Real Estate: Right to Build.

Due to historical events, a situation has developed in Latvia where a land plot can be owned by one person, but the structure or structures on it – by another. Up until 1 January 1 2017, the laws and regulations allowed the creation of a voluntarily shared property, which meant that the lessee, with the permission of the landowner, could build structures on the leased land as independent property objects. In practice, this created a considerable number of disputes between lessees and owners, especially with respect to the legal status of the structures after the expiration of the lease agreement or in similar situations.

The imperfections of the regulatory framework and disputes prompted the legislator to amend the regulatory framework by providing that as of 1 January 2017 it would no longer be possible to enter into a legal relationship where the property is voluntarily shared. The voluntarily shared property has been replaced by a new legal instrument in the Civil Law – the right to build, which also entered into force on 1 January 2017.

In order to establish a right to build, an agreement granting a person the right to build a non-residential building or a civil engineering structure on a plot of land owned by another person must be signed. Residential buildings cannot be built based on the right to build.

In order to successfully implement the right to build, the agreement must contain a number of different provisions. Among other things, the following should be determined:

(i)    the plot or unit of land that is subject to the right to build (if the right to build has been granted only with respect to a part of a land plot, the unit of land might need to be registered in the State Land Service first);
(ii)   a term for the right to build (the minimum term is 10 years, the maximum term for a public person is 30 years);
(iii)  payment for the right to build and payment terms (if the right to build will be granted for consideration);
(iv)  who will build connections to utilities; and
(v)   what will happen when the right to build expires.

However, signing the agreement is not the last step, as the property right arising from the right to build is established and enters into force only after the right to build has been entered in the Land Register. It should be noted that the right to build may be alienated, as well as encumbered with property rights and pledged, unless the agreement explicitly provides otherwise.

After the expiry of the right to build, the owner of the land acquires the non-residential building (civil engineering structure) built on the basis of a right to build without any consideration, unless consideration has been provided for in the agreement. The agreement may also stipulate that the party with the right to build is obliged to remove the non-residential building (civil engineering structure) from the land plot before the right to build expires. Similarly, the Civil Law specifies cases in which the landowner may demand the termination or sale of the right to build in a compulsory auction, for example, if the person with the right to build has in any way worsened the condition of the land plot designated for building. In addition, after the expiry of the right to build the owner of the land plot has the right to claim compensation for any damages caused by the person with the right to build by using the land plot designated for building.

Overall, the new regulation enhances the legal clarity and protection for all parties, however, incorporation of all relevant provisions in an agreement is essential for successful implementation of a right to build.

Our experience with long-term lease agreements shows that a lot of time is usually devoted to agreeing on the following:

(i)   what principles determine the consideration for a non-residential building (civil engineering structure) built on the basis of a right to build in case it is demolished after the expiry of the right to build; and
(ii)  how is the cost of removing a non-residential building (civil engineering structure) from a plot of land covered?

These issues are especially relevant in cases where the right to build is granted by a public person, including municipalities, as under the existing laws and regulations the maximum term of a right to build in such case is 30 years. Our clients have already received their first bids from municipalities on rights to build, and we must say that the proposed agreements need substantial improvements in order to meet the interests of the potential owners of the rights to build.

by Linda Bērziņa, Associate, Latvia

Related Lawyers

Vairis Dmitrijevs

Head of M&A

+371 29 258 370

vairis.dmitrijevs@vilgerts.comEmail

Gints Vilgerts

Partner, M&A

+371 29 107 768

gints.vilgerts@vilgerts.comEmail

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