Real Estate 2021

Last Updated April 13, 2021

Lithuania

Law and Practice

Authors



WALLESS has a solid real estate team in the Baltics. The Vilnius office has a team of 12 dedicated professionals, who have diverse experience in real estate law. WALLESS is unique in having its real estate team comprised of professionals working as three elite forces (real estate development and construction, real estate transactions and public procurement and PPP), covering a wide range of real estate market demand on real estate legal services. The firm is especially proud of its deep knowledge in real estate investments, zoning and planning, and dispute resolutions on construction in cultural heritage territories. The WALLESS real estate practice specialists are consulted by four out of five major municipalities in Lithuania. The WALLESS team represents and is consulted by four out of five major developers in the market and participates in most complicated developments. WALLESS is a member of the Real Estate Developers Association.

Lithuania belongs to family of civil law countries with a strict hierarchy of laws, starting with the Constitution and laws, which are followed by by-laws and ordinances.

For real estate law, the Civil Code of the Republic of Lithuania is the main source of law, where not only separate sale-purchase, lease, construction contracting agreements are regulated, but general regulations are provided to ownership, restrictions of things, obligations, and contracts. 

The Law on Construction, the Law on Spatial Planning, and the Law on Municipal Infrastructure Development are not of less importance when it comes to real estate development. Numerous construction technical regulations approved by Ministry of Environment and other by-laws approved by the Government and other ministries are enacted, which set frequently changed imperative rules. Therefore, seeking advice from a local lawyer is an essential thing to do if the newly constructed property or a property with development opportunities is a target.

In 2020, the COVID-19 pandemic which shook the global markets had an obvious impact for the Lithuanian economy and the real estate market. The largest real estate development projects continued; however, due to the uncertainty caused by the global pandemic, some of the investors were quite hesitant to initiate new major commercial development projects.

The largest commercial lease transactions over the past 12 months included relocation of some state-owned companies (eg, Ignitis) as well as leases of major areas by private companies.

Some distressed sectors which suffered most from the pandemic (eg, hotels) caught the attention of investors, followed by sale deals.

Even though there were quite a few transactions in office, retail and warehouse sectors, the residential market (especially the "second home near the sea" market) is booming.

The real estate investors, developers and lenders in Lithuania have not yet adapted to the recent emergence of blockchain, decentralised finance (DeFi), proptech and other disruptive technologies in the real estate industry. None of these technologies is expected to have a significant impact on the real estate market in Lithuania over the next 12 months. Still, alternative crowd-funded platforms seem to attract more and more capital, which makes the real estate finance market more diverse and sustainable in Lithuania.

In general, real estate investment, ownership and development processes in Lithuania are quite clear, easy to implement, and the Government is trying to push more legislation to make the process more transparent.

In 2020, the Law on Special Land Conditions was introduced. In 2021, a new Law on Municipal Infrastructure Development was enacted. Nevertheless, there is a lack of land for development in the cities. Therefore, the change of regulation on the lease of state-owned land is awaited, which could help with redevelopment. If the state-owned land lease regulation change is adopted by the parliament, the development of leased state-owned land will be more clear.

The most common types of property rights are the following:

  • ownership;
  • lease (short-term, long-term, lease of state land);
  • mortgage;
  • servitude;
  • usus fructus.

The transfer of title is governed by the Lithuanian Civil Code. There are no special laws which would apply to the transfer of any specific types of real estate (eg, residential, industrial, offices, retail, hotels).

All real estate transactions related to disposal or restraint of disposal should be confirmed by the public notary. The ownership to real estate passes over from the moment it is handed over to the buyer. Unless the parties agree that the sale and purchase agreement itself constitutes a hand-over deed of real estate and, thus, the ownership to real estate passes over from the moment of entering into such an agreement, the hand-over of real estate is to be documented by a separate hand-over deed.

All real estate in Lithuania is registered with the Real Estate Register. The data of the Real Estate Register provides comprehensive information on a real estate owner (including the transfers of title), leases, mortgages, seizures, and other encumbrances registered in respect of real estate, also ongoing lawsuits, decisions of authorities affecting the real estate (eg, decisions regarding expropriation procedures), etc. Thus, an investor can receive up-to-date data on any real estate at any time.

By virtue of law, data recorded in the public register is deemed accurate and true (prima facie evidence) unless rebutted. As a result, given that the registration system in Lithuania is very comprehensive and reliable, title insurance is not common.

The buyers usually carry out real estate due diligence before entering into a transaction. Typically, the buyer carries out legal, commercial (if the real estate is acquired not directly but through an investment vehicle), financial, technical, and environmental due diligence. Any type of due diligence normally includes three parts: preparation, investigation, and results.

Preparation for due diligence includes identification of objects and goals, and timelines, as well as entering into confidential and non-disclosure agreements.

The investigation stage includes collection of facts and documents from both the seller and buyer. The information is mainly gathered according to the checklist provided by the buyer team. Typically, all the information requested by the buyer and his or her consultants is uploaded to the virtual data rooms. In today's world, it is quite rare to have a physical data room. This stage also includes analysis and evaluation of information and material provided, questions or interviews with the management and relevant personnel of the seller.

This part of the results typically includes the preparation and presentation of the due diligence report which entails the main risks involved and suggestions for transaction documentation. Usually, red-flag due diligence is performed, outlining only the major issues pertaining to the real estate under the agreed materiality threshold.

The seller has a statutory obligation to disclose to the buyer all third parties' rights, mortgages, seizures, ongoing litigation, and other encumbrances with respect to the real estate. In the case of breach by the seller or if the seller is not able to prove that the buyer was aware of the respective encumbrances, the buyer is entitled to claim a reduction of the purchase price or termination of the sale and purchase agreement.

The buyer cannot rely on the encumbrances over real estate and invoke remedy measures against the seller if the seller has notified the buyer of those encumbrances or the buyer could have learned of them from the public registers.

Depending on the type of investment, it is important for an investor to consider planning and zoning, environmental law, competition law, etc. Merger clearance (required by the Law on Competition) is necessary in cases when (i) the total gross income of the companies participating in the merger (concentration) in Lithuania during the last financial year before the merger is more than EUR20 million and (ii) the total gross income of each of at least two companies participating in the merger during the last financial year before the merger is more than EUR2 million.

In the case of pollution or contamination, Lithuania implements the rule “polluter pays”. The buyer of a real estate asset will be held responsible for soil pollution or environmental contamination in the event that it cannot identify the person responsible for any such damage.

Permitted uses of a parcel of real estate are asserted according to a master plan or the detailed plan if one has been prepared. However, construction opportunities may be assured only after the construction permit is issued for certain developments. Until the issue of such permits, the rights to develop the land plot are in danger due the vague requirements of the Law on Architecture. The Law on Architecture also introduces regional councils of architects, which may even decide on the aesthetics of future developments, and all the developments that do not satisfy subjective criteria may be stopped. The Law on Spatial Planning provides the possibility to conclude an agreement on the implementation of the solutions of the detailed plan; however, in practice, such agreements are rarely concluded, and they regulate only infrastructure development issues. 

Land expropriation procedures can only be initiated if the land is required for public needs, upon relevant compensation to the owner. Land expropriation is initiated by the Lithuanian Land Service. The owners are duly informed about any such initiated procedure and can participate in the evaluation of the compensation.

With respect to private agricultural or forest land located within certain areas, the state has a priority right to purchase the land for sale.

Also, agricultural or forest land may be compulsorily purchased by the state where it appears that it was acquired by the buyer infringing the rules and restrictions for the acquisition of such land.

A real estate acquisition transaction is subject to notarisation. The notary fee for acquisition of real estate is equal to 0.37% of the transaction value and cannot exceed the established cap of EUR5,000. If more than one real estate unit is subject to the same sale-purchase agreement, the notary fee may not exceed EUR12,000.

The registration fee for ownership of the real estate with the Real Estate Register for legal persons is based on the value of the real estate and may not exceed EUR17.19 per one unit.

The notary costs are typically shared by the buyer and the seller in equal parts.

Transfer of at least 25% of shares in the property-owning company is also subject to notarisation, except for cases when (i) the personal securities accounts of the shareholders of the private limited company have been transferred for management to a legal person entitled to open and manage personal accounts for financial instruments and (ii) the price for shares is less than EUR14,500.

The notary fee for the acquisition of shares varies between 0.33% and 0.41% of the transaction value and cannot exceed the established cap of EUR5,000.

A mortgage/pledge of real estate and/or shares in the company is always subject to notarisation. However, notary fees for the mortgage of real estate, based on the value of the real estate object, may not be more than EUR240, and for a pledge of shares, based on the value of the object, may not be more than EUR120.

The taxes listed above are also applied in the case of a partial ownership transfer. There are no exemptions applied.

A foreign investor willing to acquire land into ownership must comply with the criteria of European and Transatlantic Integration. A legal person is required to be established in, or a natural person is required to hold the citizenship or a permanent residency of (i) countries which are not part of political, military, economic or other unions or alliances of states established on the basis of the former Union of Soviet Socialist Republics and (ii) which are members at least of one of the following organisations and treaties:

  • the European Union (EU);
  • the North Atlantic Treaty Organisation (NATO);
  • the Agreement on the European Economic Area (EEA); or
  • a member state of the Organisation for Economic Co-operation and Development (OECD).

A list of land for which acquisition is restricted to foreign investors is defined by law (eg, nature reserves, state parks, land of special economic zones, etc).

Foreign investors may use and hold (without owning) land on some other legal basis (eg, leasing) without restrictions.

Acquisition of commercial real estate in Lithuania is financed by both equity and debt, with the ratio between them depending on the market.

Equity is often provided downstream in the form of shareholder loan(s) expected to be subordinated to the debt financing. In the case of insufficient equity, additional funds are sought by the way of mezzanine or senior debt.

A security package for the financing of acquisition and/or development of real estate in Lithuania is tailored to each transaction, considering specific circumstances and the risk profile of the borrower. Usually, at least the following security is being sought by the lenders in Lithuania, ie:

  • a pledge over shares in the borrower;
  • a pledge over the borrower’s receivables (rental income) and funds in bank accounts;
  • a mortgage over the borrower’s real estate – land (or land leasehold rights) and/or building(s) (or premise(s)); and
  • upstream or cross-stream guarantees.

There are no restrictions under Lithuanian law on granting security over real estate to foreign lenders, or on repayments being made to a foreign lender under any security document or loan agreement.

Creation and perfection of the Lithuanian law-governed security over real estate involves a notary and registration fee, which is calculated as follows, ie:

  • up to EUR240 (the exact amount depends on the value of the real estate subject to the mortgage) multiplied by the number of different real estate assets subject to the mortgage; plus
  • registry expenses (usually, these are around EUR150 for each security instrument).

Enforcement of the Lithuanian law-governed security over real estate also involves:

  • a notary fee (up to EUR263; the exact amount depends on the value of the mortgaged real estate); and
  • a bailiff fee consisting of:
    1. up to EUR220 as administration expenses (the exact amount depends on the amount subject to recovery); and
    2. a success fee calculated as a percentage of the amount subject to recovery (from 4% to 19%); plus
    3. additional expenses.

All the fees are net of VAT (21%, if applicable).

Creation of security by a Lithuanian entity may raise two concerns: (i) potential non-compliance with Lithuanian financial assistance restrictions; and (ii) potential non-compliance with corporate benefit requirements. These are explained in detail below.

Article 45 (2) of the Law on Companies of the Republic of Lithuania indicates that a company may not directly or indirectly advance funds, make a loan or grant security to individuals or corporate entities if this facilitates the acquisition of shares by the latter persons. This means that the Lithuanian entity is not permitted to secure debt obligations if the only purpose and utilisation of such funds is to finance acquisition of the Lithuanian entity.

Furthermore, the principles of Lithuanian civil law and the corporate law require that an entity, by entering into any transaction, should have sufficient commercial benefit of that transaction.

Both of these issues may lead to invalidity or unenforceability of obligations of the Lithuanian guarantor and/or mortgagor (pledgor).

In the case of a failure to fulfil secured obligations by a borrower, enforcement of the mortgage over real estate would be carried by the way of an out-of-court enforcement procedure. A creditor would have to apply to a notary public requesting to issue an enforceable instrument. After the enforceable instrument has been issued by the notary public, the creditor would have to apply to a bailiff, requesting to start a recovery procedure from the real estate mortgaged in favour of the creditor.

Under Lithuanian law, the priority of a mortgage over real estate is decided considering the timing of the mortgage’s registration with the Mortgage Register of the Republic of Lithuania, ie, registration will reflect the registered mortgage priority over any other not-yet registered mortgages and any subsequently registered mortgages, as well as all unsecured claims.

A debt may become subordinated upon consent of and conclusion of an agreement with a previous creditor. In such a case, the first-created registered security would have to be re-registered to give priority over a later-created and registered security.

Only an owner or possessor of real estate who performs an activity would be liable under the relevant environmental laws. A lender holding or enforcing security over real estate usually will not be liable under environmental laws.

Generally, the commencement of insolvency proceedings does not have an adverse effect on a security interest over property. On the contrary, under Lithuanian insolvency law, secured creditors have priority to recover their debts from the value of the insolvent borrower’s property given as security. It should be noted, however, that any security granted by the borrower at the time that the latter had financial difficulties may be subject to claw-back under Lithuanian insolvency law.

Most of the real estate financings in Lithuania are EUR-denominated and thus the expiry of the LIBOR is less relevant. Where applicable, the LIBOR replacement will occur following a pre-agreed order or, in the case of the absence of the latter, the parties will have to agree on the order of transitioning to new reference rates. Most likely, this transition will be in line with the Loan Market Association (LMA) recommendations. Mechanisms to manage relevant risks, including the impact on funding, include contract reviews, careful project-planning and re-negotiating a different reference rate before the expiry of the LIBOR takes effect.

The strategic planning is usually organised by the Government and municipalities and is implemented via spatial planning. The Law on Spatial Planning provides for three levels of spatial plans, eg, national level, municipal level.

The Government and the Ministry of Environment organises and implements the master plan of the Republic of Lithuania.

The councils of municipalities approve the master plans of municipalities, which are organised and implemented by the administrations of municipalities.

The administrations of municipalities organise and control the implementation of the detailed plans, which are at the lowest level of the spatial planning hierarchy.

In addition, there also exist special spatial plans, which are used to plan territories for exceptional use (protected areas, projects of state importance, etc). These plans are organised and implemented by various authorities. All real estate owners and developers should keep to the regulations set by special plans, despite the solutions of the detailed plans.

Design and construction processes are governed by the Law on Construction and construction technical regulations.

The appearance of future buildings is reviewed by the municipality. The public and municipalities may also request the review of the project by regional architecture councils. The so-called “advice” of the aforementioned councils is mandatory, when participants (usually local communities) are complaining during a public hearing at the pre-design stage.

Design documentation of the projects is reviewed by municipalities and other competent institutions, depending on the type of the building and its location (Department of Cultural Heritage, Fire Department, National Public Health Centre, Directorate of a certain protected area, etc).

The method on construction and related solutions provided in the design are reviewed by the municipalities. Usually, municipalities rely on mandatory expertise of the design, which has to be carried out by the builder when evaluating the more technical matters of the construction, such as solutions of chosen structures and chosen construction methods.

The construction process is supervised by the State territorial planning and construction inspectorate under the Ministry of Environment, which may also check the design documentation upon the reasoned claim.

The main regulations on development are indicated in laws, which are approved by the Parliament. By-laws regulating the development and designated use of individual parcels of real estate are adopted by the Ministry of Environment and the Ministry of Agriculture. Municipalities and the National Land Service under the the Ministry of Agriculture are the main subjects taking decisions on parcels' division and indication of designated purpose under the zoning documentation.

If the development is planned in certain protected areas (eg, cultural heritage areas, protected areas), specific regulations adopted by the Ministry of Culture and other directorates are applicable.

Mainly during the development, the following legislation applies: the Law on Spatial Planning, the Law on Land, the Law on Construction, the Law on Architecture, and various construction regulations.

The projects of larger scale should go through the environmental impact-assessment procedure. Any third party has the possibility to express its opinion during the procedures of publication of the environmental impact assessment and to affect the planned development by attracting the attention of public authorities to a possible infringement of the law.

Even if the environmental impact-assessment procedure is not applicable, any third party has a right to participate and express its objection to a certain development in the pre-design stage during a pre-design public hearing. 

A public hearing is mandatory for the prepared design proposals on any planned development that is bigger than 300 square metres. During the public hearing, any third party can suggest its solutions to the project, which can be accepted or rejected by the designer. If any such proposals are rejected, the chief architect of the municipality may confirm the pre-design solutions only if the consent of the regional architecture council is received.

When the design stage is over and the municipality issues the construction permit, any third party (which has a material interest) may present a claim to the court and dispute the issued permit.

The authority's decision respecting an application for permission for development or the carrying on of a designated use can be appealed to the administrative court or the administrative dispute commissions.

From 1 January 2021, a new Law on Development of municipal infrastructure has come into force. This law provides a possibility (and in some cases this is a mandatory requirement) to enter the agreement under which the municipal infrastructure would be developed as part of the implemented project.

Municipal infrastructure, developed by a private developer, should be transferred to the municipality. A compensation will be received in five years, only if the development was performed in the territory intended for prioritised development. A compensation may be received from other joining developers, but only if they join that infrastructure in ten years in territories which were not set for prioritised development under master plans.

The restrictions on development or designated use are usually enforced during zoning and planning procedures.

Nevertheless, general architectural requirements or cultural heritage requirements, and protected areas' protection requirements, may be introduced and applied during pre-design, design, or even construction stages.

The following main types of entities are available to investors to hold real estate assets:

  • a private limited company;
  • a public limited company;
  • a personal enterprise (sole proprietorship);
  • a general partnership;
  • a limited partnership;
  • a small partnership;
  • a European company (Societas Europaea);
  • a co-operative company;
  • an agricultural company.

Despite the variety of forms, the most common type of investment vehicle among both foreign and local investors is a private company, sometimes referred to as a private joint stock company, and limited partnership.

The private and public limited liability company is a limited liability company where the shareholders' liability is limited to the amount of share capital that was contributed to those companies. Such companies are governed mainly by the Company Law of the Republic of Lithuania (and other legal acts that are applicable to publicly listed limited liability companies).

A limited partnership is a legal entity that is formed by at least two members. There are the limited liability partners and the general partners with no limited liability. An agreement is signed between the partners on management of a partnership. There is no minimum share capital requirement to conclude partnership agreement.

The minimum shared capital required to set up a private limited company is EUR2,500.

A private limited company can have a four-tier governance structure, comprising the following elements:

  • a General Meeting of Shareholders;
  • a Supervisory Council;
  • a Board (of Directors);
  • a Chief Executive Officer (CEO).

It is not obligatory to form the Supervisory Council and/or the Board in a private limited company. Supervisory Councils are rarely established in private limited companies, but Boards are formed quite often, particularly in larger private companies.

Contrary to the existing practice abroad, in Lithuania the Board does not have direct executive powers. The Board is responsible for the strategic management of a company, election of the CEO and some other decisions related to the company (eg, decisions to invest in other companies, etc). Also, members of the Board can be only natural persons.

Each entity is required to have a Chief Executive Officer. Accounting services can be outsourced. The annual entity maintenance costs comprise the salary of CEO and accounting services, and vary for each company.

According to Lithuanian laws, a person, company or other organisation is entitled to occupy and use real estate for a limited period of time under the lease or gratuitous lease agreements.

There are no different types of commercial leases in Lithuania.

In general, the rents and lease agreements are freely negotiable, subject to the condition that they do not infringe certain imperative norms established in the Civil Code. There are certain market standards of commercial leases which are not obligatory; however, they are voluntarily applied by the largest players in the market.

In the wake of the coronavirus pandemic, the government has adopted certain rent subsidies for tenants in the case that the landlord has granted at least 30% rent discount. However, such measures were applicable only during certain periods. Currently, there are no specific measures which would be directed at commercial leases; the package of measures applied by the government is aimed at general assistance to the business, especially in the most affected sectors.

The typical terms of a lease of business premises are the following:

  • the maximum term of any lease may not exceed 100 years;
  • usually, the tenant is responsible for daily maintenance and current repairs of the leased property, and the landlord is responsible for capital repairs of the property;
  • the rent payment is typically paid every month for the upcoming month in advance;
  • coronavirus pandemic issues are usually solved through standard lease provisions of force majeure, inability to use the premises, etc. Usually, the tenant and the landlord agree on some rent discount or delay of payments. So far, there have been no marked standard lease conditions aimed at pandemic issues and the parties are free to negotiate any such specific condition.

Usually, the rent payable is reviewed and indexed (increased) every year according to the index chosen by the parties. The Lithuanian consumer price index (CPI) or the Lithuanian consumer price index harmonised under the methodology with other states of the European Union (HICP) are used in most commercial leases.

As mentioned in 6.5 Rent Variation, typically, the rent is increased each year as a result of indexation. Typically, no additional consent for any such increase is required from the tenant.

If either party wishes to change or increase the rent, it must follow specific procedures and rules established in the lease agreement. In the event of the absence of any such procedure and consent from the other party, the rent may only be changed or increased by proceedings in court.

VAT is payable on rent. It is not applicable only in certain cases related to general tax regulations (eg, a foreign tenant who is not registered as a VAT payer).

In addition to the payment of rent, the tenant typically covers the costs for communal services rendered in the premises as well as operational fees intended to cover maintenance, repairs, management, insurance of the building, real estate, land tax, insurance, and related costs. Operation fees are typically calculated in proportion to the size of the area occupied by the tenant.

The costs for the maintenance and repair of areas used by several tenants, for example, parking lots and gardens, are usually shared by all the tenants as part of the operational fees described in 6.8 Costs Payable by a Tenant at the Start of a Lease.

Utilities and telecommunications that serve a property occupied by several tenants are usually divided in proportion to the area leased by each of the tenants.

The costs of insurance of the building are usually paid by the tenants in proportion as part of the operational fees.

The tenants of a commercial property are usually required to obtain the following insurance:

  • tenant’s civil liability insurance against third-party claims arising from physical injury, property loss or damage;
  • property insurance covering losses of and damages to all the tenant’s assets in the premises as a result of fire, water, theft, breaking of glass, natural calamities, unlawful activity of third parties and other usual risks, etc.

The premises can be used only in accordance with their purpose registered with the public register and the main purpose of use included in the lease agreement. In the case that the tenant uses the premises not in accordance with their purpose or main purpose of use agreed in the lease agreement, the landlord has the right to terminate the lease agreement.

As a rule, the tenant is permitted to alter or improve the real estate only upon prior consent from the landlord. Usually, the lease agreement includes certain conditions under which such works must be performed (eg, specific hours for performance of works, quality of materials used, etc).

Some specific regulations apply to the lease of residential real estate and hotels. They include longer terms on leave notice and lease transfer to tenants’ family members.

Usually, the lease agreement provides for the landlord’s possibility to terminate the lease agreement upon the tenant’s insolvency. The landlord is also included in the list of the creditors for any unpaid amounts before the termination of the lease agreement and other debts of the tenant.

Usually, the landlord’s interests against a failure by the tenant to meet its obligations are protected by a deposit, bank or parent guarantee provided by the tenant.

According to the Civil Code, if the tenant continues to occupy the premises after the expiry of a lease, the lease agreement becomes a lease of an indefinite period and each party may terminate that agreement by serving the other party with a three-month written notice. Commercial lease agreements usually include the opposite rule, stating that the lease does not become a lease of an indefinite term.

Usually, commercial lease agreements include a specific procedure for the vacating of the premises after the expiry or termination of a commercial lease. If the tenant fails to vacate the premises under the agreed terms, the landlord is usually entitled to terminate the supply of utility services, enter the premises and remove the tenant’s belongings at the cost of the tenant.

As a rule, the tenant is permitted to assign its leasehold interest in the lease or sublease all or a portion of the leased premises only upon prior consent of the landlord.

The lease may be terminated:

  • by mutual agreement of the parties;
  • by either party's demand, if the other party commits a material breach and fails to rectify that breach in due course (the parties may agree on what is to be considered a material breach under the agreement; otherwise, the material breach is to be determined based on statutory provisions);
  • on other grounds set out in the agreement (the parties are free to establish any grounds for unilateral termination of the agreement, either through the judicial procedure or without applying to court).

The cases when the landlord is entitled to terminate the lease agreement unilaterally usually include:

  • the tenant uses the leased objects not in accordance with the agreement/permitted use;
  • the tenant worsens condition of the leased objects wilfully or through negligence;
  • the tenant fails to pay rent and/or other payments under the agreement in time;
  • the tenant unreasonable refuses to sign the handover deed or does not sign it in due time;
  • the tenant fails to perform repair works of the premises;
  • the tenant performs other material breach.

The cases when the tenant is entitled to terminate the lease agreement unilaterally usually include:

  • the premises cannot be used by the tenant due to circumstances not attributable to the tenant;
  • capital repair works are not performed by the landlord when the landlord has the obligation to perform them;
  • the landlord unreasonably refuses to sign the hand-over deed;
  • the premises have material defects which prevent the tenant from using the premises for permitted use;
  • the landlord performs another material breach.

Under the Civil Code, if the landlord transfers title to the leased object, the tenant may terminate the lease. Usually, commercial leases include a waiver of the tenant's right. In addition, in the case of an investment transaction (asset deal), the buyers request the sellers to obtain specific confirmations from the tenants (usually anchor tenants) that the tenants will not terminate the lease in the case of a change of landlord.

There is no obligation to register lease agreements with the public register. However, only registered lease agreements may be invoked against third parties (eg, the new owner of the real estate).

Registration costs of the lease agreement with the Real Estate Register are minor and amounts to EUR2.90. Certain increased fees may be applied for expedited registration time.

Generally, the landlord seeking eviction of their tenant is required to apply to court. If the tenant fails or refuses to vacate premises after the adoption of the final decision in favour of the landlord, the latter will need to apply to a bailiff for the enforcement of the court decision.

The length of a eviction proceeding depends on a number of circumstances (availability of written evidence, tenant's objections, etc). In the best-case scenario, the first-instance court's decision (which may be appealed) could be expected in approximately two to three months after the application to the court.

Although there is no extensive case law as to the landlord's rights to exercise self-defence, commercial leases usually contain the landlord's rights to cut off the supply of electricity and other public utilities, lock the doors, make an inventory of and remove the tenant's property and invoke other similar measures against the tenant refusing to vacate the leased premises.

Termination of a lease by a third party is not common and it can only occur in specific circumstances (eg, defence of public interest, land expropriation, etc). Usually, this process is time-consuming as such a termination may be argued in courts.

Private developers are using their own forms of contracts and the variety of wording is settled differently in every project. When it comes to the public sector, Red and Yellow forms of FIDIC 1999 are most frequently used. Developers with Scandinavian capital prefer to use a YSE form, which is also used in the market.

Construction projects are usually priced by a fixed-price model, especially when it comes to general contracting. Other structures would be priced by the maximum guaranteed price and unit price. The market trend is to employ a construction management company which employs several contractors or one general contractor with a nomination of suppliers or contractors of certain works for a fixed price.

The control and full responsibility of the design process is usually assigned to the designer until the receipt of the construction process. The owner is only required to provide initial information and approve the solutions.

After the construction permit is issued, the preparation of the work's design documentation is usually assigned to the contractors who perform the construction works.

During the construction the contractors are responsible for proper performance of the construction. However, the construction results are reviewed by the technical engineer and the designer, who ensure that the construction follows the solutions of the design documentation.

The market trend is to employ the design and construction management company, which not only selects the designers and contractors, but also supervises them.

The market players use various methods to manage construction risks. Employers request Contractor's All Risk (CAR) insurance to cover their damages. The wide list of standard Representations and Warranties (REPs) insurance and warranties are requested. Also, employers request an advance payment guarantee, a contract implementation guarantee (5% to 10% from the contract price), and use retention (5% to 10% from the contract price), which is released when a three-year guarantee-period guarantee (usually 5%) is presented.

Liability of the parties is usually limited to 10% of the contract prices. The limitation of liability cannot be applied in cases when there is gross negligence, where the damage was caused intentionally and also when there is loss of life, and the loss of health of non-material losses.

Schedule-related risks are one of the most discussed in the market. Some employers insure this risk, but usually monetary compensation is awarded in cases when the contractor fails to achieve certain milestones which are on a critical path to the development of the project. However, the parties can agree on much stricter terms.

The construction market uses all basic forms of security, which are also known in other contractual relations. The employers usually request that the contractors provide an insurance company’s performance warranty or, in some cases, even the first-demand guarantee issued by the bank. Escrow accounts are not so popular in the market. Mother-company surety is also widely used, from the contractors’ side – when the development budget is tight, and from the employer’s side, when a general contractor or supplier has doubts about the development of a special-purpose vehicle's (SPV’s) future performances.

The law does not provide for a possibility for contractors and/or designers to lien or otherwise encumber a property. Such actions can be taken only if it is provided for in the concluded agreement or through the court proceedings during the litigation process.

The building can be used only when the construction is completed, and it is formally declared. A certificate on completion of construction must be received from a commission of construction completion for buildings indicated by the law. The construction of simple structures or simple works are officially finished by a declaration signed by the builder.

As a principle, only new buildings (up to 24 months after completion of construction) and land for construction are subject to VAT. However, if both transaction parties are registered as VAT payers, they are free to agree to apply VAT on any real estate transaction.

In the case that VAT applies, it is added on the top of the transaction price and paid to the state budget by the seller. The takeover of VAT arrears is possible to manage the cash-flow when both transaction parties are registered as VAT payers.

Real estate transactions are subject to a standard VAT rate of 21%. No reduced rates apply to real estate transactions.

In Lithuania, two methods are commonly used for transactions involving real estate:

  • a real estate transaction structured as an asset deal; and
  • a real estate transaction structured as a share deal.

The most appropriate method is decided on a case-by-case basis. Usually, it depends on whether the buyer is interested only in a real estate (asset deal), or in the business as a going concern related to the particular real estate (share deal). If a real estate transaction is structured as a share deal, it might be subject to income tax (on capital gains received), but is not subject to Lithuanian VAT. 

Thus, before entering a large real estate portfolio transaction, parties are advised to analyse precisely the subject of transaction and consider all the available protections, including individual advance tax rulings on the tax treatment of the transaction.

Business premises are subject to real estate tax in Lithuania. The annual rate of the tax is set every year by the local municipality in the range of 0.5% - 3%.

A company must pay real estate tax on the premises if those premises are:

  • owned by the company; or
  • transferred by a natural person for the use of the enterprise for a period exceeding one month.

A significant amount of various tax exemptions apply for the real estate tax, including exemption for the property of the companies of free economic zones or property of bankrupt companies. Also, the municipality has the right to reduce the tax rate for a particular taxpayer or exempt them from taxation (after receiving the application of the taxpayer, the municipality council adopts a decision on reduction of the tax rate or exemption from taxation).

Foreign investors’ income from the transfer and/or rent of a property located in Lithuania is taxable in Lithuania by applying general taxation principles. The received taxable rent income is decreased by costs related to real estate maintenance. Taxable income (gains) from the transfer of the property is decreased by the acquisition (minus depreciation, if applied) price.

Real estate-related income is subject to 15% income tax, and 20% income tax on the taxable income exceeding EUR162,324 in 2021 (20% applies only to natural persons).

When the buyer or the lessee is a Lithuanian entity, taxes must be withheld and paid to the budget on behalf of the foreign investor by this Lithuanian entity. In the case that the buyer/the lessee is a natural person, the foreign investor must take care of the Lithuanian tax liabilities himself or herself.

Premises used in commercial activity are fixed assets of the entity.

The fixed asset – buildings – may be depreciated for up to eight years for new buildings and 15 years for other commercial buildings.

WALLESS

Upės str. 23
08128 Vilnius
Lithuania

+370 611 048 64

lithuania@walless.com www.walless.com
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Law and Practice

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WALLESS has a solid real estate team in the Baltics. The Vilnius office has a team of 12 dedicated professionals, who have diverse experience in real estate law. WALLESS is unique in having its real estate team comprised of professionals working as three elite forces (real estate development and construction, real estate transactions and public procurement and PPP), covering a wide range of real estate market demand on real estate legal services. The firm is especially proud of its deep knowledge in real estate investments, zoning and planning, and dispute resolutions on construction in cultural heritage territories. The WALLESS real estate practice specialists are consulted by four out of five major municipalities in Lithuania. The WALLESS team represents and is consulted by four out of five major developers in the market and participates in most complicated developments. WALLESS is a member of the Real Estate Developers Association.

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