The recent upturn of the Slovenian real estate market has yielded a raft of new logistics projects and residential developments, as well as substantially increasing the scope and number of retail real estate transactions. A significant share of Slovenian retail properties changed hands, mostly as a consequence of the financial or organizational restructuring of the previous holders. This opened the market to both institutional and strategic investors.
Acquisition of a large real estate portfolio is complex, as it usually entails not only the asset transfer, but also significant negotiations with the financing parties and the holders of any existing security over the assets. Sometimes, the creation and/or termination of a trust structure or finance lease over the assets is required, and since Slovenia is a small market, usually at least one of the creditors is based abroad. Such deals typically involve many parties, each coming from diametrically different commercial and legal starting points.
These diverse starting positions require a considered legal approach to ensure the simultaneous fulfilment of each party’s obligations, including securing the transfer of the assets, paying the purchase price, providing fresh security over the assets to the banks financing the acquisition, and releasing any existing security. Such security can only be fully released once the purchase payment has been made, and the existing financing in turn repaid.
In real estate asset deals, various rules and mechanisms provided by the land registry laws enable the aforementioned approach to work. Typically, buyers and their banks can rely on: (a) a first come - first registered principle, (b) the publication of unresolved filings by way of annotation, and (c) the possibility of pre-securing the rank of transfer. Combined with the escrow services of notaries, such mechanisms also provide comfort to the sellers and their banks that the deal can be structured and completed in a safe-yet-streamlined manner.
Recently, however, a new challenge has arisen from some foreign financing banks. These banks have, in some cases, required that their primary security – the mortgage – be fully registered with the land registry as a condition precedent to drawing the loan. This deviates from past practice and from the current practice of Slovenian banks, where an annotation to the register evidencing that a filing has taken place is usually adequate. This new requirement results in a Catch-22 situation: if the seller will not transfer the title prior to receiving the purchase price, then the buyer will be unable to mortgage the asset, in which case the financing bank will not release the loan necessary for the buyer to make the purchase.
Sometimes sellers are themselves willing to mortgage the assets prior to the title transfer. However, sellers are often reluctant to agree to such a structure or, if they do agree, may still demand an indemnity from the buyer or even the bank. In certain situations, this approach may have a negative impact on timing, where, for example, prior pending registrations delay the registration of the mortgage and, consequently, the title.
Another alternative is to adopt a more traditional approach, placing the purchase price in notary escrow, and relying on annotations of filings to transfer title and the purchase price, while the buyer additionally procures an insurance policy in the form of “gap” coverage, insuring themselves and the financing bank until the completion of mandatory registrations. This solution is costlier and requires additional legal work and negotiation, but the availability of gap insurance products can be decisive in getting the deal through.
In my personal experience, both of these solutions are effective. However, consideration should be given as to whether either is, in fact, required in any given transaction. This is especially so if the banks’ new requirements arise from mistrust of the counterparties or even of Slovenian courts and officials. While in certain deals this approach may pass a cost-benefit test and could provide some additional comfort, in my view parties most deals would be better served by showing more trust in the Slovenian legal system and its well-established market practice. An experienced and practical lawyer will provide both robust legal advice and the strong foundations for such trust.
By Blaz Ogorevc, Partner, Selih & Partnerji Law Firm
This Article was originally published in Issue 6.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
