Contributed by Walless.
1. REAL ESTATE OWNERSHIP
1.1 Legal framework
Ownership of real estate is highly valued and protected in Estonia, enshrined already in the constitution (Section 32). Detailed rules on ownership of real estate and so-called restricted real rights (servitudes, real encumbrances, right of superficies, right of preemption, security (mortgage)) are found in the Law of Property Act. This law dates to 1993, being drafted right after the restoration of Estonia as an independent republic after the end of Soviet occupation. The framework provided by the law has been rather stable, with the last large set of amendments made in 2002, when some of the regulation was moved to the General Part of the Civil Code Act as part of codification of Estonian private law.
The Law of Property Act is not the only law containing restrictions on real estate ownership and restricted real rights. Restrictions to real estate ownership are also found in the Nature Conservation Act, Heritage Conservation Act, and other laws protecting human health, property, environment, and cultural heritage.
Rules on expropriation of privately owned real estate were reviewed quite recently, with the current law on acquisition of immovables in public interest in force from July 1, 2018. The idea of the law was to make the procedures more transparent and less time-consuming and allow the state to offer better terms to those owners who voluntarily agree on the acquisition of real estate by the state. The law also includes a clause that requires the state or local authority to acquire (for fair compensation) real estate the use of which for its intended purpose has been made impossible by administrative decisions. Special rules apply to the acquisition of private land in nature conservation areas.
As a general trend, different restrictions on ownership rights over real estate have become more numerous and complex over the past decades. The latest example of this is a draft law (still debated and considered) that would restrict the use of higher-quality agricultural land for other purposes, especially covering this land with buildings, roads, etc.
1.2 Registration of ownership
Ownership of real estate as well as restricted real rights are registered in the Land Register. The latter is a national register, which falls under the responsibility of the Ministry of Justice and is being kept by the Tartu County Court. Rules governing Land Register are found in the Law of Property Act and in the Land Register Act (and a few technical regulations based on the latter).
All immovables and limited real rights related to them must be registered in Land Register. The register has a constitutive character, i.e., ownership of real estate and restricted real rights are transferred, or their contents changed only after an agreement has been concluded, and the relevant information entered or changed in the Land Register.
1.3 Publicity of real estate register
Entries in the register are publicly available. However, the service is not free, but subject to fees (currently 3 EUR per immovable for the whole entry).
1.4 Protection of ownership
As noted above, entries in the Land Register are needed to create or modify ownership and restricted real rights. Owners of real estate can rely on the Land Register entries to protect their ownership rights. In case an entry would be incorrect, the rightful owner or a person having a restricted real right can demand that the person who has been wrongfully noted as an owner of immovable or restricted real right in the Land Register would give its consent to correct the Land Register (if need be, such claims can be brought to a civil court).
A presumption of the correctness of the Land Register has also been established, meaning that a person acting in good faith can rely on the information in the Land Register for transactions (and acquire ownership or other rights bona fide). In case a person acquires ownership of real estate or restricted real rights in good faith, they would keep these rights even if it is later determined that the Land Register entry was false. The person, whose rights have been affected by such a situation (e.g., the real owner of real estate) has only a monetary claim against the person who transferred the right to a third party acting in good faith.
2. REAL ESTATE ACQUISTION
2.1 Share deal or asset deal?
In Estonia, disposing of real estate directly to an investor can only be made as an asset deal (concluding an agreement on the sale of the immovable, see 2.3 - 2.5 for more details).
As another option, an investor may gain ownership of real estate indirectly. Instead of directly purchasing the immovable, an investor may purchase shares of a company that owns or will purchase a real estate asset, and via this share transaction, acquire the role of the owner of the real estate.
The second option can be more efficient in terms of time and costs for the investor, provided that the share transaction can be done without notarial authentication (see section 2.2). With this option, the investor can invest its money via a simple share purchase agreement without going through the process involving notaries public. The purchase of real estate assets (including involving the notary public) will be done then by the company of which shares the investor purchased.
2.2 Share deal
There are different options in Estonia to purchase shares. The options depend on the type of entity whose shares are being purchased. The most common two types are a public limited company (aktsiaselts) and a private limited company (osauhing).
The shares of a public limited company can be transferred via a simple agreement that is signed digitally or by handwritten signatures. The agreement does not need to be authenticated or certified by a notary public.
The sale of shares of a private limited company must, as a rule, be done via a transaction that is certified by a notary public (more details on the certification are provided in 2.4). However, there are two exceptions when private limited company shares can be transferred without notarial certification:
i.the share of a private limited company has been registered in the Estonian register of securities; or
ii.the share capital of the company which share is purchased is at least EUR 10,000, there are specific clauses stipulated in the articles of association and a necessary exemption note is made to the Estonian Commercial Register.
The applicable fees depend on whether the transaction is certified by the notary or not. With transactions certified by a notary public, there are notary fees, state fees, translation fees (if applicable). The size of the notary fee is calculated based on the transaction fee. Notary fees can be skipped in the case a notarial certification is not required. With either option advisory fees should be always considered.
Usual risks transferred to the purchaser of shares are:
i.The investor acquires a share of the company, not only the property, and there may also be liabilities held by the company. This may include liabilities that are not reflected in the balance sheet and/or are not disclosed to the buyer.
ii.If the investor does not acquire 100% of the shares, control of the company and as well as the real estate, may not be guaranteed.
To minimize the above risks, it is recommended to carry out a due diligence check before the transaction is concluded. Relevant clauses (warranties) should also be stipulated in the share purchase agreement.
2.3 Asset deal
The disposal of real estate as an asset requires the conclusion of a written agreement authenticated by the notary public and registering the change of ownership in the Land Register (more details at 2.4 and 2.5).
The Land Register and publicly available databases contain a lot of information on incumbrances of the immovable which should be explained to the parties by the notary public. Therefore, the main issues to consider for minimizing risks by the investor are, on the one hand, contractual obligations related to the asset (most relevantly, leases, see 6.) and, on the other hand, the factual, the (technical) condition of the asset (e.g., the state of the buildings on the real estate and their potential defects). In practice, addressing risks in the transaction documentation mostly include warranties given by the seller which can be relied upon by the investor. Such warranties may be backed by contractual penalties due to providing incorrect information to the buyer.
Fees for the notary public and state fees for changes made to the registry must be paid in case of an asset deal, for more details see 2.4 and 2.5. With regard to taxes, see 4.1.
2.4 Disposal process
To dispose of the ownership of immovable or restricted real rights, an agreement authenticated by a notary public must be concluded. The notary public is obligated to take an active role when authenticating an agreement. They are required to clarify the will of the parties and relevant facts of the case. The notary public is also obligated to clarify the meaning, legal consequences of the transaction, and alternative ways of concluding it.
Fees of the notary public are set by the government and, for transactions concerning real estate ownership and restricted real rights, are dependent on the value of the transaction. For example, for a sale of an immovable worth EUR 500,000, the fee would be EUR 1,857.48, for an immovable with the price of EUR 1,000,000, it would be EUR 3,515.31. An online calculator for the fees can be found on the web page of the Chamber of Notaries (www.notar.ee).
Notaries are liable for damages arising from their professional activities only if these are considered wrongful. This essentially means that notaries’ liability is not a strict liability (they are not liable for any damages they cause) but instead a fault-based liability i.e., liability only arises in case the notary public has failed to apply the required level of duty of care.
All documents, maps, plans, and projects related to acquisition and possession of an immovable as well as construction on it are accessories to the immovable and should be handed over to the new owner if the ownership is transferred.
2.5 Registration of change of ownership
Change of ownership is registered by the registry department of the Tartu County Court. The application for changing the ownership entry is forwarded to it by notaries public via a specific electronic system. Notaries are also responsible for explaining to the parties to a sale agreement what documents are needed for the registration. The court checks the documents sent to it for completeness and ensures that the entry can be lawfully made i.e., this would not be prevented by rights of third parties or statutory provisions.
The deadline for registering changes in ownership is one month from receipt of application; in practice, however, the entries to the Land Register are made sooner (in many cases in a matter of few days).
Fees for registering changes of real estate ownership are provided in Annex 2 of the State Fees Act and are dependent on the value of the immovable. For example, for an immovable with the value of EUR 500,000, the fee is EUR 755; with the value of EUR 1,000,000, the fee is EUR 1,600. The maximum amount of the fee is EUR 2,560.
2.6 Risks to be considered
As part of its tasks in authenticating a real estate transaction, the notary public is obligated to determine all encumbrances and rights of pre-emption applicable to the object of the transaction. The right of pre-emption must be entered into the Land Register to be valid, therefore if it exists then it would be clearly visible.
Any defects of real estate known to the seller should be communicated to its buyer. In case the real estate acquired has defects, i.e., it does not correspond to the qualities expressly agreed on or is of sub-standard quality, and the defects were already present at the time of the sale of the immovable, the purchaser should immediately notify the seller of defects. As a rule, the purchaser can require the seller to remove the defects at their own expense. If the seller refuses to do so, the purchaser may have the defects removed and claim compensation from the seller for reasonable costs.
Disputes related to defects are handled by the civil courts. The key issue in such disputes is proving that defects existed already at the time of concluding the purchase agreement.
3. REAL ESTATE FINANCING
3.1 Key sources of financing
Real estate is mainly financed by bank loans and the developer’s or acquirer’s equity. In the case of new developments, the necessary funds are sometimes also raised from capital markets by issuing notes. In addition, to finance the expenses of the early stage of real estate development, smaller developers sometimes also raise debt via various crowdfunding platforms.
3.2 Protection of creditors
The main types of security used in real estate financing include the mortgage over the real estate, the pledge of shares of the company developing or acquiring the real estate, and in the case of cash-flow generating real estate, pledge of the cash-flow (mainly rental income). Pledge on movables and personal sureties are also options, although less often used. In addition, the borrower must usually ensure the real estate and appoint the lender as the first beneficiary of the insurance.
If the real estate is financed from multiple sources, the financing documents may include an inter-creditor agreement, and a collateral agent collectively appointed by the lenders could take the collateral. In such a case, the collateral agent holds the collateral for all creditors' benefit and distributes the proceeds according to the inter-creditor agreement. However, as an alternative, the above-referred collateral could be established only for the benefit of the senior lender and the junior lenders may only be given a right to receive a lower ranking mortgage over the respective real estate.
4. REAL ESTATE TAXES
4.1 Transfer taxes
Estonia’s tax system is relatively simple. In connection with the disposal of real estate, two taxes are relevant.
First is the value-added tax (VAT). If the seller of a real estate is a person subject to VAT requirements (legal persons with annual revenue over EUR 40,000), VAT (currently 20%) must be added to the sale price. If the real estate is purchased by a legal person who is also subject to VAT requirements and the real estate will be used for its business activity, they can deduct it as ‘input’ VAT from the overall sum of VAT it should pay.
Second is the income tax (currently at 20%). Estonia’s system for taxing legal persons (corporations) is based on the principle that profits are taxed only at the time of their distribution (generally when dividends are paid out). If the income is reinvested or kept as a reserve, no income tax would therefore be due. Individuals are taxed on a yearly basis, and income tax from selling real estate becomes due without delay. The purchase price may be deducted from the sale price. As an exception, income tax is not due when an individual sells their home – this can only be done if they have lived in the apartment/house right before the sale agreement and only once every two years.
In the case of a share purchase transaction, income tax is applicable to the seller if the seller is an individual.
4.2 Specific real estate taxes
Owners of immovables, or persons having a right of superficies or usufruct, are obliged to pay a land tax. The land tax is based on the taxable value of the land (it can be 0.1% – 2.5% of that value, with the exact percentage being determined by municipalities). Currently, the taxable value of land determined by the authorities is rather outdated in many parts of the country and does not reflect the actual value of the land (the actual value is often significantly higher). As there are plans to review the taxable values, an increase in land tax can be expected.
Immovables used as the main residence by individuals are exempt from land tax.
5.1 Legal framework for condominiums
Condominiums (apartment associations) exist in Estonia and are, in practice, the most common form of ownership of apartment buildings. According to the regulation, apartment buildings and the plot of land surrounding it are divided into physical spheres (single apartments/units) of a building that belong to specific owners. The rest of the immovable is in the common ownership of all apartment owners who own a legal (non-physical) share of it.
The distinction between specific units and commonly owned parts of the immovable is important as the commonly owned parts cannot be modified or disposed of by an owner of a single unit. The distinction is made based on the functionality of the building and its parts and not merely on the spatial location of different parts of the building. For example, the plumbing or central heating pipelines located in an apartment are part of the common ownership if these are used by all unit owners. The same applies to the outer walls/facade of the building as well as its roof.
All owners of units in a condominium form an apartment association, a legal person in charge of managing the condominium. The highest decision-making body of the apartment association is the general meeting of apartment owners. The number of votes that owners of units have is commonly dependent on the number of units (one vote per unit), but the association may provide in its statutes that every owner may have one vote (regardless of the number of units they hold) or that the number of votes a person has is related to their share of commonly owned property. The day-to-day management of the apartment association within the budget and other limits set by the general meeting is carried out by the management board. The management board may be replaced by a legal person (administrator; commonly a property management company), who appoints a specific person (building manager) to perform its duties.
Matters of regular administration (e.g., regular maintenance and repairs, liability insurance, concluding contracts for services) are decided by a simple majority of votes. Some decisions, such as taking on new debt, where this would lead to the total debt of the association exceeding the management cost of the previous year, require a qualified majority (more than half of the owners who own more than half of the commonly owned share of the immovable must agree). For some decisions, such as making non-essential rearrangements and restoration of the building (e.g., changing the heating system of the building) an agreement of all unit owners is required.
5.2 Rights and duties of co-owners
Owners of single units must use and maintain their units in good faith and take into consideration the legitimate interests of other unit owners. For example, they are required to keep the humidity and temperature in their units within boundaries that ensure that the object of common ownership is preserved (e.g., warm enough so that the water pipes do not freeze or dry enough to avoid mold in the ventilation systems) and other units may be used as intended. On the other hand, they are also required to tolerate the regular use of other units in accordance with their intended purpose. An owner of a unit must ensure that their family members, visitors, or tenants also comply with these rights and duties.
5.3 Liability of co-owners
Co-owners are all separately liable for any damages created because of not fulfilling their duties as a unit owner. For example, in case a water pipe bursts in an apartment, because the owner did not ensure that it is properly maintained and/or failed to notify the condominium association of its poor condition, they are liable for damages to owners of other units. On the other hand, if the condominium association neglects to fulfill its duties despite being warned by a unit owner, the association is responsible for damages.
In a recent judgment (case No 2-18-13649), the Supreme Court explained that in the case damages are caused by the commonly owned parts of the immovable (e.g., burst water pipelines within an apartment building), but both the apartment owner and association have fulfilled their duties, the apartment association will be liable for damages related to the restoration of the damaged unit and parts of the common ownership to its previous state.
5.4 Rights and duties of condominium associations
Condominium associations as such are entitled to carry out the decisions made by the general meeting of apartment owners (see 5.1). The management board of the condominium association has, in addition to the general duty of care when performing its activities, also an obligation to provide information and documents on the activities of the association to the apartment owners.
6. COMMERCIAL LEASES
6.1 Form and contents of a lease agreement
There are no requirements to the form of the lease agreement, i.e., it may also be concluded orally. However, in practice, the most common form of lease agreements, also for commercial properties, is unattested written form. This means that the contract is either signed by the parties on paper or by using electronic signatures (the latter method is already more common in practice).
Commercial lease agreements should, as a standard, include (a) the parties to the agreement, (b) determination of the object (immovable), (c) the purpose of use, (d) the term of validity (when applicable) and cancellation of the contract, (e) the amount of rent due and the way this may be revised, (f) covering of accessory expenses (usually covered by the lessee), (g) rights and obligations of the parties, e.g., regarding repairs, improvements and alterations to the immovable; (f) liability for non-performance, including penalties for late performance/payment.
In terms of the most recent trends in the commercial lease market in Estonia, the following are worth mentioning:
- Sale and leaseback deals are gaining popularity, especially in industrial and retail sectors, pushed by rising property prices and the reduced availability of investment options.
- Industry and logistic companies are well catered for by the market. Out-of-date assets are losing lessees, with the availability of modern, well-equipped premises with lower accessory expenses (for water, electricity, heating).
- The rise of e-commerce has increased the demand for real estate for logistic centers.
- The office space market is under significant pressure, with the rise of teleworking. New developments are well placed to attract remaining workplaces at the office, with older premises facing vacancies and pressure to reduce prices.
- Investments in retail real estate have been shifting to smaller, ‘neighborhood’ shops and retail centers, with most such premises being dominated by a supermarket as the key lessee and smaller shops added. The sector has held up well during the pandemic and investors are actively seeking opportunities to invest in high-quality premises.
6.2 Regulation of leases
The regulation of leases of real estate are somewhat different depending on whether the lease includes the right to the fruits received from the property (such as grain, livestock, timber) or not. Fruits received from the property belong to the lessee under the commercial lease contract (rendileping) and this is mostly relevant for agricultural and forest land. Commercial property such as premises for offices, shops, industrial installations are covered by the regulation concerning lease contracts (uurileping). Rules of the ‘simple’ lease contract also apply to commercial lease contracts, with a few exceptions, such as a longer-term notice of cancellation of the commercial lease contract.
There are also some exceptional clauses that apply to the lease of dwellings, meant to protect the lessee of a dwelling as a presumably weaker party. Whereas the terms of the lease of commercial property can be mostly freely determined by the parties, any term in the lease contract for a dwelling that differs from the default rules found in the Law of Obligations Act to the detriment of the lessee is considered null and void (and therefore statutory rules will be applied).
6.3 Registration of leases
Commercial leases do not need to be registered. However, the lessee has the right to demand that a notation regarding the lease contract be made in the land register.
6.4 Termination of leases and renewals
Termination of leases depends on whether the lease was concluded for a fixed term or not. In case the term of the lease was not fixed, the lease may be canceled without any reason by either party. The statutory minimum term for the notice of such ‘regular’ cancellation is three months (parties may agree on a longer-term.
For contracts where the term of the lease is fixed, only extraordinary cancellation is allowed. In the case of leases without a fixed term, extraordinary cancellation may be used to cancel the contract without prior notice.
Extraordinary cancellation is allowed when there is “good reason” for it, i.e., under the circumstances where the party wishing to cancel the contract cannot be presumed to continue performing the contract. The Law of Obligations Act contains an open list of grounds that can be invoked for extraordinary cancellation, such as the lessee not being able to use the asset because of reasons attributable to the lessor and the latter has failed to fix the situation after being given a warning and reasonable term to do so.
Lease contracts for a fixed term may be automatically extended and become lease contracts without a fixed term. This would be the case where after the expiry of the term of a lease contract, the lessee continues to use the asset, and neither party objects to the lease continuing within two weeks. The two-week period is calculated from the end of the term of the contract for the lessee and from the time the lessor learned of continued use for the lessor. Such an extended contract may be canceled as explained above.
6.5 Rent regulations and rent reviews
Estonia has no rent controls, i.e., the rental market functions as a free market. Rent reviews are common and usually explicitly regulated in lease agreements. If the parties have not explicitly agreed on the rent review, the lessor is entitled to increase the rent once a year for lease contracts without a fixed term.
6.6 Services to be provided together with the lease
Any services to be provided together with the lease should be explicitly agreed on by the parties to the agreement.
6.7 Fit-out works and their regulation
Improvements or alterations to the leased property by the lessee require, as a rule, the consent of the lessor in a form that can be reproduced in writing (e.g., an e-mail). If such improvements or alterations would be necessary for reasonable use or management of the property, the lessor is not allowed to deny their consent.
Upon expiry of the lease contract, the lessor may demand the removal of improvements and alterations only if this has been explicitly agreed on. On the other hand, the lessee can remove the improvements or alterations if this is possible without damaging the property. If the lessor pays a reasonable compensation for the improvements or alterations and the lessee does not have a legitimate interest in removing them, they should remain on the property. In case the lessee is not interested in removing the improvements or alterations made, but the value of the property has considerably increased because of such improvements or alterations, the lessee may demand reasonable compensation for them.
6.8 Transfer of leases and leased assets
The sale of leased assets does not automatically end the lease contract; the rights and duties of the lessor are transferred to the new owner. If the new lessor fails to fulfill their obligations under the lease agreement within three years of the transfer of ownership, the previous owner/lessor is liable as a surety to the new lessor, i.e., they are jointly and severally liable to the lessee.