Real Estate 2021

Last Updated April 13, 2021

Bulgaria

Law and Practice

Author



Penkov, Markov & Partners was established in 1990 and was one of the first law firms in Bulgaria, with one of the largest client portfolios. The firm is respected both domestically and internationally. The firm has approximately 38 partners and associated lawyers and several external legal consultants. PM&P is a member of Lex Mundi, FLI Net and Lex Adria and was the first law firm in Bulgaria to be certified under the ISO 9001:2000 and later recertified under the ISO 9001:2008 and ISO 9001:2015 standards. In 2019, PM&P was awarded Superbrand of the year for a fourth time (previously in 2007, 2015, and 2017) as recognition for the exceptional reputation of the trade mark Penkov, Markov & Partners. The firm's practice areas are M&A, banking and finance, anti-money laundering, terrorist financing, fraud prevention, commercial and company, bankruptcy and restructuring, energy and natural resources, real estate and project development, TMT, competition and antitrust and consumer protection, public procurement, labour and social security, tax, state regulatory, pharmaceutical, trade marks and IP, litigation and arbitration, compliance and personal data protection.

The main sources of real estate law are:

  • the Ownership Act;
  • the Stare Ownership Act;
  • the Municipal Ownership Act;
  • the Act on Ownership and Use of Agriculture Lands;
  • the Territory Development Act and the related subordinated legislation;
  • the Obligations and Contracts Act;
  • the Civil Procedural Code; and
  • the Restitution laws.

According to various surveys, in 2020 the GDP of Bulgaria decreased by 5.2%, and as a result of the global COVID-19 crisis, especially as a result of the imposed lockdown, the unemployment rate increased significantly. This general trend led to reduced leasing activity and increasing vacancy rates on the real estate market.

Logically, the retail market was most affected by the lockdown. Due to the temporary closure of shopping centres, the fashion and entertainment industry experienced a significant fall in revenues. This caused an increase in the vacant space on the market. A limited number of new openings have been registered, since many operators in the retail industry have decided to hold off on their expansion plans. At the same time, the "big-box" concept has attracted the attention of some retailers, as three medium-sized retail parks have opened in 2020 in some towns in the country.

The office market has also faced significant challenges. The volume of the rented space has decreased by 39% in comparison to 2019, with renewals and relocations accounting for about 90% of the total take-up.

The logistics operations and logistics market have remained on an upward trend thanks to e-commerce. In this regard, the stable demand and the increasing supply of logistics space have kept the leasing activity in this market relatively active.

For the time being, the real estate industry in Bulgaria remains rather unaffected by the emergence of blockchain, decentralised finance (DeFi), proptech and other disruptive technologies. The real estate data is far from fully digitalised and there is a lack of the required infrastructure. In addition, there is no legal framework to regulate how the new technologies may be used in the field of real estate. Considering the foregoing, it is very unlikely that these technologies will have a noticeable impact on the real estate market in the next 12 months.

Currently, there are no pending legislative initiatives that would significantly impact the real estate investment, ownership or development.

Recently, however, certain reforms have been introduced related to the urban development regulation, which may impact the investments in real estate. For instance, the legislator introduced as a mandatory condition precedent for issuance of a building permit that the street regulation be applied, ie, that the land falling within the street adjacent to the site is acquired by the municipality. In practice, this will mean that the investors will have to “donate voluntarily” the lands falling within the borders of the street if they want to obtain a building permit within a reasonable time.  Also, the projects shall be commissioned (ie, vested with an occupancy permit) only if the construction of the respective adjacent street is completed. Again, notwithstanding that, generally, the construction and maintenance of the public street infrastructure falls within the prerogatives of the municipality, the investors may be put in the situation to invest additional funds in public infrastructure, in order to be able to commission their projects in a timely manner.

Construction permits for extensions and superstructures will now be issued only after an inspection of the building structure.

The legislative changes introduced the Unified Public Register for Spatial Planning, which will be established at the Ministry of Regional Development and Public Works. It will consolidate existing registers in the sector. It will publish explicitly listed decisions, permits, refusals, orders of the respective mayors, municipal councils, chief architects, district governors, the National Construction Supervision Directorate and the Minister.

The property rights that can be acquired are:

  • right of ownership, which includes full and absolute power to use, possess and dispose with the title over real estate;
  • right of use, which includes the right to use the real estate property in accordance with its purpose and the right to the benefits thereof without causing any essential changes to it;
  • a building right, which includes the right to construct a building on a third party’s land and become an owner of that building, as well as to use the adjacent land to the extent it is necessary for the use of the building;
  • easement rights.

The following laws apply to transfer of title:

  • the Ownership Act and Contracts and Obligations Act, with respect to transactions with private real estate properties;
  • the State Ownership Act and subordinated legislation, with respect to the transfer of state-owned real estate properties;
  • the Municipal Ownership Act, with respect to the transfer of municipality-owned real estate properties;
  • the Act on Ownership and Use of Agriculture Lands, relevant for transfer of title over agricultural lands.

The title over private real estate properties is transferred in a form of notary deed being executed by the buyer, the seller and the notary public. The title over state or municipal properties is transferred in a form of written contract, whereby notarisation is not required.

Both notary deeds and written contracts for transfer of title over real estate properties are subject to registration with the respective recordation office at the location of the property: the Property Register.

Title insurance is not common practice, but sometimes it is used to mitigate the title risk in the case of a significant real estate transaction involving former state-owned real estate assets. 

Usually, the real estate due diligence is carried out based on documents presented by the seller, as well as on information and documents collected through the publicly available sources of information. In some cases, the buyer collects the required documents for the due diligence based on the power of attorney issued by the seller.

The due diligence includes a check of the legal history of the target property going back in time at least ten years, a check for the lack of a third party’s restitution claims, the lack of municipal or state ownership deeds issued with respect to the property, and the lack of any type of encumbrances, limited rights in rem in favour of a third party or title claims recorded with respect to the property. Also subject to the due diligence exercise are the urban status of the property (the allowed development parameters), and, in the case that the target asset is a building, the lawfulness of its construction and commissioning.

Typically, the seller warrants to the buyer that it is the sole owner of the property, that there are no encumbrances over the property, inter alia mortgages, special pledges over commercial enterprise, distrains, established limited rights in rem or lodged third parties’ claims, that the buildings are duly constructed and commissioned, and that there are no state or municipal deeds issued with respect to the property, nor restitution claims.

In the case that, as a result of the seller’s misrepresentation, the buyer is evicted from the property, the buyer shall be entitled to cancel the notary deed upon recourse to court and claim back the paid purchase price and compensation for the damages suffered.

In addition to the legislation specified in 1.1 Main Sources of Law, the provisions contained in the Anti-money Laundering Law (AML) (Закон за мерките срещу изпиране на пари) are relevant for investors, whereby in the case of a more complicated corporate structure of the investor, the AML check may appear to be a time- and effort-consuming exercise.

Generally, under the Environmental Protection Act the actual polluter (if a legal entity) shall be liable for soil pollution or environmental contamination of a property in which it operates. However, there are cases envisaged in the law (for example, when the real estate asset is acquired as a result of a privatisation procedure and it is a matter of ecological damages that have arisen due to past acts or omissions) when the buyer of a real estate asset might be held liable even if it did not cause the pollution.

The permitted use of a parcel of real estate could be ascertained upon checking in the Master Plan for the respective municipality, which is available on the websites of each respective municipality. The main construction parameters (intensity and density of construction, green areas, etc) and the designation of the real estate are specified depending on the zone in which the real estate falls, as per the projections of the Master Plan for the respective territory.

Private property is fundamentally protected by the Bulgarian Constitution, whereby compulsory expropriation of property for state or municipal needs shall be possible solely if explicitly provided in the law, if these needs cannot otherwise be satisfied, and after a preliminary and equivalent compensation.

The following fees are due and payable in the case of a real estate transaction structured as an asset deal:

  • a 0.1% – recordation fee;
  • a 0.1%–3% (depending on the decision of the respective local Municipal Council at the location of the property) – local tax for acquisition of real estate property;
  • a step notary fee, depending on the value of the transaction, capped at EUR3,000.

The fees listed above are calculated based on the amount of the purchase price.

The local tax is due from the buyer, whereby the other fees shall be borne by the buyer or shared equally between the parties.

In the case that the transaction is structured as a share deal where the target is a limited liability company, there will be only a notary fee due (capped at EUR3,000).

Foreign investors may acquire ownership over buildings and limited rights in rem without limitation. Foreign investors registered in EU countries may also acquire ownership over land, and for non-EU foreign investors there remains the option to establish a local special-purpose vehicle (SPV) and use it for the acquisition of all types of real estate properties, including land.

Certain restrictions and specific requirements apply with respect to the acquisition of agricultural land. Those ineligible to acquire ownership over agricultural lands will be:

  • companies that are directly or indirectly controlled by offshore companies;
  • companies where partners and shareholders are non-EU foreigners or non-EU legal entities;
  • joint-stock companies that have emitted bearer shares.

Those eligible to acquire a right of ownership over agricultural lands will be natural or legal persons who have been resident or established in Bulgaria for more than five years. Legal persons with registrations under Bulgarian law of less than five years may acquire a right of ownership over agricultural lands if the shareholders in the company meet the aforementioned requirement for at least five years of residency in Bulgaria.

Real estate acquisitions are financed by both debt and equity, whereby equity is usually in the form of shareholder loans which are subordinated to the debt financing.

Sometimes, the acquisitions of large real estate portfolios are financed by syndicated loans involving various lenders.

Also in local practice, sale-and-leaseback transactions can be seen, under which the former owner becomes a tenant and undertakes to have the asset leased for a certain unbreakable period of time.

Usually, a commercial real estate investor who is borrowing funds to acquire or develop real estate is required to provide one or more of the following securities:

  • a mortgage, established in the form of notary deed; 
  • a special pledge over a trade enterprise as a going concern;
  • a special pledge over equity shares or a real pledge over shares;
  • a special pledge over the receivables of the investor under lease or sale agreements for the real estate asset;
  • a special pledge over the funds available in the bank account of the investor.

Bulgarian law does not provide for restrictions on granting securities over real estate to foreign lenders. No restrictions are envisaged on repayments made to a foreign lender under a security document or loan agreement.

In the case that the loan amount exceeds BGN50,000 (approximately EUR25,000) the loan agreement shall be subject to notification to the Bulgarian National Bank and subsequent reporting on the repayment status for statistical purposes. Upon repayment to a foreign lender through a bank transfer, the local bank may require written evidence on the payment ground.

In the case of the establishment of a mortgage over real estate property, the debtor has to pay a recordation fee in the amount of 0.1% over the secured debt and a notary fee which can vary, depending on the amount of the secured debt, but it is capped at EUR3,000.

On the grounds of the mortgage, the creditor may, without recourse to litigation, address the court with a request for the issuance of an Order for Immediate Enforcement and Writ of Execution, and based thereon to instigate a foreclosure procedure. The fee for obtaining a writ of execution based on a mortgage deed will be in the amount of 2% of the amount of the secured debt.

Depending on the type of the legal entity which provides the security, the financial assistance rules may appear to be applicable. A joint-stock company may not provide any loans or valid security over its real estate assets for any acquisition of its own shares by a third party. This restriction will not apply to any transactions concluded by banks or financial institutions over the course of their business, if thereupon the net value of the property of that company continues to meet the legal requirements. Financial assistance rules do not apply in the case that the legal entity has the legal organisational form of limited liability company.

In addition, other rules related to insolvency law may apply with respect to the establishment of securities within the so-called suspicious period (the period between the initial insolvency date and the date of the court decision for opening of the insolvency procedure) that disadvantage creditors.

In addition to complying with the contractually agreed requirements for the enforcement of security, such as serving notice to the debtor and inviting him or her to perform their obligation voluntarily, the lender with a receivable secured by a mortgage must initiate the respective procedure on issuance of an Order for Immediate Execution and Writ of Execution, and then start a foreclosure procedure. The mortgage is an out-of-court ground for the issuance of a Writ of Execution without recourse to litigation.

Generally, it is possible that secured debt becomes subordinated to newly created debt by virtue of the respective subordinated agreement. In the case that the existing debt is secured by a mortgage, it shall be deregistered formally in order to give priority of the mortgage securing the new debt, and then eventually registered again as a second-ranked mortgage. 

A lender holding or enforcing security over real estate may not be liable under environmental laws if it did not cause any pollution of the real estate.

Under the insolvency proceedings, certain actions and transactions of the borrower, inter alia, the establishment of pledges or mortgages affecting real estate properties of the borrower, if performed by the borrower after the initial insolvency date, may be invalidated by his or her insolvency creditors within one year (or two, if the creditor was aware that his or her debtor was insolvent/over-indebted) of the transaction concerned.

The Bulgarian financial market is working predominantly with the Euro Inter-bank Offered Rate (EURIBOR) and not with the London Inter-bank Offered Rate (LIBOR). Therefore, it could be expected that the expiry of the LIBOR will not cause directly key consequences to the borrowers.

In Bulgaria, strategic planning and zoning are governed by the Territory Development Act, some regional legislative acts as the Sofia Municipality Development Act, the Black See Side Development Act, the Master Plans adopted for the respective municipalities, and the detailed development plans for the different territories.

The main legal requirements in connection to the scope of the design works, the appearance and the method of construction are specified in the Territory Development Act and various subordinated legislative acts, as well as with respect to projects located in Sofia, in the Sofia Municipality Development Act and, for projects located in the towns and resorts at the Black See side, in the Black See Side Development Act.

The Territory Development Act generally regulates the development and designated use of individual parcels of real estate. With respect to individual parcels of real estates located in Sofia and in the Black See side, the special regulation of the Sofia Municipality Development Act and, respectively, of the Black See Side Development Act, shall apply.

The municipal authorities (the Mayor of the Municipal Council, depending on the case) are responsible for regulating the development of both (i) the entire municipal territory through the Master Plan of the municipality which determined the different zones, their designation and the allowed development parameters, and (ii) the individual parcels of real estate through the detailed development plans, which should comply with the respective municipal Master Plan and specify the particular purpose of each parcel.

In order to develop a new project, one should first elaborate on the plan, co-ordinate with the respective utility companies and obtain approval from the competent authorities of the detailed development plan. On the basis of that plan, the investor should apply for a design visa and procure the elaboration of the investment design. The design is subject to approval by the competent authority and, based thereon, a building permit is issued.

The right of appeal against a relevant authority's decision in respect of an application for approval of a detailed development plan will belong to the owners, the holders of limited rights in rem and the concessionaires of real estate properties immediately affected by the projections of the plan. The following real estate properties are considered to be immediately affected by the projections of the detailed plan:

  • the real estate subject to the plan itself;
  • the neighbouring real estate properties, where incorporated into an attached development and/or an alteration of the building development thereof is projected;
  • the neighbouring real estate properties, including those fronting the opposite street line, where reduced separations are permissible;
  • the neighbouring real estate properties, where the assigned use of the property subject to the plan is altered.

The building permit may be appealed only by the owner of the property for which it has been issued and by the holders of limited rights in rem over that property.

Usually, the investors enter into preliminary arrangements with the utility companies where the requirements for the building of the respective infrastructure and external connections necessary for connecting the project to the common utility networks are set out. In some cases, the investors will enter, with the municipality, into the so-called agreements for compensatory greenery. These agreements are executed in cases where, due to the specifics of the project, it is not possible to comply within the site with the required percentage of greenery, and therefore the investor is undertaking to perform greenery activities outside the site.

Local competent authorities are entitled to undertake various measures in order to enforce restrictions on development and enforcement of the designated use. For instance, if it is established that a development is being carried out not in compliance with the issued building papers, the competent authority may stop the works on the construction site until the rectification of the established incompliance. The authorities may also order the destruction of an illegal development (ie, a development realised without construction papers or not in compliance with the provisions of the detailed development plan) and impose certain penalties on the persons involved. In the case of already commissioned projects being used in deviation from the permitted use, the competent authorities may impose penalties, order the electricity supply to be cut off, etc.

All types of legal entities, including local and foreign commercial companies and non-profit organisations, are eligible to hold real estate assets. The limited liability company and joint-stock company are the preferred types and are commonly used by investors to acquire real estate.

Joint-Stock Company (AD)

A joint-stock company shall be founded at an incorporation meeting attended by all the persons subscribing to shares. The incorporation meeting shall adopt the Articles of Association. A joint-stock company has a complex system of bodies. The founders can choose between a one-tier or two-tier management system. In the case of a one-tier system, the Board of Directors is the governing body. In the case of a two-tier system, the governing body is the Management Board, which makes its decisions under the supervision of the Supervisory Board. Against the subscribed shares, the shareholders are obliged to make a contribution. The liability of the shareholders for obligations of the company is limited to the contribution they have made in the capital.

Limited Liability Company (OOD)

A limited liability company may be formed by one or more persons who are liable for the obligations of the company with their share contribution in the capital of the company. The Memorandum of Association shall be concluded in writing. The company bodies shall be the general meeting and one or more managing directors. The company is represented by a managing director (who may or may not be  a shareholder in the company). The managing director organises and manages the activity of the company in accordance with the statutory provisions and the decisions of the General Meeting. The General Meeting may amend and supplement the Memorandum of Association, admit and dismiss shareholders, give consent to the transfer of a company share to a new shareholder, approve the annual report and balance sheet, adopt decisions on profit disbursement, adopt decisions on any capital reductions or increases, etc. Each shareholder shall pay in his or her or its share contribution, be involved in the management of the company, assist in its business and implement the decisions of the general meeting.

Both a limited liability company and a joint-stock company could be owned by one single shareholder who is an individual or a legal entity.

The minimum required capital to set up a company is:

  • BGN2 (EUR1) for a limited liability company;
  • BGN50,000 (EUR25,000) for a joint-stock company.

Generally, there are no special governance requirements applicable to each respective entity used to invest in real estate. There are certain regulatory limitations, however, for investing in real estate with respect to specific types of entities: pension funds, banks, entities with a special investment purpose for the securitisation of real estate, etc.

The annual entity maintenance and accounting compliance costs depend on the particular circumstances and the type of real estate property.

A person, company or other organisation may be allowed to occupy and use real estate for a limited period of time without buying it, based on:

  • the establishment in favour of such a person, company or other organisation by virtue of a notary deed of right of use, for a specified period of time; or
  • entering into a lease agreement.

Bulgarian law generally recognises operational and financial leasing.

Under a financial leasing contract, the lessor undertakes to obtain property from a third party under terms specified by the lessee, and to provide that property to the lessee for use against payment, whereby the lessee may acquire the property during the term of the leasing contract or after the expiry thereof. In financial leasing, the lessee shall bear the risk of accidental destruction or damage to the property.

The Obligations and Contracts Act regulates the basic contractual matters related to the lease terms. Within that scope, contracting parties may freely negotiate the contractual provisions, including to deviate from the dispositive legal provisions (ie, provisions of a non-mandatory nature).

The governmental authorities did not enact any specific legislation dedicated particularly to the lease terms in the context of the coronavirus pandemic (except some provisions related to the rent of state or municipal real estate properties). Thus, the regulation of the legal consequences from the pandemic and the lockdowns under leases of private properties have been left in the hands of the contractual parties. In some cases, when, due to the lockdown, the tenants were not allowed to use the leased premises (shops, restaurants, entertainment facilities, etc) they claimed a state of force majeure and rejected the payment of the rent for the respective period. In other cases, the landlords, being proactive, proposed various measures such as rent relief or rent reduction for a certain period of time, or paying only turnover rent (instead of a combination of minimum rent and turnover rent).

A special act on measures to overcome the effects of the pandemic has allowed the state and municipal authorities to decrease the amount and number of instalments for rent or exempt from their payment in whole or in part for leases of state/municipal property, if a tenant was affected by the pandemic and could not use the property effectively. These rent reliefs could be applied until the end of the emergency epidemic situation and two months after its cancellation, which currently would be 30 June 2021.

Fixed commercial leases typically run for a period of between five and ten years. Often, extension options are agreed in favour of the tenant or in favour of both parties. There is no limitation of the term of commercial leases (only civil leases are limited to ten years).   

In most cases, the landlord remains responsible for structural and major repairs, and the tenant carries out internal repairs and maintenance, as well as repairs related to the interior decoration.

Rent is mainly paid on a monthly basis. In rare cases, quarterly, six-monthly or yearly rents are agreed.

Coronavirus pandemic issues in the context of eventual lockdowns or restrictive measures usually appear as a part of force majeure clauses. 

The parties are free to determine the amount of the rent and the terms and conditions for its change or adjustment. Usually, the rent is adjusted annually by applying certain indexes (the statistical office of the European Union's (EUROSTAT’s) Harmonised Index of Consumer Prices or the Inflation index of the Bulgarian National Statistical Institute).

In the case of a commercial lease of retail real estate assets, it is common that the rent is agreed as a combination between a minimum fixed rent and turnover rent. Sometimes, the parties agree on step rent; the lease term is divided into periods and different rent rates are applicable for each separate period.

The change or increase of the rent shall be determined in accordance with the stipulations set out in the lease contract or upon mutual agreement between the parties.

VAT is payable on the rent under commercial leases. No VAT is payable on rent for real estate assets used for residential purposes.

It is a common practice at the start of the lease for the tenant to be required to present to the landlord a security in the form of a cash deposit or bank guarantee, covering an amount equal to the rent and service charge for up to three months. In some cases, and depending on the type of leased asset, the tenant may be required to pay a certain amount for fit-out works, tenant co-ordination, an opening fee, a marketing fee, etc. 

Usually, the cost for the maintenance and repair of areas used by several tenants is covered by a service charge. The service charge is paid to the landlord and the landlord or a facility management company assigned by the landlord takes care of the maintenance and repairs in the common areas.

It is a common practice that the utilities expenses are paid by the tenants, based on actual consumption, which is determined according to the readings of respective controlling measurement devices. If this approach is not technically feasible, the cost is allocated pro rata between the tenants, unless agreed otherwise in the lease agreement.

Usually, the landlord procures property insurance for the building, covering the risks of fire, storm, hail, water damage and other natural disasters. Depending on the type of leased asset (for example, in the case of a retail asset), the landlord’s costs for the property insurance will be covered by the service charge. Any improvements made by the tenant and the tenant’s movable assets located in the leased real estate are insured by the tenant. The tenant under commercial leases is also required to procure third-party liability insurance.

The use of the leased real estate property is specified in the lease agreement and must comply with the permitted use, as set out in the use permit issued by the competent authority upon the commissioning of the real estate asset. A change of use at the tenant’s request will require the consent of the landlord, and eventually may require elaboration of the investment designs, the issuance of a new building permit and a new-use permit, whereby the provisions of the Master Plan, the detailed development plan and the requirements of the relevant legislation should be observed.

Any alterations or improvements to the leased real estate property are subject to landlord’s prior consent. The alterations and improvements permanently attached to the property come under the ownership of the landlord. In some cases, the parties may agree that the alterations and improvements made by the tenant are removed upon expiry of the lease term and the property is reinstated to its initial condition. Depending on the contractual stipulations, the cost for the alterations and improvements could be borne by the tenant, or could be deducted from the rental price.

Bulgarian law does envisage quite specific regulations with respect to leases, depending on the purpose of the leased property (residential, industrial, offices, retail or hotels).

Usually, the start of an insolvency procedure, either with respect to the tenant or to the landlord, is envisaged as a termination ground in the lease agreement. If no such ground is provided for and a receiver (trustee in bankruptcy) is appointed within the insolvency proceeding opened with respect to the tenant, the receiver has the right to terminate the lease agreement. In such a case, any claims of the landlord against the tenant must formally be filed with the receiver.

It is a common practice for the landlord to be provided with a security for the good performance of the tenant’s obligations in the form of a cash deposit or bank guarantee. For residential leases, the preferred form of security is the cash deposit, which usually covers the rent for two months. For commercial leases, bank or corporate guarantees are commonly used, whereby the guaranteed amount covers up to three months' rent and service charge.

Generally, the tenant is not entitled to continue to occupy the relevant real estate after the expiry or termination of the lease. In the case that the tenant refuses to vacate the leased premises, the landlord has to lodge a claim in the court and, based on a duly entered into force court decision and an issued writ of execution to proceed with the foreclosure, will be permitted to evict the tenant. The vacation of the tenant from the property and the delivery of the possession back to the landlord is done through the assistance of a bailiff (private or public) appointed by the landlord to execute the writ of execution.

If not otherwise agreed in the lease agreement, the tenant may sub-lease parts of the leased property without the consent of the landlord. However, even in this case the tenant is not discharged whatsoever from its obligations under the lease agreement. Usually, when it is a matter of commercial leases, the lease agreement contains certain restrictions with respect to sub-leasing – either total prohibition for sub-leasing without the prior landlord’s consent, or prohibition for a respective category of sub-lessees.

The sub-lessee shall not have more rights than the tenant as to the use of the leased property.

The following events typically give the landlord the right to cancel (terminate due to the other party’s fault) the lease agreement:

  • failure by the tenant to pay the rent, the service charge, utility costs or other monetary obligations if any such delay continues for a certain period of time;
  • failure by the tenant to provide to the landlord a bank guarantee or cash deposit as a security, if envisaged under the lease agreement;
  • use of the leased property in deviation of the designated purpose;
  • causing significant damages to the leased property;
  • in some cases, systematic breach of the internal rules of the building where the leased property is located;
  • a bankruptcy procedure is opened against the tenant.

The following events typically give the tenant the right to cancel (terminate due to the other party’s fault) the lease agreement:

  • failure by the landlord to hand over the lease property within a certain agreed period of time;
  • limiting the access to the leased property;
  • destruction of the lease property;
  • a bankruptcy procedure is opened against the landlord.

Although usually the lease agreement is entered into for a certain period of time, the parties may agree on a termination option in favour of one or both of them.

In some specific cases, events giving the tenant the right to terminate the lease agreement could be related to a breach by the landlord to comply with its undertakings with respect to the tenant mix and the achievement of a certain level of tenant occupancy of the project.

There is no legal requirement for a specific form of validity of the lease agreement, nor a requirement for its registration with the Property Register. However, there is an option for the parties to have the lease agreement notarised and registered with the Property Register.

The recordation fee shall be in the amount of 0.1% over the rental price calculated for the entire lease term.

In the event of default by the tenant and after cancellation of the lease agreement by the landlord, the tenant may be vacated from the lease property upon recourse first to the competent court and then to a bailiff appointed by the landlord. Although the Bulgarian Civil Procedural Code provides for a specific fast procedure under claims for vacation of defaulting tenants (but only with respect to the first court instance), nevertheless, depending on the circumstances relating to the particular case, the vacation process may take more than a year.

In the case that the leased real estate property is sold by the landlord to a third party after the execution of the lease agreement, the latter may be terminated by that third party, the acquirer of the property, by serving the tenant with a one-month written notice. Such a termination option shall not apply in a case where the lease agreement is notarised and registered with the Property Register, whereby in this case the acquirer shall be bound by the terms of the lease agreement. Should the lease agreement bear a certified date but not be registered, the acquirer shall be bound by its terms for a period not longer than one year.

There are two common structures used to price construction projects. The price could be agreed as a lump sum (fixed price), whereby in this case the contractor shall agree to complete the construction project against that fixed price, assuming the risk of wrong calculation of type and volume of the construction works. The other option would be that the parties agree on the unit price of the respective construction works required for the completion of the development, whereby the final price shall be determined on the basis of the actual quantities of works calculated in accordance with the agreed unit prices.

There are two general approaches for assigning responsibility for the design and construction of a project. Under the first one, the elaboration of the design and the performance of the construction works are assigned to different contractors, whereby each of them shall be responsible only for its own scope of work. Even if this approach is chosen, the author of the design (ie, the architect) shall be under the obligation to ensure the so-called “author supervision”, ie, to make site visits and ensure that the construction works are performed in compliance with the design.

With regard to the risks of the construction process, the Territory Development Act refers to the Ordinance No 2 of 31.07.2003 on Commissioning of the Construction Projects in the Republic of Bulgaria and the Minimal Warranty Periods for Executed Construction Works, Facilities and Construction Projects, where the minimal warranty periods for the different categories of construction works are regulated. The Territory Development Act provides that the warranty periods are fixed by the contract between the contracting entity and the contractor, but they cannot be shorter than the minimum periods fixed in the above-mentioned Ordinance (for example, the minimal period for all types of newly executed structures of buildings and facilities, including for the land basis under them, is ten years). Secondly, the construction developer is obliged to insure himself or herself against professional liability for any detriment inflicted on the other participants in construction and/or third parties as a result of wrongful acts or omissions in the course of the performance of their duties. These insurances can be contracted for a period of one year and may be renewed annually. In addition, the contactors in the construction project may conclude a supplementary insurance contract, covering their liabilities for a specific work. Last but not least, the liability of the construction developer is unlimited – the contractor shall be responsible for any damages caused and for lost profit sustained through his or her own culpable acts and/or omissions. As an exception, the contractor’s liability may be excluded only in the case of slight negligence. 

In order to manage the schedule-related risk on construction projects, the parties under a construction contract use a penalty scheme, whereby, in the case of delay in achieving certain milestones or completion dates, the contractor shall be liable to pay a penalty in the amount of an agreed percentage of the contract price per each day of delay. Usually, the penalty for delayed performance will be determined in the range of 0.1% to 0.2% per each day of delay, but will be capped at 10% or 20% of the contract price, whereby in the case where the delay continues for more than a certain number of days, the owner shall be entitled to cancel the construction contract and to a penalty for cancellation.

If the actual amount of damages suffered by the owner exceeds the amount of the penalty provided under the construction contract, the owner shall be entitled to claim (and prove) compensation for the excess before the respective competent court.

As a matter of standard practice, in order to secure the good performance of the contractor’s obligations during the construction phase the contractors provide to the owner a bank guarantee in the amount of 10% of the contract’s value. In the case that the owner has paid in advance a certain portion of the price, the contractor provides a bank guarantee for advance payment. Instead of a bank guarantee, the parties may agree to use another security mechanism: retention of money (a certain percentage of each interim payment certificate is retained by the owner to serve as a security). 

In the event of non-payment, the contractor and/or designers are entitled to lodge a claim against the owner, and to request of the court the imposition of security measures, inter alia, a distraint over the real estate property. Such a request could be made before lodging the claim (securitisation of future claim) but in this case the request should be accompanied by written evidences or could be allowed against a deposit to be paid by the contractor to a special bank account of the court to serve as a guarantee of eventual claim for damages to the owner if the claim of the contractor turns out to be groundless. 

Upon settlement of the debt, the contractor will be obliged to undertake the required legal actions for discharge of the distraint.

Before a project can be inhabited or used for its intended use after completion of the construction process, it shall be vested with an occupancy permit (for the construction projects of first, second and third categories) or a certificate on commissioning (for the construction projects of fourth and fifth categories). The occupancy permit is issued by the National Construction Supervision Directorate on the basis of a Protocol, form 16, issued by a state acceptance commission (involving, among others, a representative of the fire-safety authorities) after a detailed inspection of the construction site.

VAT is payable on the purchase of certain types of real estate: regulated plots of land and new buildings (ie, buildings being commissioned before no more than five years). The VAT rate is 20%. The VAT shall be paid by the buyer, whereby under certain conditions the buyer may be eligible to a VAT tax return.

Where the subject of the transaction is non-regulated plots or an old building, no VAT shall be due.

Bulgarian law does not provide for commonly used methods to mitigate tax liabilities related to acquisitions of large real estate portfolios if the respective transactions are structured as asset deals. Certain cost optimisation could be achieved in the case of a share deal.

Municipal tax and garbage fees must be paid for owned real estate property. The current rate of the municipal tax is 1,875 per thousand on the tax assessment of the real estate.

In addition, the owner shall pay a garbage fee determined by the decision of each respective Municipal Council. The garbage fee is purposed to cover the cost of the municipality for provision of the following public services:

  • household waste collection and transport to household waste treatment installations and facilities;
  • household waste treatment at installations and facilities;
  • sanitation of the spatial development areas for public use in the nucleated settlements and dispersed settlements in the municipality.

For commercial real estate property generating significant volumes of waste, certain schemes are envisaged in the law for optimising the cost for a garbage fee.

Unless otherwise provided under a respective applicable Double Taxation Treaty, subject to withholding tax shall be any income of a foreign investor from:

  • rent or other provision for the use of real estate, including non-divisible interest in real estate in Bulgaria;
  • the disposal of real estate, including non-divisible interest in or a limited right in rem to real estate in Bulgaria, provided that such income is not realised by the foreign investor acting through a permanent establishment in Bulgaria.

Buildings are subject to depreciation at an annual rate of 4% on the acquisition costs. Land is not depreciable. Taxable rental income will further be reduced by costs incurred by the landlord, to the extent such expenses are recognised for tax purposes.

Penkov, Markov & Partners

13B Tintyava Str. fl. 6
Iztok District
1113 Sofia
Bulgaria

+359 2 971 39 35

+359 2 971 11 91

lawyers@penkov-markov.eu www.penkov-markov.eu
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Penkov, Markov & Partners was established in 1990 and was one of the first law firms in Bulgaria, with one of the largest client portfolios. The firm is respected both domestically and internationally. The firm has approximately 38 partners and associated lawyers and several external legal consultants. PM&P is a member of Lex Mundi, FLI Net and Lex Adria and was the first law firm in Bulgaria to be certified under the ISO 9001:2000 and later recertified under the ISO 9001:2008 and ISO 9001:2015 standards. In 2019, PM&P was awarded Superbrand of the year for a fourth time (previously in 2007, 2015, and 2017) as recognition for the exceptional reputation of the trade mark Penkov, Markov & Partners. The firm's practice areas are M&A, banking and finance, anti-money laundering, terrorist financing, fraud prevention, commercial and company, bankruptcy and restructuring, energy and natural resources, real estate and project development, TMT, competition and antitrust and consumer protection, public procurement, labour and social security, tax, state regulatory, pharmaceutical, trade marks and IP, litigation and arbitration, compliance and personal data protection.

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