If the parties agree on the possibility to increase or change the rent, such an option should be explicitly provided under the lease agreement. Any subsequent change to the initially agreed rent must be made in written form by way of concluding an annex to the lease agreement. It is also common to predefine the criteria for determination of the new rent, thus avoiding subsequent changes to the lease agreement or renegotiations. If the tenant's possession is jeopardised, the tenant has the statutory right to claim a decrease of rent or to terminate the lease agreement.

Rent from lease agreements concluded between legal entities is subject to payment of VAT with the application of a general 20% tax rate. In the event that an individual is renting premises to a legal entity, the personal income tax regime applies, not VAT, and approximately 19% withholding tax is payable by the tenant.

There is no stamp or other cost payable with respect to the conclusion of a lease agreement. If the parties opt for a lease in the form of a notarial deed, the tenant would usually bear the costs of notarisation. Conversely, landlords typically require from the tenant a security deposit prior to entering the rented premises, which may also be replaced by adequate collaterals, such as a bank guarantee. The value of a security deposit usually corresponds to three months' rent, including other monthly costs such as service costs.

The costs of maintenance and repair of areas used by several tenants are usually split between the tenants and determined proportionally to the rented area. It is common practice to integrate these costs in the monthly services charges payable in addition to the rent.

Utilities and telecommunication costs are usually metered separately and each tenant bears costs corresponding to its premises. If this is not the case, such costs are calculated pro rata based on the size of the rented premises.

Real estate property insurance is generally contracted and covered by the owner and relates to property all risk insurance against fire or other perils, including smoke, lightning, explosion, earthquake, storm and water damage. It is also common for landlords to request tenants to provide property all risk insurance of leased premises, their own property and equipment, as well as to have in place civil liability insurance against legal liability and third-party claims with a defined insurance cover amount. The market trend present in shopping mall leases is to integrate property insurance in service costs charged by the landlord while also keeping the tenant’s obligation to provide a comprehensive list of adequate insurance policies related to its fit-out, property and liabilities.

There is a statutory obligation for the tenant to use the rented premises in line with the lease agreement or in line with the nature/type of property. Permitted use is determined more precisely in the lease agreement and the use contrary to the contracted purpose represents a breach of the tenant’s obligations and constitutes legal grounds for contract termination.

In general, the tenant may only use the rented premises for permitted use and in line with the lease agreement. The lease agreement usually restricts the right of the tenant to alter or improve the real estate by imposing prior consent of the landlord, but otherwise can be contracted as well. The tenant does have the right to make low-value repairs caused by regular usage, at its own cost.

There are no specific regulations that apply to leases of particular categories of real estate, such as residential, industrial and offices.

In the event of a tenant’s insolvency, the lease is not automatically terminated. Liquidity problems are often envisaged as a reason for termination by the lessor. However, once a bankruptcy proceeding is formally initiated, the lease agreement cannot be terminated due to failure to pay rent or aggravation of the tenant’s financial standing.

The bankruptcy administrator appointed to represent the tenant may terminate lease agreements irrespective of the rental term with a 30 days prior notice, in which case the lessor will have the right to claim damages due to lease termination in the amount of up to six months’ rent.

If the agreement is not terminated, the tenant's obligation to regularly pay the rent remains, whilst any claim arising from the lease is considered a liability of the bankruptcy estate.

It is common practice for tenants to provide a security deposit at the start of the lease agreement. In addition, fulfilment of the obligations under commercial lease agreements is usually secured by additional instruments such as bank guarantees and promissory notes.

In principle, a tenant does not have the right to occupy the relevant real estate after the expiry or termination of a lease. If the tenant continues to occupy the leased premises after the expiry of the lease agreement without the landlord objecting, the lease is considered automatically prolonged for an undefined period of time under the same terms and conditions. If the landlord objects, they may initiate a court proceeding requesting the court to establish that the lease agreement is terminated and to order the tenant to vacate the premises. The court proceeding could last for several years.

Repossession of premises by the landlord without a court decision and disconnecting the water or electricity supply is not allowed by law and may be considered a criminal offence in some circumstances. However, due to lengthy and inefficient court proceedings, this type of eviction measure is often stipulated in the lease agreements and implemented in practice. In some instances, this type of clause was even upheld by the court as legitimate despite the wording of the law.

Under the applicable regulations, the tenant is generally permitted to sublease unless the lease agreement provides differently, and it does not cause any damage to the landlord. However, in practice, the right to sublease or assign rights under the lease agreement is explicitly excluded or conditioned with the prior written consent of the landlord.

The main reason for termination of a fixed-term lease agreement is expiry of the lease period. Other reasons for termination by either party typically include breach of contractual obligations related to permitted use, rent payment, other payments, unauthorised sublease, provision of security, jeopardised possession, material breach of maintenance and repair, bankruptcy and/or liquidation.

There are no statutory formal requirements imposed for the validity of lease agreements and leases are not subject to mandatory registration. It is possible to register the existence of a lease agreement in the Cadastral Land Registry if the leased premises are registered as a separate and independent property unit and the lease agreement is notarised by a notary public. However, it is standard practice in Serbia that office buildings and shopping malls comprising a large number of units and covering more extensive surfaces are registered as single objects without registering individual property units within a building.

The main practical implication of registering a lease is that the sale of leased property through enforcement proceedings cannot affect the lease.

Registration entails the costs of lease agreement notarisation and a registration fee charged by the Cadastral Land Registry that are not material and do not exceed EUR100 in total.

Similarly to the situation when a tenant continues to occupy the leased premises after expiry of the lease agreement, the landlord may initiate a lawsuit requesting the court to establish the termination of the lease agreement due to default by the tenant and to order the tenant to vacate the premises. It is not possible to assess the duration of a lawsuit, and whether the tenant would finally abide with the court decision or an enforcement procedure will also be needed. Due to the inefficiency of court proceedings, specific eviction measures such as repossession of lease premises or disconnection of the water or electricity supply are contracted in lease agreements and sometimes implemented in practice. In some instances, this type of clause was upheld by the court as legitimate despite the fact that the landlord is generally not allowed to evict the tenant.

In the regular course of business, termination of a lease agreement by a third party is not possible. This may occur only in exceptional cases such as expropriation and bankruptcy proceedings.

In Serbia, both fixed lump sum price and price per unit are used to price construction projects and both are recognised as such by the Law on Contracts. Moreover, construction agreements for large real estate development projects are often concluded with a special “turnkey” clause. Under turnkey projects, the contractor undertakes to complete all construction works required from the start until the building is fit for use, for a fixed price, while the contractor cannot subsequently claim adjustment of price due to unforeseen difficulties or additional works.

Project design may be assigned contractually by the investor only to licensed entities or entrepreneurs that are duly registered for such activities and possess relevant work references. In addition to requirements pertaining to the eligibility of designers, the law provides that technical documentation drafted by a licensed architect is subject to technical control conducted by a licensed company that verifies whether the technical documentation is made in compliance with relevant regulations and standards.

Similarly, construction works may be assigned to registered contractors having licensed staff and relevant work references for assigned construction works. The same requirement is imposed for subcontractors.

In addition to statutory prerequisites that are imposed on designers and contractors for performing tasks on a construction project, additional conditions mitigating construction risk on a project may be contractually agreed through contractual penalties, provision of adequate insurance, collaterals, etc. It is common practice to limit the maximum amount of contractual penalties; however, the investor will always retain the right to claim full damages through court proceedings and any waiver of such a right will have no legal effect.

Schedule-related risk in construction projects is commonly managed through contractual penalties applicable in the event that a contractor misses deadlines agreed for the completion of each project milestone. The amount of the penalty may be determined as a lump sum or fixed amount, as a percentage of the value of the works or for each day of delay. The parties may freely agree on the amount and structure of the penalty, including limiting the total amount of the penalty. The payment of penalties is often secured by bank guarantees and promissory notes. The investor also has a statutory right to claim damages in excess of the contractual penalty.

It is common practice for investors to seek a wide range of security to guarantee a contractor’s performance on a project, which is commonly integrated in the construction service agreement. Securities range from bank guarantees, parent guarantees, escrow accounts and retention of payment to standard contractual penalties and provision of promissory notes.

It is rather uncommon for contractors or designers to lien or otherwise encumber a property in the event of non-payment. If so, the contracting parties would have to explicitly agree on the type of security and fulfil registration and any other formal requirements otherwise prescribed for establishment and registration thereof, such as notarisation of a mortgage agreement and registration of mortgage. Removal of a lien or an encumbrance is done based on a document confirming that the owner has fulfilled its payment obligations and presentation of such evidence with the relevant public registry for deletion. Alternatively, the owner may address the court in order to achieve deletion should the contractor object to the removal of the lien.

When the claims of service providers are not secured and the investor is in default, contractors sometimes take possession over the construction site to exert pressure on the non-paying investor. Although the described actions are illegal, these situations do happen in practice and then the investor must initiate court proceedings in order to recover its possession.

In order to start using a newly constructed building, it is necessary to obtain an occupancy permit. Upon completion of all the works, a technical inspection of the new building is performed, with the task to assess whether construction works are done in compliance with the construction permit and technical regulations, also known as the technical acceptance of the building. Technical acceptance is performed by a licensed company engaged by the investor, while the occupancy permit is only issued upon positive findings. However, due to an often slow administration process, the law provides for an exception allowing that a building may be used based on the positive findings of a technical inspection in cases when the occupancy permit was not issued within five days as of the investor’s request, nor was the request rejected by the competent authority.

Sale or purchase of real estate is generally subject to 2.5% property transfer tax based on the market value of the real estate at the time of acquisition and is commonly borne by the buyer.

VAT applies always in all cases of first transfer of ownership over buildings. The general rate is 20% and it applies except in the case of the first transfer of residential buildings, when 10% VAT is charged.

With respect to subsequent transfer of ownership title, VAT also applies in the case of “option to tax” when the following conditions are cumulatively met: (i) the buyer and the seller are both registered for VAT at the moment of ownership transfer, (ii) the sale and purchase agreement provides that VAT will be applied to the transfer of ownership over buildings, and (iii) the buyer is entitled to fully deduct calculated VAT.

Tax liability may be mitigated to some extent through choosing the optimal deal structure (share or asset deal) and considering the impact of double taxation treaties in transactions involving a party based in a foreign jurisdiction.

A share deal is not subject to transfer tax, as opposed to an asset deal, which is taxed by property transfer tax or VAT.

Whether parties would choose an asset or share deal may also be influenced by the tax treaty applicable to the transaction and if the transaction involves foreign entities based in jurisdictions with a favourable tax regime. For instance, capital gains tax is charged at 15% for residents and 20% for non-residents unless the tax rate is reduced under an applicable tax treaty or even exempted.

However, when opting to structure a real estate transaction as a share deal, especially in the case of large real estate portfolio transfers, there is a risk of local tax authorities considering the purely economic effect of a transaction and treating such a transaction as a pure asset deal, thus triggering a property transfer tax instead of a tax on transfer of shares (which is currently 0).

There are no specific municipal taxes payable for occupation of business premises and owners of business premises pay the corresponding property tax. In the past, the fee for land usage and development was payable by all legal entities that own, lease or otherwise use premises in addition to the property tax. The so-called land use fee was integrated in the property tax as of 2014.

Non-resident foreign investors that do not have legal presence in Serbia are not subject to withholding tax. Instead, recipients of the income that is subject to taxation are obliged to report and pay the tax.

Income from lease and rental costs of a non-resident foreign investor is subject to a 20% withholding tax, unless the rate is reduced through application of a double taxation treaty. Serbia has a network of 59 valid tax treaties. In cases when a foreign investor is a resident of a jurisdiction with a preferential tax regime, a special 25% withholding tax is applicable.

The gains from disposition of real estate property realised by a non-resident on the territory of Serbia, regardless of whether from a resident or non-resident legal entity or individual, are subject to 20% capital gains tax based on the assessment made by the tax authorities unless an applicable double taxation treaty provides for a reduced tax rate or tax exemption.

Under Serbian law there are no tax benefits linked directly to ownership title over real estate. However, ten-year corporate income tax holiday is available to companies investing EUR8.5 million in fixed assets, including real estate, and employing at least 100 new employees.

NKO Partners

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Law and Practice


NKO Partners is a leading law firm that provides the full scope of commercial law services, with offices located in Belgrade, Serbia, and Podgorica, Montenegro. The firm, now counting 20 professionals, was founded in 2008 by lawyers with extensive experience in commercial law in the region, and who have led the largest and most complex M&A and privatisation transactions since economic and political transition began in the former Yugoslavia. NKO Partners provides the full range of corporate and commercial legal services to its diverse portfolio of clients, which includes the largest international investors in the market, promising start-up companies, public and private sector clients, non-profit institutions and governments. In the real estate practice area, the firm has extensive experience representing international and local investors both on the buying and selling side, as well as developers, in all stages of real estate transactions while advising in connection to the structuring of transactions, project financing, negotiations, due diligence, zoning and construction as well as regulatory aspects in specific industries. Currently, NKO Partners is advising on major real estate deals in Serbia, including Belgrade Waterfront, the largest real estate development project in the Balkan region, covering 1.8 million square metres and comprising a complex of several luxury residential, commercial and hotel properties along the Belgrade riverside.

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