Buying Real Estate in Latvia.


Latvian real estate market can be described as a traditional market with mostly standard transactions. In recent years, market activity has been stable, and no major changes have occurred.
The most common forms of real estate deals are as follows:
(1)    purchase of assets or business of the target company, including purchase of only real estate or in combination with other assets (e.g. office building with lease agreements);
(2)    purchase of shares in the target company which in turn owns the real estate (it is not unusual that an additional SPV is incorporated into the overall structure);
(3)    mergers or demergers of companies;
(4)    acquisition of real estate by using a contractual joint venture.

Purchase of assets (business) and purchase of shares are the most common methods of structuring real estate deals in Latvia which are also preferred by financing banks. However, most of the high value real estate transactions are engineered as sale of shares plus creation of buying entity (with or without an in-kind investment of the real estate into the share capital of the target company) due to a high real estate transfer tax (2% from the value of the deal). Due to unfriendly tax policy from Tax Authorities, tax planning shall be mandatory part of any transaction.

Purchase of shares in the target company.

When purchasing shares in a target company, the standard practice in all major business transactions is to sign a letter of intent (LOI) between potential seller and buyer. LOI outlines the terms of the deal and serves as an “agreement to agree” between the parties, including price calculation method, timeframe, confidentiality, exclusivity clauses and other provisions. In some cases, LOI only serves as a summary of agreed terms between the seller and the buyer.

Once the LOI or at least a confidentiality agreement is signed, the due diligence (DD) process of the target company and also the real estate commences, including legal, technical, financial and tax. The aim of DD is to identify potential risks which are likely to have a negative effect on the asset (business) or share value, and which need to be addressed in the share purchase agreement (SPA). Risks identified during DD can result in price adjustments, increased guarantees or even be a deal breaker for the potential buyer.

In parallel to the DD process, the parties negotiate the terms of the SPA and other transaction documents (e.g., corporate documents, financing documents – refinancing, loans, encumbrances, etc.). In our experience, the first draft of the SPA is provided by the buy-side. Once the parties have agreed on all terms and conditions of the SPA and other transaction documents, signing of those documents takes place. The transaction can be structured as a simultaneous signing and closing or as a deferred closing.

Usually the payment of the purchase price is through an escrow account, where the buyer and its financing bank transfers the purchase price and it is released from the escrow account in one or several tranches upon completion of specific conditions described in the SPA, escrow account agreement (e.g. resigning of the existing management board of the target company, termination of the agreements, completion of construction, etc.) and financing documents (e.g. registration of commercial pledges on shares and all assets, mortgage on the real estate, etc.).

The time for closing the transaction is required for the seller and/or the target company to obtain any consents required for change of control or merger clearances, as well as to provide other documents and perform other acts required for closing, so that the title to the shares and control of the target company can be transferred from the seller to the buyer on the closing date. These include, e.g., change of the target company’s management board to ensure transfer of control to the buyer on the closing date.

Depending on the complexity of the transaction and the business type of the target company (e.g. whether it is a regulated company), and whether the purchase of the target company shares is considered as a merger under Latvian Competition Law, the time required for closing the transaction can vary from a couple of weeks to several months after signing the SPA and other transaction documents.

According to the Commercial Law, changes to the (i) Articles of Association, (ii) the management board and supervisory board, (iii) the legal address of the target company, and (iv) notification of change of shareholders of the target company, and other changes are to be registered with the Company Register. In particular, the buyer shall disclose the ultimate beneficia owners of the Latvian company in the public register.

There are also various post-closing issues which means that there may be significant ongoing ties between the sell-side and buy-side. The parties will likely cooperate in determining the purchase price adjustment.

Purchase of real estate (assets or business).

When purchasing a real estate, the first step is signing of the real estate purchase agreement. If the real estate is complex, it is possible that the seller and the buyer signs LOI or confidentiality agreement and perform DD of the real estate and enter into an agreement only afterwards similar as in case of share transfer deals.

Once the real estate purchase agreement is concluded, the parties enter into an escrow account agreement with and the buyer and the buyer’s financing bank transfers the purchase price or its part to the escrow account. The funds remain in the escrow account until the parties have fulfilled conditions for the release of the funds. Conditions that must be fulfilled by the seller and/ or the buyer depend on the specifics of the real estate, but usually the seller needs to obtain a refusal from the municipality or third party to exercise their rights of first refusal, the seller must terminate agreements, etc.

The parties sign an application to the Land Book for registration of the buyer’s title to the real estate in front of a notary. One of the parties, usually the buyer, covers the state and stamp duties. The signed documents are then filed with the Land Book. Usually the agreement sets strict time limits for each action to be taken by the respective party. Once the buyer is registered as the owner of the real estate, the bank transfers the purchase price or its remaining part to the seller.

Financing considerations – internal loans and equity.

There is no special regulation with respect to financing for transactions in the laws of the Republic of Latvia and the parties are free to reflect on the financing method in the transaction documents. However, the choice of the financing method is based on various interrelated aspects – tax considerations (e.g., transfer pricing issues in case of related party financing, etc.), especially considering the new tax regime in force as of 1 January 2018, requirements of the financing bank(s), etc.


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