Lithuania is a civil law country with a strict hierarchy of laws, starting with the Constitution and laws, followed by by-laws and ordinances.

The Civil Code of the Republic of Lithuania is the main source of real estate law. It regulates separate sale-purchase, lease and construction contracting agreements, and also contains general regulations on ownership, restrictions, obligations and contracts.

The Law on Construction, the Law on Spatial Planning and the Law on Municipal Infrastructure Development are also significant when it comes to real estate development. There are also numerous construction-related technical regulations approved by the Ministry of Environment, and other by-laws approved by the government and other ministries, which set frequently changing imperative rules. Therefore, it is essential to seek advice from a local lawyer when targeting a newly constructed property or a property with development opportunities.

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

After the initial hesitation, investors regained their confidence in 2021 and invested in various real estate objects.

Despite the pandemic and geopolitical challenges, in 2022 Lithuania managed to achieve a record foreign direct investment (FDI) result, attracting as many as 57 projects. The retail segment took the lead but the biggest transaction was in the office sector: the sale of the Girteka Park campus in Vilnius by Galio Group. The sale of an office building constructed by Lords LB should also be noted.

While anticipating the downturn of the economy, at the start of 2022 the residential and commercial market was showing signs of caution; already planned developments were moving forward, but new projects were postponed. However, there was a bounce back at the end of 2022. Also, the development of industrial and logistics objects continues, with new building developments underway, especially in hi-tech industries. According to the experts, 2023 should be a year of two halves for the commercial real estate market: the first half of the year will be slower, but the second half of the year should become a counterweight – the curve will rise.

Real estate investors, developers and lenders in Lithuania have not yet adapted to the recent emergence of blockchain, decentralised finance, proptech and other disruptive technologies in the real estate industry, so none of these technologies is expected to have a significant impact on the real estate market in Lithuania over the next 12 months.

Alternative crowdfunded platforms are attracting more and more capital, which makes the real estate finance market more diverse and sustainable in Lithuania. Crowdfunded platforms began to gain momentum in the second half of 2021 in particular, and offer possibilities to invest in various real estate assets. This trend continued in 2022, as the crowdfunding platforms offer possibilities for entities with smaller capital funds to make real estate investments in bigger projects.

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

• The Law on Special Land Conditions was introduced in 2020.
• A new Law on Municipal Infrastructure Development was enacted in 2021.
• Amendments to the Law on Land came into force in March 2022, which have changed the rules for developing on state-owned land – developers now pay huge fees (up to 75% of the value of the land plot) for development rights, which has prompted investors to buy-out the land plots from the state.
• Further amendments to the Law on Land came into force in June 2022, which allow the municipalities to gain rights over state-owned land in cities and smaller towns. Additional changes are currently being considered, which would allow for more possibilities in the development of state-owned land plots. The changes will boost the real estate market and give positive incentives to seek brownfield investments.

These additional changes to the regulations on leasing state-owned land are long awaited. If the state-owned land lease regulation change is adopted by the parliament, the development of leased state-owned land will be clearer. The municipalities are expected to be given more tools to plan and prioritise brownfield development in state-owned land plots leased by private parties.

The most common types of property rights are:

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

The transfer of title is governed by the Lithuanian Civil Code. There are no special laws that would apply to the transfer of any specific types of real estate (eg, residential, industrial, offices, retail, hotels). However, some laws (eg, the Law on Forests, the Law on Agricultural Land) provide some restrictions regarding the transfer of ownership rights to specific types of land (agricultural or forest land). These restrictions relate to subjects that have a priority right to acquire land, to the amount of land that can be acquired, etc. Discussions are currently underway as to whether the limitations for the acquisition of agricultural land should be lifted.

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

The pandemic-related limitations in governmental office functionality and in-person availability for document signing or notarisation did not result in new procedures for the documentation and completion of real estate transactions. Some documents, such as powers of attorney, may be approved via virtual meetings but this does not apply to real estate sale-purchase deals.

All real estate in Lithuania is registered in the Real Estate Register, which 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, and also regarding 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 comprehensive and reliable, title insurance is not common.

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 through an investment vehicle rather than directly), financial, technical and environmental due diligence. Any type of due diligence normally includes three parts.

• Preparation – this includes the identification of objects, goals and timelines, as well as entering into confidential and non-disclosure agreements.
• Investigation – this includes the collection of facts and documents from both the seller and the buyer. The information is mainly gathered according to the checklist provided by the buyer team. Typically, all the information requested by the buyer and its consultants is uploaded to virtual data rooms; in today's world, it is quite rare to have a physical data room. This stage also includes the analysis and evaluation of the information and material provided, and questions or interviews with the management and relevant personnel of the seller.
• Results – this typically includes the preparation and presentation of the due diligence report, which details the main risks involved and makes 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. Fines are the most usual security for the enforcement of those remedies; representation and warranty insurance is not used in Lithuania.

No specific new representations and warranties were brought about by the COVID-19 pandemic. Risks related to the pandemic are usually managed through the structuring of the transaction.

There is no typical cap on the seller’s liability for a breach of its representations and warranties. In some cases, such cap is agreed but it depends on the specifics of the transaction and/or the real estate.

Usually, only the representations and warranties related to the suitability of construction works expire after the end of the warranty terms stipulated in the legal acts – five, ten or 20 years. Other representations and warranties are subject to a general limitation period for filing a claim to court (ten years, in most cases).

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 if 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 when:

• 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
• 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 “polluter pays” rule, under which the buyer of a real estate asset will be held responsible for soil pollution or environmental contamination if they 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, for certain developments, construction opportunities may be assured only after the construction permit is issued. Until the issue of such permits, the rights to develop the land plot are in danger due to the vague requirements of the Law on Architecture.

The Law on Architecture also introduces regional councils of architects, which may decide on the aesthetics of future developments, and any 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, and upon relevant compensation being provided 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.

The state has a priority right to purchase private agricultural or forest land for sale within certain areas.

Agricultural or forest land may also be compulsorily purchased by the state where it appears that it was acquired by a buyer who infringed the rules and restrictions for the acquisition of such land.

A real estate acquisition transaction is subject to notarisation. The notary fee for the 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 unit.

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

The transfer of at least 25% of shares in the property-owning company is also subject to notarisation, except in the following cases:

• when the personal securities accounts of the shareholders of the private limited company have been transferred for management to a legal person who is entitled to open and manage personal accounts for financial instruments; and
• when 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 may not be more than EUR120 for a pledge of shares, based on the value of the object.

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

A foreign investor wishing to acquire land 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 – countries that 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 that are members of at least 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
• the Organisation for Economic Co-operation and Development (OECD).

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

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

The 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 loans, which are expected to be subordinated to the debt financing. In the case of insufficient equity, additional funds are sought by way of mezzanine or senior debt.

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

• 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 premises); and
• upstream or cross-stream guarantees.

There are no restrictions under Lithuanian law on granting security over real estate to foreign lenders, nor on repayments being made to a foreign lender under any security document or loan agreement.

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

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

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

• a notary fee of up to EUR263, with the exact amount depending 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);
2. a success fee calculated as a percentage of the amount subject to recovery (from 4% to 19%); plus
3. additional expenses.

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

The creation of security by a Lithuanian entity may raise two concerns:

• potential non-compliance with Lithuanian financial assistance restrictions; and
• potential non-compliance with corporate benefit requirements.

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 nor grant security to individuals or corporate entities if doing so 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 the acquisition of the Lithuanian entity.

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

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

If a borrower fails to fulfil secured obligations, enforcement of the mortgage over the real estate would be carried out through 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 over the real estate mortgaged in favour of the creditor.

Under Lithuanian law, the priority of a mortgage over real estate is decided by considering the timing of the mortgage registration in 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. The duration of the enforcement and realisation on real property security can vary greatly. If there are no unfounded complaints, the enforcement takes about six months from the application to the bailiff. In the debtor has exhibited malice in making unfounded complaints, the litigation may last for several years. No specific rules regarding restrictions on a lender’s ability to foreclose or realise on collateral in real estate lending have been implemented by governmental entities in response to the pandemic.

A debt may become subordinated upon the consent of a previous creditor and the conclusion of an agreement with said previous creditor. In such a case, the registered security that was created first would have to be re-registered to give it 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 will not usually 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 they had financial difficulties may be subject to claw-back under Lithuanian insolvency law.

Most of the real estate financings in Lithuania are EUR-denominated, so the expiry of LIBOR is less relevant. Where applicable, the LIBOR replacement will occur following a pre-agreed order; in the absence of such, 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 renegotiating a different reference rate before the expiry of LIBOR.

Strategic planning is usually organised by the government and municipalities, and is implemented via spatial planning. The Law on Spatial Planning provides for spatial plans at the national, municipal and local levels.

The government and the Ministry of Environment organise and implement 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.

There are also 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 adhere 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 a review of the project by regional architecture councils. The so-called “advice” of these councils is mandatory when participants (usually local communities) complain during a public hearing at the pre-design stage. In some cases, the design ideas of the larger buildings have to be selected through a design contest.

The design documentation of a project 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 of construction and related solutions provided in the design are reviewed by the municipalities. Usually, municipalities rely on the mandatory expertise embodied in 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 Ministry of Agriculture are the main bodies that make decisions on the division of parcels and the indication of designated purposes under the zoning documentation.

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

The Law on Spatial Planning, the Law on Land, the Law on Construction, the Law on Architecture and various construction regulations mainly apply during the development.

Projects on a larger scale should go through the environmental impact assessment procedure. Any third party has the opportunity to express its opinion during the procedures of publishing 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 sq m. 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 (that has a material interest) may present a claim to the court and dispute the issued permit.

As of 1 November 2021, in a transfer of development rights with the construction permit, the information regarding the new developer has to be provided in order to change the relevant data of the construction 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.

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

Municipal infrastructure that is developed by a private developer should be transferred to the municipality. Compensation will be received in five years, but only if the development was performed in the territory intended for prioritised development. Compensation may be received from other joining developers, but only if they join that infrastructure in ten years in territories that 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 the 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; and
• an agricultural company.

The most common types of investment vehicle among both foreign and local investors are the private company (sometimes referred to as a private joint stock company) and the 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. It has limited liability partners and general partners with no limited liability. An agreement is signed between the partners on the management of a partnership. There is no minimum share capital requirement to conclude a partnership agreement.

The minimum share capital required to set up a private limited company is EUR2,500. A small partnership can be established with a minimum share capital of EUR1, but this type of entity is not popular with developers.

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); and
• 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. It is responsible for the strategic management of a company, the election of the CEO and some other decisions related to the company (decisions to invest in other companies, etc). Also, only natural persons can be members of the Board.

Each entity is required to have a CEO. Accounting services can be outsourced. The annual entity maintenance costs comprise the salary of the CEO and the costs for 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, rents and lease agreements are freely negotiable, provided they do not infringe certain imperative norms established in the Civil Code. Certain market standards of commercial leases are not obligatory, but are voluntarily applied by the largest players in the market.

There are no material ongoing regulations regarding rents or lease terms that resulted from the COVID-19 pandemic. The pandemic did not have a substantial effect on existing leases, and deals continued to be made between landlords and tenants regarding payments for leased premises during the pandemic. Due to trends in the lease market, the leasing of residential and/or office buildings is still booming.

The typical terms of a lease of business premises are as follows:

• the maximum term of any lease may not exceed 100 years;
• the tenant is usually 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; and
• 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. The market does not usually use specific clauses that would deal with construction build-out/supply chain issues due to the pandemic.

The rent payable is usually reviewed and indexed (increased) every year according to the index chosen by the parties. The Lithuanian consumer price index (CPI) or the Lithuanian CPI 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, the rent is typically increased each year as a result of indexation. No additional consent for any such increase is usually 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 through court proceedings.

VAT is payable on rent. It is not applicable 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 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 – eg, 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 insuring the building are usually paid proportionally by the tenants 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; and
• property insurance covering losses of and damage 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 tenant and the landlord usually agree on some rent discount or delay of payments as there is very little incentive for tenants to insure leases as part of business interruption insurance. Tenants with business interruption insurance policies that cover rent payments did seek compensation during the pandemic.

The premises can be used only in accordance with the purpose registered for them in the public register and the main purpose of use included in the lease agreement. If the tenant uses the premises not in accordance with their purpose or main purpose of use as 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 if they have prior consent from the landlord. Usually, the lease agreement includes certain conditions under which such works must be performed (specific hours for performance of works, quality of materials used, etc).

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

The lease agreement usually gives the landlord the 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.

The landlord’s interests against a failure by the tenant to meet its obligations are usually 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 for 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.

Commercial lease agreements usually 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 to sublease all or a portion of the leased premises only with prior consent from the landlord.

The lease may be terminated through the following methods:

• 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); or
• 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 landlord is entitled to terminate the lease agreement unilaterally if the following occurs:

• the tenant uses the leased objects not in accordance with the agreement/permitted use;
• the tenant worsens the 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 unreasonably refuses to sign the handover deed or does not sign it in due time;
• the tenant fails to perform repair works on the premises; or
• the tenant commits another material breach.

The tenant is entitled to terminate the lease agreement unilaterally if the following occurs:

• 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 is obliged to perform them;
• the landlord unreasonably refuses to sign the handover deed;
• the premises have material defects that prevent the tenant from using them for their permitted use; or
• the landlord commits another material breach.

Under the Civil Code, the tenant may terminate the lease if the landlord transfers title to the leased object. 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 in the public register. However, only registered lease agreements may be invoked against third parties (eg, the new owner of the real estate).

The costs for registering the lease agreement with the Real Estate Register are minor, amounting to EUR7.33. Certain increased fees may be applied for expedited registration time.

Generally, a landlord seeking the eviction of their tenant is required to apply to court. If the tenant fails or refuses to vacate the 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 an eviction proceeding depends on a number of circumstances, such as the availability of written evidence, the 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 application to the court.

Although there is no extensive case law surrounding the landlord's rights to exercise self-defence, commercial leases usually contain a right for the landlord 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 a tenant who refuses to vacate the leased premises.

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

Private developers use their own forms of contracts, and the various wording is settled differently in every project. When it comes to the public sector, Red and Yellow forms of FIDIC 1999/2017 are used most frequently. Developers with Scandinavian capital prefer to use a YSE form, which is also used in the market.

Construction projects are usually priced using a fixed-price model, especially when it comes to general contracting. Other structures would be priced using the maximum guaranteed price and unit price. The market trend is to employ a construction management company that employs several contractors, or to employ one general contractor with a nomination of suppliers or contractors of certain works for a fixed price. The changes in construction regulation currently being implemented will most likely secure the market model of working by a form of general contracting.

Control and full responsibility for the design process are usually assigned to the designer until the construction permit is received. The owner is only required to provide initial information and to 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 the 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 a design and construction management company that not only selects the designers and contractors, but also supervises them.

Market players use various methods to manage construction risks. Employers request contractors all risk (CAR) insurance to cover their damages. A wide list of insurance and warranties over standard representations and warranties (REPs) are requested. Employers also request an advance payment guarantee and a contract implementation guarantee (5% to 10% of the contract price), and retain 5% to 10% of the contract price, which is released when a three-year guarantee is presented – this is usually a 5% warranty issued by the insurance company.

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

Schedule-related risks are among 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 on the 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 that are 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, on the contractors’ side when the development budget is tight, and on the employer’s side when a general contractor or supplier has doubts about the development of a special-purpose vehicle's future performance.

The law does not provide a possibility for contractors and/or designers to lien or otherwise encumber a property. Such actions can be taken only if doing so 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 is 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.

If VAT applies, it is added on top of the transaction price and paid to the state 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.

In Lithuania, real estate transactions are commonly structured as either an asset deal or a share deal.

The most appropriate method is decided on a case-by-case basis, and usually depends on whether the buyer is interested in the real estate alone (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 not Lithuanian VAT.

Therefore, before entering into a large real estate portfolio transaction, parties are advised to carefully analyse the subject of the transaction and to 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 and ranges between 0.5% and 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 variety of tax exemptions apply for the real estate tax, including for the property of companies in free economic zones or the property of bankrupt companies. Also, the municipality has the right to reduce the tax rate for a particular taxpayer or to exempt them from taxation (after receiving the application from the taxpayer, the municipality council adopts a decision on the 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 the 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 price (minus depreciation, if applied).

In 2023, real estate-related income is subject to 15% income tax, and to 20% income tax on the taxable income exceeding EUR202,188 (20% applies only to natural persons).

When the buyer or the lessee is a Lithuanian entity, it must withhold taxes and pay them to the state on behalf of the foreign investor. If the buyer/lessee is a natural person, the foreign investor must take care of the Lithuanian tax liabilities themselves.

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

Fixed assets (buildings) may be depreciated for up to eight years for new buildings and 15 years for other commercial buildings. A tax reform suggested in March 2023 would allow the depreciation of fixed assets within one year.