Real Estate in 28 jurisdictions worldwide 2014...Real Estate in 28 jurisdictions worldwide...

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Real Estate in 28 jurisdictions worldwide Contributing editor: Joseph Philip Forte 2014 ® Published by Getting the Deal Through in association with: Arzinger Biedecki Bin Shabib & Associates (BSA) LLP Coulson Harney D’Acol Cardoso Advogados DLA Piper LLP (US) Edas Law Bureau Estudio Rubio, Leguia, Normand & Asociados Freeman, Freeman & Smiley, LLP González Calvillo, SC Gyandoh Asmah & Co I.L.A. Pasrich & Company Kleyr Grasso Associés Kluge Advokatfirma DA Law Chambers Nicos Papacleovoulou LLC Leks & Co Nagashima Ohno & Tsunematsu Nnenna Ejekam Associates OMG Oppenländer Rechtsanwälte Reed Smith LLP Rödl & Partner Schellenberg Wittmer Sultan Al-Abdulla & Partners Taylor Wessing Thiery & Ortenburger Rechtsanwälte OG Tilleke & Gibbins Varul Žuri´c i Partneri d.o.o.

Transcript of Real Estate in 28 jurisdictions worldwide 2014...Real Estate in 28 jurisdictions worldwide...

  • Real Estate in 28 jurisdictions worldwide

    Contributing editor: Joseph Philip Forte2014

    ®

    Published by Getting the Deal Through

    in association with:

    Arzinger

    Biedecki

    Bin Shabib & Associates (BSA) LLP

    Coulson Harney

    D’Acol Cardoso Advogados

    DLA Piper LLP (US)

    Edas Law Bureau

    Estudio Rubio, Leguia, Normand & Asociados

    Freeman, Freeman & Smiley, LLP

    González Calvillo, SC

    Gyandoh Asmah & Co

    I.L.A. Pasrich & Company

    Kleyr Grasso Associés

    Kluge Advokatfirma DA

    Law Chambers Nicos Papacleovoulou LLC

    Leks & Co

    Nagashima Ohno & Tsunematsu

    Nnenna Ejekam Associates

    OMG

    Oppenländer Rechtsanwälte

    Reed Smith LLP

    Rödl & Partner

    Schellenberg Wittmer

    Sultan Al-Abdulla & Partners

    Taylor Wessing

    Thiery & Ortenburger Rechtsanwälte OG

    Tilleke & Gibbins

    Varul

    Žurić i Partneri d.o.o.

  • Overview Joseph Philip Forte DLA Piper LLP (US) 3

    Austria Ernst W Ortenburger Thiery & Ortenburger Rechtsanwälte OG 6

    Brazil Gustavo D’Acol Cardoso and Giovana Ramos Franzini D’Acol Cardoso Advogados 14

    Croatia Miroslav Plašćar and Iva Filipan Žurić i Partneri d.o.o. 23

    Cyprus Chrysthia N Papacleovoulou and Evi N Papacleovoulou

    Law Chambers Nicos Papacleovoulou LLC 31

    Dominican Republic Juan Alcalde and Vilma Santana OMG 48

    England & Wales Jon Pike and Siobhan Hayes Reed Smith LLP 58

    France Alfred Fink and Pierre Tallot Taylor Wessing 66

    Germany Jens Kaltenborn and Christian Gunßer Oppenländer Rechtsanwälte 76

    Ghana Theresa Tabi Gyandoh Asmah & Co 85

    India Amir Singh Pasrich and Gopa Bhardwaz

    I.L.A. Pasrich & Company 92

    Indonesia Eddy Marek Leks Leks & Co 105

    Italy Eugenio Bettella and Svenja Bartels Rödl & Partner 113

    Japan Kenji Utsumi and Hiroto Inoue Nagashima Ohno & Tsunematsu 121

    Kenya Alex Njage and Cornelius Kigera Coulson Harney 130

    Lithuania Robert Juodka, Tomas Venckus and Liutauras Baikštys Varul 138

    Luxembourg François Collot, Patrick Chantrain and Pascal Sassel Kleyr Grasso Associés 148

    Mexico Alfredo Chávez Goyeneche and Paulina Sellerier Giménez González Calvillo, SC 158

    Nigeria Nnenna Ejekam, Chris Eze and Innocent Abidoye Nnenna Ejekam Associates 168

    Norway Belinda Taranger Ingebrigtsen, Knut Prestvik and Frode Olsen Kluge Advokatfirma DA 176

    Peru Milagros Maraví Sumar, Arturo Ruiz Sánchez and Maribel Príncipe Hidalgo

    Estudio Rubio, Leguia, Normand & Asociados 185

    Poland Radosław Biedecki Biedecki 191

    Qatar Salman Mahmood, Hasan El Shafiey and Mohammed Riaz

    Sultan Al-Abdulla & Partners 201

    Russia Igor Kurochkin and Dayana Dzhimbeeva Edas Law Bureau 210

    Switzerland Yves Jeanrenaud and Josef Caleff Schellenberg Wittmer 221

    Thailand Cynthia Pornavalai and Ahmet Yesilkaya Tilleke & Gibbins 229

    Ukraine Timur Bondaryev, Svitlana Teush and Natalia Klochun Arzinger 238

    United Arab Emirates Jimmy Haoula, Rima Mrad and Mamoon Ashraf

    Bin Shabib & Associates (BSA) LLP 249

    United States Curtis A Graham, Damon M Juha and Jill M Draffin

    Freeman, Freeman & Smiley, LLP 260

    Real Estate 2014Contributing editor Joseph Philip Forte DLA Piper LLP (US)

    Publisher Gideon Roberton

    Business development managers Alan Lee, George Ingledew, Dan White, Robyn Horsefield, Adam Sargent

    Account managers Megan Friedman, Joseph Rush, Dominique Destrée, Emma Chowdhury, Lawrence Lazar, Andrew Talbot, Hannah Mason, Jac Williamson, Ellis Goodson

    Media coordinator Parween Bains

    Administrative coordinator Sophie Hickey

    Research coordinator Robin Synnot

    Marketing manager (subscriptions) Rachel Nurse [email protected]

    Head of editorial production Adam Myers

    Production coordinator Lydia Gerges

    Senior production editor Jonathan Cowie

    Senior subeditor Caroline Rawson

    Subeditor Anna Andreoli

    Director Callum Campbell

    Managing director Richard Davey

    Real Estate 2014 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 © Law Business Research Ltd 2013 No photocopying: copyright licences do not apply.First published 2007 Seventh edition

    ISSN 1756-7084

    The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of November 2013, be advised that this is a developing area.

    Printed and distributed by Encompass Print Solutions Tel: 0844 2480 112

    CONTENTS

    LawBusinessResearch

  • luxembourg Kleyr grasso Associés

    148 Getting the Deal Through – Real Estate 2014

    LuxembourgFrançois Collot, Patrick Chantrain and Pascal Sassel

    Kleyr Grasso Associés

    GENERAL

    1 Legal systemHow would you explain your jurisdiction’s legal system to an investor?

    Luxembourg is a parliamentary representative democracy in the form of a constitutional monarchy. The Luxembourg legal system is a civil code system essentially composed of written laws.

    Applicable Luxembourg law rules, in particular with regard to evidence, depend on the value of the contract as well as whether the contract is of a civil or commercial nature. Contracts may be entered into either orally or in writing. Save as otherwise provided for by law, oral agreements are considered as valid without the need for further formalities. Oral evidence is generally not admissible to alter or challenge the content of a written contract.

    Interim injunctions may be obtained by way of summary pro-ceedings either to avert a situation that would cause irreparable harm to the plaintiff or to remedy an unlawful situation that has already occurred, or to receive advance payment on a debt that is not seriously debatable.

    2 Registration and recording systemDoes your jurisdiction have a system for registration or recording

    of ownership, leasehold and security interests in real estate? Must

    interests be registered or recorded?

    Luxembourg has a Mortgage Registry listing all transfer of owner-ship, rights and interests, leases concluded for a period exceeding nine years, mortgages, easements and encumbrances in the estate and a Land Registry providing information about the current owner, the description, the exact situation and surface of the property. Even if lease contracts have to be registered for tax reasons, there is no registry for leases concluded for a period not exceeding nine years. The Mortgage Registry is governed by the Law of 25 September 1905 on the transcription of real rights and the Law of 18 April 1910 on the Mortgage Regime. The Land Registry is governed by the Law of 8 March 1950 in the Land Registry conservation, as amended. While registration of transfer of ownership, easement, mortgage in the Mortgage Registry is mandatory to render the sale enforceable in relation to third parties purposes, it does not affect the validity of the transaction between the parties. Registration of the mortgage grants the real estate lender the right to an effective payment over the proceeds of the sale of the real estate by priority to the subsequent registration.

    3 Registration and recordingWhat are the legal requirements for registration or recording

    conveyances, leases and real estate security interests?

    Lease contracts are subject to:• aproportionalregistrationfeeof0.6percentontheaggregate

    sum of the rental payments set forth in the rental agreement, if the rental term does not exceed nine years;

    • aproportionalregistrationfeeof0.6percentiftherentaltermis nine years;

    • aproportionalregistrationfeeof1.6percentiftherentaltermexceedsnineyears(a0.6percentregistrationfeeanda1percent transcription fee).

    The registration must be made within a period of three months fol-lowing the signing of the lease agreement, failing which a fine equal to the amount of the registration fee will be payable.

    The leasing of buildings is generally exempt from VAT, although the parties may opt to render VAT applicable. In the latter case, the building must be used by the tenant for activities that allow at least 50 per cent of input VAT to be deducted. This will be the case for taxable persons partially subject to VAT if their recovery rate exceeds 50 per cent and for mixed-use buildings. Before VAT can be charged to an account, the lease contract must have been approved by the tax authorities, which also requires the lease to be registered (registered at the fixed rate).

    If the rental is subject to VAT, only a fixed registration fee of E12 will be charged, irrespective of the rental term.

    Such fees are generally supported by the tenant.For real estate purchasing, a distinction must be made between

    purchases of buildings to be constructed and purchases of exist-ing buildings. Buildings to be constructed are those where the cli-ent buys the land on which the construction company will erect the building. These purchases will incur a registration fee of between 7 and 10 per cent, depending on whether the premises are located in the city of Luxembourg (10 per cent) or elsewhere. The construc-tion of the building itself will still be subject to VAT at the rate of 15 per cent. VAT may be recovered by the business up to the limit of its input VAT recovery rate (100 per cent for a business whose total turnover is subject to VAT). The construction of the building is not subject to registration fees.

    The purchase of existing buildings is in principle exempt from VAT and is subject to registration fees as explained above (10 per cent or 7 per cent depending on whether the building is located in Luxembourg or elsewhere), but VAT can be opted for under the same conditions as the VAT option with respect to rental payments. The VAT option will allow the sale price net of VAT to be reduced since the seller will not have to adjust the input VAT that he may have deducted in the past.

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    However, sales of existing buildings subject to precedent condi-tions are only subject to a fixed registration fee of E12.

    Such registration fees are generally supported by the purchaser.The registration and renewal tax for mortgages amounts to 0.05

    per cent of the amount guaranteed by the mortgage.

    4 Land recordsWhat are the requirements for non-resident entities and individuals

    to own real estate in your jurisdiction? What other factors should a

    foreign investor take into account in considering an investment in your

    jurisdiction?

    Foreign investors can purchase and rent real estate in Luxembourg without having to be established or registered in Luxembourg. No business licence is required. Notwithstanding the foregoing, land-lords or tenants wishing to submit the lease agreement to VAT must be registered for Luxembourg VAT. See also question 35.

    5 Exchange controlIf a non-resident invests in a property in your jurisdiction, are there

    exchange control issues?

    Luxembourg has no exchange controls and its ability to introduce restrictions in relation thereto is impaired by its membership of the European Union.

    6 Legal liabilityWhat types of liability does an owner or tenant of, or a lender on,

    real estate face? Is there a standard of strict liability and can there

    be liability to subsequent owners and tenants including foreclosing

    lenders? What about tort liability?

    Owners of real estate properties may face civil or criminal liability, or both. Civil liability may be incurred:• onthebasisofthegeneralliabilityintortprinciple(article1382

    Civil Code);• inrelationtodamagescausedbytheruinofabuildingduetoalackofmaintenanceoradefectintheconstruction(article1386Civil Code);

    • when causing excessive trouble by the use of the property (article 544 Civil Code);

    • asaconsequenceofaviolationofthestipulationssetforthinthesale agreement; or

    • understatutorylaw(warrantyfordefects).

    Tenants and lenders of real estate may either incur liability in tort (article 1382 of the Civil Code) or contractual liability as a conse-quence of a violation of the lease agreement.

    With respect to environmental issues, Luxembourg has enacted the polluter pays principle, according to which the person respon-sible for contamination must pay for the damage, even if said per-son is no longer the owner or occupier of the contaminated asset. Criminal sanctions may apply both to natural persons and compa-nies in the case of violation of environmental legislation.

    7 Protection against liabilityHow can owners protect themselves from liability and what types of

    insurance can they obtain?

    A purchaser’s potential liability may be limited during the due dili-gence process when checking issues such as insurance coverage, con-struction insurance policies (eg, 10-year liability insurance policy, damage insurance policy), loss of rent cover, disclaimers, etc. In addition, real estate sale agreements may provide for specific indem-nity clauses whereby the former owner undertakes to indemnify the purchaser in relation to liability claims.

    Owners of real estate property also customarily subscribe to insurance policies covering damage caused by their negligence or fault, damage caused to the property by fire, flooding or theft and damage caused by the exploitation of a business covering all non-contractual damage caused to third parties, including accidental pollution.

    Luxembourg environmental legislation requires the owner of a potentially polluting establishment to provide financial guarantees or take out insurance to cover the costs of the decontamination of the site in the event of a closing-down of business or accidental pol-lution. Such insurance, however, does not exclude the criminal liabil-ity of the company’s management or the company itself in cases of violation of environmental legislation.

    The use of special purpose vehicles (SPVs) owning the prop-erty may shield the shareholders or ultimate beneficial owner from liability.

    8 Choice of lawHow is the governing law of a transaction involving properties in

    two jurisdictions chosen? What are the conflict of laws rules in your

    jurisdiction? Are contractual choice of law provisions enforceable?

    Luxembourg traditionally applies the lex loci rei sitae conflict of laws rule. Accordingly, real estate property located in Luxembourg is subject to Luxembourg law and jurisdiction.

    In relation to European cross-border real estate transactions, the applicable law would be determined in accordance with the provisions of the Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on law applicable to contractual obligations. Notwithstanding any choice of law by the parties, the formal requirements applicable to a contract, the subject matter of which is a right in rem in immoveable property or a ten-ancy of immoveable property, may be subject to the requirements of the law of the country where the property is situated. With respect to the foregoing, the choice by the parties of the applicable law would be recognised and applied by the Luxembourg courts.

    9 JurisdictionWhich courts have subject-matter jurisdiction over real estate

    disputes? Which parties must be joined to a claim before it can

    proceed? What is required for out-of-jurisdiction service? Must a party

    be qualified to do business in your jurisdiction to enforce remedies in

    your jurisdiction?

    Legal proceedings are brought before the following courts, depend-ing on the legal matter addressed or the value of the claim at stake.

    Justices of the peace enjoy jurisdiction for all civil and commer-cial matters where the value of the claim does not exceed e10,000. The judgment is final and conclusive (no appeal allowed) where the value of the case does not exceed e2,000. Justices of the peace have exclusive jurisdiction irrespective of the value of the claim for certain disputes, such as disputes related to leaseholds.

    District courts have jurisdiction in civil and commercial matters for all disputes that are not specifically allocated to other courts. Some specific rules of procedure apply to commercial disputes, but the parties may choose to follow the civil procedure even in com-mercial matters.

    Appeals of judgments rendered by a justice of the peace are brought before the district courts. Appeals of all other judgments are brought before the Court of Appeal.

    The Cour de Cassation is the highest court in the judicial hierar-chy. Cassation is an extraordinary recourse, and the court is merely in charge of verifying whether the legal basis of the judgment has not been misinterpreted or infringed by the lower courts.

    Administrative courts are notably competent for all matters in relation to urban planning law and administrative permits.

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    150 Getting the Deal Through – Real Estate 2014

    Representation by a lawyer who is a member of the Luxembourg Bar (list 1) is compulsory before the district courts (except in com-mercial procedures), whereas parties appear before the justice of the peace either in person or through a representative (a lawyer, a spouse, a parent, etc).

    Out-of-jurisdiction service is governed by Regulation (EC) No. 1393/2007 of the European Parliament and of the Council of 13 November 2007 on the service in Member States of judicial and extrajudicial documents in civil or commercial matters, and by arti-cles156etseqoftheLuxembourgNewCodeofCivilProcedure,which requires the claimant to hand over his or her claim to the bailiff or the court clerk, as the case may be, who will be in charge of the proper service of the claim to the defendant domiciled outside Luxembourg.

    The claimant can enforce a judgment by means of compulsory enforcement. The judgment must first be given ‘enforcement title’ through the appropriate procedure, after which the enforcement itself is executed by a bailiff.

    10 Commercial versus residential propertyHow do the laws in your jurisdiction regarding real estate ownership,

    leasehold and financing, or the enforcement of those interests in real

    estate, differ between commercial and residential properties?

    Both residential and commercial leases are governed by the general rules set forth in the Civil Code (articles 1713 to 1778 Civil Code). Residential leases are in addition governed by the specific provisions ofthelawof21September2006onresidentialleasewhichgrantsspecial protection to the tenant (eg, in respect of the duration or the termination of the lease (articles 12 to 15) as well as protection againsttheevictionofthetenant(articles16and17)).Commercialleases are governed by special provisions of Civil Code that provide the tenant, to some extent, with a special right to the lease renewal (article1762-4CivilCode)andarighttoclaimforthesuspensionofhisorhereviction(article1762-8CivilCode)orgranttothetenantthe possibility to assign (without the prior consent of the landlord) the lease contract to a third party in the framework of the assign-mentofhisorherundertaking (article1762-3CivilCode).Rentreview (as for exemple according to an automatic indexation system of market price, which is linked to the Index des prix issued by the Statec) is authorised for commercial leases but prohibited for resi-dential leases.

    From an administrative perspective, the authorisations required to construct a building differ depending on whether the intended use of the property is commercial or residential. The construction of residential real estate is generally only subject to the deliverance of a building permit issued by the municipality in accordance with the law of 19 July 2004 on municipal planning and urban develop-ment (see question 11). Construction of commercial (as well as any industrial or small-scale public) real estate in addition requires prior ministerial or district authorisation (in accordance with the law of 10 June 1999 on classified establishments). According to the law of 22 September 2011, the construction of real estate for retail business purposes (superstore with sales area exceeding 400m2) is subject to a specific permit from the Department of Small and Medium-Sized Businesses of the Ministry of Small and Medium-Sized Businesses and Tourism. Sales areas exceeding 2,000m2 are subject to addi-tional conditions.

    Except for the question of the public aids granted by the state under certain conditions to individuals, there is no difference between commercial and residential real estate from a financing perspective.

    11 PlanningHow does your jurisdiction control or limit development, construction,

    or use of real estate or protect existing structures? Is there a planning

    process or zoning regime in place for real estate?

    Any construction, transformation or demolition of real estate in Luxembourg is subject to the deliverance of a building permit issued by the mayor of the municipality where the building or the plot of land is located.

    Building permits are only delivered if the project is compliant with the building regulations, which are specific to each municipal-ity; the general development plan (PAG); and the special develop-ment plans (PAP).

    The building regulations, together with the PAG and, where applicable, the PAP, are aimed at achieving a harmonious and sus-tainable development of the territory of the municipality. In particu-lar they aim to improve public safety, health and hygiene. They also ensure a certain aesthetic harmony and balance of house façades.

    PAPs implement and specify the nature of each area in the PAG of a municipality (with the exception of green areas and land plots, which are part of a land use plan). PAPs are nevertheless subordinate to PAGs and to the municipality’s building regulations. PAPs are approved by the council and the Minister for Home Affairs and the Greater Region.

    A PAG exists for each municipality and consists of a series of provisions in graph and written form intended to ensure:• rationaluseofland;• harmoniousdevelopmentofurbanandruralstructures;• respect for cultural heritage and protection of the natural

    environment;• publichealthandsafety;• improvementofthepopulation’squalityoflife;and• rationaluseofenergy.

    With these objectives in mind, the PAG:• coversallofthelandinagivenmunicipality;• divides themunicipality intovariousareas forwhich itdeter-

    mines allocation and usage; and• determinesthedistributionanddevelopmentofhumanactivity

    in each area.

    PAGs are approved by the council and the Minister for Home Affairs and the Greater Region.

    12 Compulsory purchaseDoes your jurisdiction have a legal regime for compulsory purchase of

    real estate? Do owners, tenants and lenders receive compensation for

    a compulsory appropriation?

    The legal regime for compulsory purchase of real estate is gov-ernedbyarticle16oftheConstitutionandbythelawof15March1979 (as amended) on compulsory sale for public interest reasons. Accordingtoarticle16oftheConstitution,noonemaybedeprivedof his or her property except on the grounds of public interest in cases and in the manner set forth by the law and subject to an indemnification. According to the aforementioned law of 15 March 1979, expropriation of real estate (absolute ownership or other right in rem) for public utility reasons has to be ordered by a court. Expropriation may be required by public authorities (ie, the state, the municipalities, public administrations or public undertakings) or, to some extent, by individuals (whose interests coincide with the public interest). The price is either determined by the parties (on a mutual agreement basis) or by the court after consultation with three experts specially appointed by the court for that purpose. The price is usually based on the market price. There is no exception to

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    the payment of compensation for such appropriation. However, the allocated compensation can be valued and paid after the expropria-tion occurred.

    13 ForfeitureAre there any circumstances when real estate can be forfeited to or

    seized by the government for illegal activities or for any other legal

    reason without compensation?

    During criminal investigations, the investigating magistrate may ordertheseizureofrealestatepropertypursuanttoarticle66-1ofthe Code of Criminal Procedure.

    Pursuant to article 31 of the Criminal Code, real estate prop-erty can be subject to special confiscation by the trial judge if it is the object; the direct or indirect product of an offence; or any kind of benefit deriving thereof. The confiscation is mandatory in case of crimes with imprisonment exceeding five years and optional for offences with imprisonment of up to five years.

    INVESTMENT VEHICLES

    14 Investment entitiesWhat legal forms can investment entities take in your jurisdiction?

    Which entities are not required to pay tax for transactions that pass

    through them (pass-through entities) and what entities best shield

    ultimate owners from liability?

    Luxembourg offers a range of regulated and unregulated structures. Regulated investment entities may be established as a specialised investment fund (SIF), an undertaking for collective investment fund (UCI), a investment company in risk capital (SICAR) or a securitisa-tion company.

    Luxembourg-regulated funds can be incorporated under the form of an investment company with variable capital (SICAV) or mutual fund (FCP) or an investment company with fixed capital (SICAF). Unregulated investment vehicles, having exclusively hold-ing and financing activities to which specific tax treatment applies, qualify as a holding and financing company (SOPARFI).

    Luxembourg law provides for a number of types of companies (with limited or unlimited liability) the most frequently used being the limited liability company, the limited company, the real estate partnership and the company limited by shares. In addition, for-eign companies with legal personality may also operate directly in Luxembourg.Seealsoquestion16.

    15 Foreign investorsWhat form of entities do foreign investors customarily use in your

    jurisdiction?

    The choice of the real estate investment vehicle will depend on certain criteria such as the funding to be raised, the type of proposed invest-ment, specific investor-related requirements and tax considerations.

    16 Organisational formalitiesWhat are the organisational formalities for creating the above entities?

    What requirements does your jurisdiction impose on a foreign entity?

    What are the tax consequences for a foreign investor in the use of any

    particular type of entity, and which type is most advantageous?

    The incorporation of a Luxembourg commercial company requires the notarisation of the deed of incorporation, the subscription for a minimum required share capital (which will depend on the form of the company), the registration of the newly incorporated company with the Luxembourg Register of Commerce and Companies (RCS) and the publication of the incorporation deed in the Luxembourg official gazette.

    Certain types of regulated funds are subject to the authorisa-tion of the regulator, the Financial Services Sector Supervisory Commission (CSSF) and may require higher capital than ordinary commercial companies. A fund contractually set up is not subject to notarisation or registration with the RCS.

    The tax consequences for a corporate foreign investor using a commercial company with a limited liability to invest in real estate are, among others, the following:• such structure may allow the ultimate beneficiary to benefit

    from Council Directive 2003/123/EC of 22 December 2003 amending Council Directive 90/435/EEC on the common sys-tem of taxation applicable in the case of parent companies and subsidiaries of different member states, if within the EU, or from a double tax treaty, if the investor is located outside the EU; and

    • theoptionforaninvestortodisposeoftheunderlyingassetviaan alienation of the shareholding, which on the one hand avoids the payment of transfer and transcription taxes and on the other permits, under certain circumstances, the exemption of capital gains resulting from the sale of shares.

    Several Luxembourg-regulated investment vehicles (UCITS, non-UCITS and SIFs), whether they invest directly in real estate or in securities, are not subject to income and capital gains taxes in Luxembourg. They are, however, subject to an annual subscription tax.

    Distributions by Luxembourg real estate investment funds paid to resident or non-resident investors are generally not subject to a withholding tax.

    Particular tax implications apply to SICARs and SOPARFIs.

    ACQUISITIONS AND LEASES

    17 Ownership and occupancyDescribe the various categories of legal ownership, leasehold or other

    occupancy interests in real estate customarily used and recognised in

    your jurisdiction.

    The right of ownership can be divided into the following categories:‘Usufruct’ is the right to enjoy a property, which is vested in

    another (the bare owner). The usufructuary can draw from the property’s profit, utility and advantage, provided the usufructuary does not alter the substance of the asset;

    ‘Bare ownership’ gives the owner the right to dispose of the property, but it does not allow the owner to use or benefit from it. The bare owner generally pays the property’s taxes and charges. On the death of the usufructuary, the bare owner has full ownership of the property.

    ‘The right of superficie’ (surface right) is the right over land enti-tling the holder to construct and own buildings on the land. This right cannot exceed 99 years. At the term, the landowners auto-matically become owners of the building but must reimburse the superficiaire with the market value of the constructions erected by the superficiaire (see the law of 22 October 2008 on the right of superficie and emphyteusis).

    ‘Emphyteusis or long-term lease’ is a right, capable of assign-ment and descent, over productive real estate. The right is coupled with the right to enjoyment of the property on condition that the rights holders take care of the real estate and pay taxes on it. It can also involve the payment of a small amount of rent. This lease typi-cally relates to immoveable property and grants the right to make full use of the immoveable property; lasts for a term of between 27 and 99 years; and obliges the rights holder to make improvements that increase the value of the land, which will belong to the land-owner at the end of the lease.

    Usufructus, bare ownership, right of superficie and emphy-teusis have to be evidenced in a notarial deed and recorded at the Mortgage Register for publicity reasons.

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    152 Getting the Deal Through – Real Estate 2014

    ‘Easement’ is a charge imposed on an immoveable for the use and utility of another immoveable belonging to another owner (arti-cle637CivilCode).Easementresultseitherfromthenaturalloca-tion of the premises, or from obligations imposed by statute, or from agreementsbetweenowners(article639CivilCode).

    Leases are governed by the provisions of the Civil Code (articles 1713to1778CivilCode)andbythelawof21September2006onresidential lease. The main leaseholds are: commercial lease, resi-dential lease, agricultural lease. Suis generis leases (such as industrial leases or office leases) also obey the provisions of the Civil Code.

    According to article 117 of the New Code of Civil Procedure, possessory actions (actions possessoires) can be undertaken to stop disturbance occurred to those who possess or hold the property peacefully for at least a year. The claim has to be initiated within the year of the disturbance.

    Condominium regimes and cooperative ownership arrange-mentsarerecognisedandgovernedbytheLawof16May1975andthe Grand-Ducal Regulation of 13 June 1975.

    18 Pre-sale Is it customary in your jurisdiction to execute a form of non-binding

    agreement before the execution of a binding contract of sale? Will

    the courts in your jurisdiction enforce a non-binding agreement or

    will the courts confirm that a non-binding agreement is not a binding

    contract? Is it customary in your jurisdiction to negotiate and agree on

    a term sheet rather than a letter of intent? Is it customary to take the

    property off the market while the negotiation of a contract is ongoing?

    The use of letters of intent for prospective commercial real estate transactions, including binding (eg, exclusivity granted for the nego-tiations, taking the property off the market, confidentiality), non-binding or ‘subject to’ clauses, is standard market practice.

    In cases of dispute, the court may interpret and requalify the stipulations of the letter of intent (the common intention of the par-ties will be considered as prevailing over the letter of the contract) and order the enforcement of the obligations contained therein.

    In any case, parties have to negotiate in good faith and damages can be claimed against a breaching party (eg, in the case of an abu-sive and unjustified termination of the negotiations).

    The letter of intent may be followed by a preliminary sales agree-ment, which will be fully binding and enforceable or subject to condi-tions precedent (eg, obtaining the required environmental permits).

    19 Contract of saleWhat are typical provisions in a contract of sale?

    Save for turnkey contracts, which are governed by mandatory provi-sions set forth in the Civil Code, the parties are free to agree upon the terms and conditions of the sale agreement.

    A sale agreement must contain a (detailed) description of the property and the purchase price. In addition, the agreement usu-ally provides for general and specific seller and buyer representations and warranties. Such provisions generally relate to property title, taxation, the absence of restrictions affecting the property (mort-gages, liens, pre-emption rights, easements, emphyteusis, usage rights, expropriation decisions, leases, etc), the existence of required public approvals for use of the property (eg, existence and validity of building and environmental permits), the technical situation of the property, defects and compliance with environmental legislation.

    Down payments of at least 10 per cent of the purchase price that are made either directly to the seller or held in escrow are market practice. For turnkey agreements, down payments are made propor-tionately to the achievement of the construction works.

    Unless otherwise agreed between the parties, the purchaser has to bear the applicable taxes (eg, registration duties, costs and fees regarding the authentication, registration and transcription of the

    transfer of the property), notary fees and all other fees relating to the sale (article 1593 Civil Code).

    Unless otherwise agreed between the parties, the transfer of risk is generally operated at the same time as the transfer of the property.

    20 Environmental clean-upWho takes responsibility for a future environmental clean-up? Are

    clauses regarding long-term environmental liability and indemnity that

    survive the term of a contract common? What are typical general

    covenants? What remedies do the seller and buyer have for breach?

    Accordingtothepolluterpaysprinciple(seequestion6),thepersonresponsible for the contamination normally has to support any and all costs related to the decontamination. If the entity that is respon-sible for the contamination cannot be identified, or if it is insolvent and has no insurance coverage, the public authorities will ultimately cover the costs of the decontamination.

    The parties may contractually agree who will support the clean-up costs. Survival provisions in relation to long-time environmental liability are frequent.

    In the case of wilful misrepresentation in relation to the pollu-tion of the property, the purchaser may initiate legal proceedings and request the cancellation of the contract, claim for compensation, or both.

    21 Lease covenants and representationWhat are typical representations made by sellers of property regarding

    existing leases? What are typical covenants made by sellers of

    property concerning leases between contract date and closing

    date? Do they cover brokerage agreements and do they survive after

    property sale is completed? Are estoppel certificates from tenants

    customarily required as a condition to the obligation of the buyer to

    close under a contract of sale?

    The seller’s representations and warranties in relation to existing leases generally relate to the validity of the lease, the compliance with legal and regulatory requirements (eg, environmental legislation, operating permits), the absence of defects, the absence of litigation, etc.

    Typical covenants made by the seller relate, inter alia, to usage and alterations of the property (ie, no changes to the property prior to closing), no execution of new leases or subletting without the prior consent of the purchaser, maintenance in good condition and undertaking repairs and replacement, keeping appropriate insur-ance, maintenance of property management agreements and rent adjustments.

    Brokerage agreements are generally not transferred to the pur-chaser. The seller’s covenants may include provisions relating to the payment of the broker’s fees.

    Tenant estoppel certificates are not market practice and as such are not a condition to closing.

    22 Leases and real estate security instrumentsIs a lease generally subordinate to a security instrument pursuant

    to the provisions of the lease? What are the legal consequences

    of a lease being superior in priority to a security instrument upon

    foreclosure? Do lenders typically require subordination and non-

    disturbance agreements from tenants?

    The only relevant security instrument in this respect is the mortgage. Generally the relationship between a lease and a mortgage, includ-ing subordination or priority issues, is not covered by lease agree-ments but is governed by law.

    Provided that the lease has been evidenced by a notarial deed or has an authenticated date, the lease cannot be terminated in the event of the sale of the property or upon foreclosure, unless the lease

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    agreement provides otherwise (in which case the lessor might have to indemnify the lessee).

    Rather than requiring subordination or non-disturbance cov-enants, or both, lenders (in commercial real estate or office projects) request a viable business model, prospective tenants (engaged by a letter of intent) or guarantees (eg, a fixed-term rent guarantee).

    23 Delivery of security depositsWhat steps are taken to ensure delivery of tenant security deposits

    to a buyer? How common are security deposits under a lease? Do

    leases customarily have periodic rent resets or reviews?

    Security deposits are standard practice in all types of Luxembourg law-governed lease agreements. Generally, a deposit takes the form of a first demand bank guarantee or a cash deposit. The deposit generally amounts to three months’ rent. In commercial lease agree-ments the rent is also often guaranteed by a third-party guarantor.

    The guarantees or deposits (or both) are generally transferred to the new owner concomitantly with the transfer or assignment of the lease agreement.

    In private residential leases, automatic rent adaptation clauses are prohibited. In commercial lease agreements, periodic rent review by indexation may be agreed upon by the parties.

    In the event that the rent is reviewed, the security deposit will be adapted accordingly, if so provided by the contract.

    24 Due diligenceWhat is the typical method of title searches and are they customary?

    How and to what extent may acquirers protect themselves against bad

    title? Discuss the priority among the various interests in the estate.

    Acquisition of commercial real estate property (share deal or asset deal) is generally subject to a legal (title and registry searches on mortgages, easements, business licence, etc) and technical (environ-mental and engineering reviews, validity of building permits) due diligence investigation. Bad title risks may additionally be reduced through title investigations carried out by the purchaser’s notary public in the case of an asset deal (eg, requests for extracts from the Mortgage Registry listing all rights and interests, mortgages, ease-ments in the estate and the Land Registry providing information about the current owner, the exact situation and surface of the prop-erty), as well as by representations and warranties given by the seller.

    As a real estate transfer must be compulsorily registered with the Mortgage Registry, use of title insurance, legal opinions or indem-nity funds are not market practice.

    25 Structural and environmental reviewsIs it customary to arrange an engineering or environmental review?

    What are the typical requirements of such reviews? Is it customary

    to get representations or an indemnity? Is environmental insurance

    available? Is it customary to obtain a zoning report or legal opinion?

    Although Luxembourg law does not provide for a compulsory envi-ronmental and engineering review as part of a real estate deal, an environmental review, as part of the due diligence investigation, is recommended, especially when hazardous activities or installations have been operated on the property.

    An environmental review would include an examination of the register of polluted sites implemented by the Luxembourg Environment Administration, a historical study of the site and a qualification and quantification of the pollution, impact and risks of the pollution on human beings and the environment.

    Sale agreements generally include representations and war-ranties given by the seller in relation to possible pollution of the property, as well as indemnification clauses and clauses regarding clean-up or decontamination costs.

    Environmental liability insurance covering pollution, remedia-tion and environmental legal liability, and costs related thereto, may be contracted.

    26 Review of leasesDo lawyers usually review leases or are they reviewed on the business

    side? What are the lease issues you point out to your clients?

    The legal aspects of lease agreements are generally reviewed by law-yers. Areas of focus are the validity of the agreements, duration and termination clauses (anticipated cancellation options, renewal pos-sibilities), the rent and periodic rent review, warranties, insurance issues, works and maintenance (repairs and restoring of the build-ing), transfer of lease and possibilities of subletting, etc.

    The commercial aspects of the leases (accuracy of the tenants, profitability of the lease, etc) are generally reviewed by business advisers.

    27 Other agreementsWhat other agreements does a lawyer customarily review?

    If the transaction is structured as a share deal rather than an asset deal, the due diligence process includes, aside from the review of the documents relating to the property (acquisition deeds, third-party option rights, mortgage deeds, lease agreements, insurance policies, building operations and maintenance agreements, operating and environmental permits, building and zoning prescriptions, building documents, etc), a review of the particulars of the company (articles of incorporation and amendments thereto, annual accounts, assets owned by the company, employment agreements, ongoing litigation, etc).

    28 Closing preparationsHow does a lawyer customarily prepare for a closing?

    Closing formalities typically depend on the underlying deal. In the case of structured property acquisition, the purchase agreement pro-vides for a detailed action list, which may include, inter alia:• verificationofdueauthorisationandlegalcapacityofthesigna-

    tories (articles of association, excerpt and non-bankruptcy cer-tificate delivered by the RCS, proxies, board resolutions, legal opinion);

    • verificationofvalidpropertytitleandcompletionofallcondi-tions precedent;

    • verificationofcompliancewithLuxembourganti-moneylaun-dering regulations;

    • delivery of original records (including property title, leaseagreements, insurance documents, corporate and accounting documents);

    • executionofaduediligenceinventoryandadisclosureschedule(listing disclosures made by the seller that qualify the representa-tions and warranties given by the seller);

    • executionofanyrequireddocuments,deedsandformsinorderto complete the sale, including financing and security agree-ments; and

    • paymentofthepurchaseprice.

    In terms of timing, both the signing of the purchase agreement and closing of the transaction generally occur the same day. However, to the extent that the financing of the purchase is not fixed prior to signing,thepartiesmayagreetoclosethedealwithinaperiodof60to 90 days after signing the purchase agreement.

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    29 Closing formalitiesIs the closing of the transfer, leasing or financing done in person with

    all parties present? Is it necessary for any agency or representative

    of the government or specially licensed agent to be in attendance to

    approve or verify and confirm the transaction?

    In case of an asset deal (ie, the acquisition of the property) closing typically occurs with all parties being present or represented in front of the Luxembourg notary. To the extent that the purchase price has not been paid in advance of such meeting, it is not unusual to have representatives of the financing bank attending such meeting.

    If the transaction is structured as a share deal, the parties freely agree on closing place and closing mechanics. In practice, represent-atives of both the purchaser and the seller and their respective advis-ers attend the closing meeting.

    30 Contract breachWhat are the remedies for breach of a contract to sell real estate?

    According to article 1184 of the Civil Code, the party towards whom the undertaking has not been fulfilled has the choice either to compel the other party to perform its obligations under the agree-ment (if this is possible), or to request the cancellation of the sale and the award of damages. The aforementioned claims must be filed with the court.

    31 Breach of lease termsWhat remedies are available to tenants and landlords for breach of

    the terms of the lease? Is there a customary procedure to evict a

    defaulting tenant and can a tenant claim damages from a landlord?

    Do general contract or special real estate rules apply?

    See question 30. Landlords can claim for the performance of the lease agreement until its term or ask for its cancellation and the award of damages as well as the eviction of the tenant. Tenants can claim for damages or ask for a reduction of the rent in case of a violation by the landlord of his or her legal obligations or those set forth in the lease agreement. Justices of the peace have exclusive jurisdiction for disputes related to leasehold irrespective of the value of the claim.

    FINANCING

    32 Secured lendingDiscuss the types of real estate security instruments available to

    lenders in your jurisdiction.

    See question 33.

    33 Form of security What is the method of creating and perfecting a security interest in

    real estate?

    The most common lien, the mortgage, is established in writing and must be registered in the Mortgage Registry. Luxembourg law rec-ognises three types of mortgages (ie, legal, judicial and contractual mortgages). The contractual mortgage has to be in the form of a notarial deed. Article 2103 of the Civil Code provides for the seller a lien on the sold property in order to secure the payment of the price. Such seller’s lien is automatically registered in the Mortgage Registry together with the registration of the notarial deed.

    In addition, potential claims are secured by account pledge agreements, receivables pledge agreements or share pledge agree-ments, which are governed by the law dated 5 August 2005 on financial collateral arrangements, as amended (the 2005 Law). The privilege granted shall only remain on the pledged collateral if the

    possession of such collateral has been and has remained or shall be deemed to have remained transferred to the creditor or to the agreed-upon third party custodian. For each type of collateral that may be pledged pursuant to the 2005 Law, specific perfection rules apply. The most common are the registration of share pledges in the shareholders’ register, and the notification (and acceptance) of pledges over claims to (and by) the debtor of the pledged claim. Pledge agreements may be evidenced among the parties and against third parties, in writing or by any other legally equivalent manner as determined by article 109 of the Luxembourg Commercial Code (LCC).

    Cash may also be deposited as security.

    34 ValuationAre third-party real estate appraisals required by lenders for their

    underwriting of loans? Must appraisers have specific qualifications?

    Banks financing real estate transactions typically require a third-party real estate appraisal. Such appraisals are generally provided by specialised real estate services firms.

    In addition, especially in case of investments in stressed and dis-tressed property portfolios, banks are looking for additional com-firmation that the investment manager perfectly understands the relevant market.

    35 Legal requirementsWhat would be the ramifications of a lender from another jurisdiction

    making a loan secured by collateral in your jurisdiction? What is the

    form of lien documents in your jurisdiction? What other issues would

    you note for your clients?

    Foreign creditors can enforce any collateral without having to be established or registered in Luxembourg.

    Without prejudice to the provisions of the Law on markets in financial instruments, credit institutions authorised in another EU member state may exercise their activities in Luxembourg, through the establishment of a branch, as well as the provision of services, provided that their activities are covered by their authorisation delivered in their home jurisdiction and that the proposed activities are in line with those of a Luxembourg-authorised credit institution.

    Non-EU credit institutions wishing to establish a branch in Luxembourg shall be subject to the same authorisation rules as those applying to credit institutions governed by Luxembourg law. Credit institutions and other persons from a third country carry-ing on activities of the financial sector that are not established in Luxembourg, but that occasionally and temporarily come to Luxembourg in order, among other reasons, to collect deposits and other repayable funds from the public, shall hold an authorisation from the minister responsible for the CSSF. All these requirements are more specifically outlined in the Law of 5 April 1993 on the financial sector.

    The 2005 Law provides for a security regime that is very aus-picious to creditors and provides specific rules for pledges, com-pensation or transfer of property as a guarantee mechanism (even enforceable in the case of bankruptcy of the debtor); see question 33.

    Any assignment of mortgage is subject to the same registration and tax payment obligations. The registration and renewal tax for mortgages amounts to 0.05 per cent of the amount guaranteed by the mortgage. Exemptions may be granted in particular circumstances. Being a right in rem, the mortgage shall follow the property if it is sold, without any fees. Regarding security instruments governed by the 2005 Law, an assignment can be operated in accordance with the terms and conditions of the security agreement. Generally, no additional taxes apply.

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    36 Loan interest ratesHow are interest rates on commercial and high-value property loans

    commonly set? What rate of interest is unreasonably high in your

    jurisdiction and what are the consequences if a loan exceeds the

    reasonable rate?

    Interest is typically charged at a spread over EURIBOR (plus man-datory costs, if any). Finally, however, the reference interest depends on the financing bank and the commercial negotiations.

    Particular consumer rights limits may apply to private credit contracts. Although no specific legal restrictions are applicable to commercial loans, excessive rates may trigger tax and corporate benefits issues.

    37 Loan default and enforcementHow are remedies against a debtor in default enforced in your

    jurisdiction? Is one action sufficient to realise all types of collateral?

    What is the time frame for foreclosure and in what circumstances can

    a lender bring a foreclosure proceeding? Are there restrictions on the

    types of legal actions that may be brought by lenders?

    Generally, legal proceedings are initiated against a defaulting debtor after the expiry of a formal notice demanding performance. Non-performance of a contractual obligation generally only gives rise to a claim for damages rather than specific performance (however, the latter is possible for monetary obligations or an obligation to sell). After the judgment has been rendered, it may be enforced by a bailiff.

    A creditor may foreclose on collateral if the secured debt is due and payable (it should be stressed that enforcement may be stayed as a consequence of the opening of insolvency proceedings). The most common types of collateral arrangements used in Luxembourg are the pledge, the transfer of title for security purposes over claims and financial instruments and the mortgage over immoveable property (this last being governed by article 2092 et seq of the Civil Code, the Law of 25 September 1905 on the transcription of real rights and the Law of 18 April 1910 on the Mortgage Regime).

    According to the 2005 Law, secured parties may enforce col-lateral (essentially pledges and transfer of title for security purposes) by way of an appropriation or a private or public sale without any court intervention, provided that the secured debt is due and paya-ble. As to mortgages, in the absence of an enforceable title the mort-gagee must obtain a court payment order to enforce the mortgage by way of an attachment over immoveable property that can entail a public auction of the property by a notary public. If the security interest is a first ranking mortgage, the notarial deed may include a clause de voie parée whereby the mortgagee is authorised to sell the immoveable property through a notary public without having to comply with the legal requirements for the aforementioned attach-ment procedure.

    There is no concept similar to the ‘one-action rule’ under Luxembourg law. Consequently, a creditor can bring several pro-ceedings to recover a due debt.

    38 Loan deficiency claimsAre lenders entitled to recover a money judgment against the borrower

    or guarantor for any deficiency between the outstanding loan balance

    and the amount recovered in the foreclosure? Are there any limitations

    on the amount or method of calculation of the deficiency?

    As a matter of Luxembourg law, to the extent that the amounts recovered in the foreclosure are not sufficient to reimburse the financing loan, lenders are entitled to initiate a money claim against the borrower or guarantor, as applicable for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure.

    39 Protection of collateralWhat actions can a lender take to protect its collateral until it has

    possession of the property?

    A mortgage granted to the real estate lender does not entail a posses-sion right for the lender over the property, but provides the lender only with the right to an effective payment priority over the proceeds of the sale of the real estate. As the mortgage deed securing the loan has to be registered, it will prevail over any later mortgages. Registration thus offers protection from third-party creditor claims against the borrower and the property. In the event of default of the borrower, the lender can enforce the mortgage by way of an attachment over the immoveable property (see question 37). The lender could also initiate summary proceedings to apply for interim measures.

    Receivables deriving from a lease agreement may be secured by a pledge or a transfer of title for security purposes governed by the 2005 Law.

    40 RecourseMay security documents provide for recourse to all of the assets of

    the borrower? Is recourse typically limited to the collateral and does

    that have significance in a bankruptcy or insolvency filing? Is personal

    recourse to guarantors limited to actions such as bankruptcy filing,

    sale of the mortgaged or hypothecated property or additional financing

    encumbering the mortgaged or hypothecated property or ownership

    interests in the borrower?

    Luxembourg law does not provide for a security granting a right to all assets of a borrower. The form of security depends on the type of assets. The most common forms are mortgage on the property, share pledges, account pledges and receivable pledges. Securities validly granted under the 2005 Law are enforceable against third parties (including bankruptcy receivers). In cases where the enforcement value of the security does not cover the secured claim, the creditor may be paid for the remaining part of its claim on a pro rata basis with other unsecured creditors.

    41 Cash management and reservesIs it typical to require cash management system and do lenders

    typically take reserves? For what purposes are reserves usually

    required?

    Although cash management systems are not very common in prac-tice, commercial loan agreements may provide for a cash man-agement system or a cash-pooling mechanism, depending on the underlying value, the complexity of the transaction and the financ-ing structure. However, issues of potential corporate benefit should be considered in such agreements. It is rather unusual that lenders take reserves. However, in order to secure the underlying loan, it is not unusual that lenders take a security interest over such reserves claimed by the borrower in its capacity as property owner from its tenants. Such security interests are generally covered by pledge agreements governed by the 2005 Law; see question 33.

    42 Credit enhancementsWhat other types of credit enhancements are common? What about

    forms of guarantee?

    The most commonly used methods of credit enhancement are bank guarantees, third-party or parental guarantees, guaranteed liquidity facilities, letters of credit, insurance and financial collateral arrange-ments set forth in the 2005 Law.

    Other forms of guarantees include guarantees for completion of construction works in the event of turnkey projects.

    Recourse carve-back guarantees and holdbacks are not common in practice in Luxembourg.

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    43 Loan covenants What covenants are commonly required by the lender in loan

    documents? What is the difference depending on asset classes?

    Obviously, covenants may vary depending on the underlying real estate property and its destination. Typically, commercial loans pro-vide for covenants such as:• propertycovenants–maintenanceingoodconditionandunder-

    taking repairs, keeping appropriate insurance, maintenance of property management agreements, compliance with restrictions on leases and valuation requirements;

    • positivecovenants–generalinformationregardingchangestothe corporate structure, delivery of quarterly financial reports and annual financial statements, update on leases, access to corporate records and the property, compliance with applicable laws (including construction, environmental and tax laws); and

    • negativecovenants–nofurtherinvestmentsandtakingofaddi-tional participations, no grant of loans or security interests in favour of third parties, no new indebtedness or disposal, except as permitted by the loan agreement.

    44 Financial covenantsWhat are typical financial covenants required by lenders?

    It is market practice in Luxembourg to have financial covenants based on a loan-to-value ratio (generally with periodical appraisals) and an interest cover ratio (which is usually tested quarterly on a 12-month forecast period). Depending on the purpose and nature of the property, an EBITDA-based ratio may be used as an alternative to the interest cover ratio.

    45 Bankruptcy and insolvencyBriefly describe the bankruptcy and insolvency system in your

    jurisdiction.

    Under Luxembourg law, the word ‘insolvent’ is a generic word, and the expression ‘insolvency proceedings’ means collectively all insol-vency proceedings that are available under Luxembourg law.

    The following insolvency procedures are available for non- regulated companies in Luxembourg:• bankruptcy,governedbyarticles437to592oftheLCC;• controlledmanagement,governedbytheGrandDucalDecree

    of 24 May 1935;• suspensionofpayments,governedbyarticle593etseqofthe

    LCC;• compositionwith creditors governedby theLawof 14April1886;and

    • the Law of 10 August 1915 on commercial companies, asamended, which governs both voluntary and involuntary (com-pulsory) liquidation.

    Bankruptcy for commercial companies and merchants in Luxembourg is governed by articles 437 to 592 of the LCC. A bank-ruptcy adjudication can be made on the basis of a bankruptcy decla-ration filed by the debtor, at the request of a creditor or ex officio on the basis of elements held by the court.

    The criteria for bankruptcy to be cumulatively met are cessation of payments and loss of creditworthiness.

    If the district court decides to open bankruptcy proceedings over a debtor, it will appoint a supervisory judge and one or more bankruptcy receivers. Bankruptcy is a liquidation and not a reorgan-isation procedure. Reorganisation is possible under the controlled management procedure.

    Pursuant to article 444 LCC, any payments, operations and acts made by the debtor, and all payments made to the debtor since the opening of the bankruptcy procedure, are void and of no effect. In bankruptcy proceedings, unsecured creditors and creditors with a general priority right are, as of the bankruptcy order, no longer per-mitted to take any action based on title to moveables and immove-ables, nor any enforcement action against the bankrupt company’s moveable or immoveable assets. Actions may only be exercised against the receiver (articles 452 and 453 LCC).

    Secured creditors who are holding, for example, a validly insti-tuted pledge may, however, enforce the security over the pledged assets regardless of the bankruptcy order. The same applies for creditors holding a first-ranking mortgage. Furthermore, interest on debts that are secured by collateral such as a pledge or a mort-gage will continue accruing until the day such collateral is enforced (article 451 LCC).

    All the creditors are obliged to file proofs of debt in the liquida-tion or bankruptcy proceedings, which need to undergo a verifica-tion process organised by the bankruptcy receiver together with the court. The bankruptcy receiver will realise the assets of the company and pay dividends to ordinary creditors, as far as monies for unse-cured claims will remain available.

    Regarding the collection of rent in the context of a bankruptcy, a difference must be made between the rents due up to the bankruptcy adjudication and the rents due after the opening of a bankruptcy. Regarding the former, they will be considered as debt in the estate and the lessor would have to file a statement of claim in relation to the unpaid rents. As to the rents that are due after the bankruptcy adjudication, provided that the lease agreement has not been termi-nated, they will be considered as debt in the estate and rank before any other claim.

    François Collot [email protected] Patrick Chantrain [email protected] Pascal Sassel [email protected]

    31–33 rue Ste Zithe Tel: +352 22 73 30 1

    2763 Fax: +352 22 73 32

    Luxembourg www.kckg.com

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    46 Secured assetsWhat are the requirements for creation and perfection of a security

    interest in moveable property? Is a ‘control’ agreement necessary to

    perfect a security interest and, if so, what is required?

    As mentioned in question 33, the formal requirements for creating and perfecting security interests vary depending on the kind of assets secured and the type of security. A written instrument is normally required, sometimes with a mandatory wording.

    Subject to exceptions, perfection is generally achieved:• bymeansoffilingorregistration(inthecaseofsecurityover

    intangible assets like share pledges or in the case of security over tangible moveable assets not implying dispossession);

    • bymeansofnotice tothedebtor(forexample, in thecaseofpledges over receivables); or

    • bymeansofdispossession(inthecaseofsecuritywithdisposses-sion over tangible assets).

    Security over financial instruments and shares of certain types of companies is achieved by means of notice to the account bank or the issuing company, without any additional filing.

    Except in cases where the security involves dispossession, the secured party is not required to maintain control over the collateral to maintain the security’s validity.

    47 Single purpose entity (SPE)Do lenders require that each borrower be an SPE? What are the

    requirements to create and maintain an SPE? Is there a concept of an

    independent director of SPEs and, if so, what is the purpose? If the

    independent director is in place to prevent a bankruptcy or insolvency

    filing, has the concept been upheld?

    Although there is no statutory regime in Luxembourg, lenders may require a borrower to be an SPV. Such requirement is rather usual in the case of investment-based borrowing, and includes inter alia restriction on the corporate object of the borrower and subordina-tion of capital and inter-company financing.

    The concept of independent director exists in Luxembourg. However, such concept is linked to corporate governance and is of no particular interest in the context of insolvency-related queries.

    © Law Business Research Ltd 2013

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