Navigating the maze of zoning, planning, and land-use-approval processes can result in significant delays and escalating costs, which may spell the difference between a development project’s success and failure. With the economic growth of Romania over the last few years having generated investor interest in developing new real estate projects, particularly in well-established urban areas like the country’s capital, the authorities have repeatedly expanded and amended the country’s urban planning laws.
With a general urban plan (PUG) dating back to the year 2000 and whose subsequent extended validity is questionable, since 2018 the real estate development of Bucharest has followed the district coordinating urban zoning plans (“Coordinating PUZs”), approved by the General Council of the Bucharest Municipality.
In February 2021, the General Council issued a series of decisions aiming to suspend the Coordinating PUZs for Bucharest’s 2nd through 6th districts for a period of 12 months. According to these decisions, procedures already underway shall follow the rules of the Coordinating PUZs, but any new procedures will have to comply with the (old) PUG provisions.
Although the declared purpose of the General Council’s decisions is to delay new projects until updated rules are put in place, from a legal perspective, they create unclarity and are subject to various interpretations, mainly because of the significant differences between the PUG and the Coordinating PUZs. Moreover, it remains unclear how a suspension can legally operate when the law does not allow the issuing authority to suspend its own administrative deeds.
In practice, one of the main issues triggered by this suspension involves its effects on ongoing transactions.
In Romania, investors prefer to condition the acquisition of real estate on the seller’s ability to obtain the approval of the specific zoning plan (PUZ) for the intended project and/or the construction permit (CP) for it. This way, buyers avoid bureaucratic and time-consuming regulatory process, avoid buying a property which cannot be used for the intended project, and, to a certain extent, ensure the feasibility of the development. In contracts, this materializes in conditions precedent to the close-out of the transaction.
Pursuant to the General Council’s decisions, the suspension becomes an issue if the seller commences the regulatory procedure based on a pre-existing agreement which provides a project theme contemplated in line with the Coordinating PUZs (but not observing the provisions of the PUG). Should such impossibility occur, the buyer may find itself in a situation of not being able to develop the envisaged project, so a waiver or an amendment of the conditions precedent would be required. If the parties cannot reach an amicable agreement, the contract will lack a legal cause, which is one of the validity requirements for contracts under Romanian law.
Joint ventures between landowners and constructors could also be affected by the General Council’s decisions. In this case, obtaining a PUZ/CP could be an obligation for either party.
Since under an ongoing and effective contract, the inability to obtain the PUZ/CP would practically mean a default, the matter of the most appropriate remedy benefiting the defaulting party should be considered. An option would be to invoke a force majeure event. However, it is unclear whether extent enactments having the value of a general legal provision, such as the decisions, would qualify as force majeure , in the absence of express contractual provisions on the subject.
A hardship clause, which would enable the parties to renegotiate the terms of the agreement to re-establish the contractual balance, could be another option. However, a hardship clause may be used only if it has not been expressly excluded by the contract.
Finally, a rescission, even if provided under the agreement, could be difficult to implement, as that contractual sanction implies a party’s fault, which would not apply in these circumstances.
In all cases, a legal assessment on a case-by-case basis may prove necessary for an investment project to be smoothly implemented.
By Oana Ijdelea, Partner, and Siranus Hahamian, Managing Associate, Ijdelea Mihailescu