When investors analyze opportunities in the real estate sector, it is essential to carefully assess the risks to avoid complicated situations in the long term. Recent issues in real estate have demonstrated how important it is to avoid legal, financial, and operational pitfalls that can turn an apparently safe investment into a major challenge. In this Q&A, Lorena Ciobanu, a partner at ONV LAW, discusses the key mistakes investors should avoid when entering the real estate market, from the lack of thorough legal analysis to the risks associated with developers without a solid track record.

1. What due diligence checks can investors perform on a developer before committing to a property acquisition in Romania? Are there specific certifications, accreditations, or licenses that reputable developers in Romania should hold?

Before investing in a property in Romania, investors should conduct a thorough set of checks on the developer to ensure their legitimacy, credibility, and, most importantly, their financial standing.

Among the most important steps are analyzing the legal and financial situation of the company, checking the legal documentation of the project, such as building permits, property rights history, and the land registry extract, as well as assessing the developer’s reputation in carrying out other similar projects. These measures are essential to avoid legal risks and to guarantee that the investment meets quality standards and complies with applicable regulations.

Additionally, investors can perform a series of legal and administrative checks to ensure the credibility of a developer before committing to an investment. For example, legal and financial checks can be carried out, such as consulting information about the developer, including the existence of the company, its business activities, ownership structure, and any ongoing litigations or insolvency requests. Financial statements submitted by the developer to the Ministry of Finance can also be reviewed to verify the economic stability. Real estate checks are another way investors can ensure the stability of a developer. The land registry extract can confirm that the developer owns the land on which they are building or has legal rights to develop the project, ensuring there are no encumbrances or disputes. The building permit can also be checked to ensure the developer is complying with the law and that the permit has been issued in accordance with legal requirements.

Another way to verify is through the urbanism certificate, which, among other things, provides information about the legal, economic, and technical status of the land and existing buildings at the time of the request, in accordance with urban planning regulations and related guidelines or territorial planning. It also establishes the urban planning requirements that need to be met depending on the location’s specific features and lists the necessary approvals/agreements for granting the building permit.

Additionally, investors can review other projects completed by the same developer to assess the quality of the construction and adherence to deadlines. Lastly, they can ask for references from other investors or property owners to check the developer’s relationship with its clients.

It is important for investors to work with a real estate lawyer to perform these checks and negotiate the clauses of the preliminary agreement and the sale contract, where applicable, thus reducing legal and financial risks.

The ONV LAW team has been involved in numerous real estate transactions over time, with the most recent being a transaction of approximately 8 million Euro for the acquisition of the entire share package of Bluehouse Investiții, a company that owns the property where a historic store in Bucharest, Eva store, once operated.

2. How can investors verify the financial health of the developer and their project history? Are there accessible records regarding the developer’s previous projects, particularly completion rates and any delays or failures to meet obligations?

To avoid financial and legal risks, investors must base their decisions on a detailed analysis of the developer's financial health and project history. This involves accessing reliable public sources as well as investigating the company’s reputation.

The financial statements submitted annually by the developer to the Ministry of Finance can be accessed through the institution’s public platform. These documents include summarized information such as turnover, net profit, short- and long-term liabilities, and the company’s share capital. There are a few indicators to monitor, such as the level of debt and cash flow. If the developer has significant short-term debts, there is a risk they may face difficulties completing projects. Additionally, positive cash flow and high equity levels indicate healthy financial resource management.

By simply checking the Trade Registry, investors can find out whether the developer is involved in insolvency proceedings, the company’s share capital, if there are frequent changes in shareholders, or if the company was recently established, which could raise red flags.

Moreover, most developers include a portfolio section on their websites, detailing completed projects. Investors should verify the location of these projects and whether they are in a similar market segment. The quality of the work is another aspect to consider, and it can be checked directly by visiting completed properties. Lastly, the completion rate – whether projects have been delivered according to the agreed timelines – is important.

Consulting the land registry excerpts of completed projects can be done by requesting them from the Land book Register for informational purposes. This allows verification of whether the developer has registered the completed properties in the land registry and if there are any encumbrances, mortgages, or legal issues such as ongoing litigation.

Furthermore, another check investors can undertake is to see if the developer has any ongoing lawsuits, especially those related to delivery delays or failure to fulfill contractual obligations.

For large developers, credit reports can be obtained from specialized companies that provide detailed information on financial soundness and risks associated with the company. Additionally, some developers hire independent firms to audit their projects and financial situation. Investors can request these reports or verify their existence.

A specialized, interdisciplinary team can perform these detailed legal, financial, and technical checks, offering an objective report on the risks associated with the investment. These steps allow investors to gain a clear understanding of the developer’s financial stability and their ability to complete projects according to the law and their contractual commitments.

3. What red flags should investors look out for in developers' marketing and promotional materials? Are there industry standards in Romania that limit the claims developers can make, and how can investors verify these claims?

Currently, Romania does not have an explicit industry standard that limits the marketing claims of developers, but there is legislation regarding misleading advertising (Law no. 158/2008). Additionally, investors can consult specialized lawyers to verify the legality of the claims.

In cases where investors are individuals, and not professionals engaged in specialized economic activities, consumer protection legislation applies, and they can reach out to organizations such as the National Authority for Consumer Protection (ANPC).

Although attractive, real estate developers' marketing and promotional materials may contain exaggerated claims, incomplete information, or even misleading statements. In the context of the Romanian market, there are a few key aspects that investors should be aware of: vague claims related to the project's stage or excessive superlatives require more detailed analysis. The absence of concrete data supporting these claims is a red flag. Similarly, if the developer promises fixed returns, investors should ask for details about the basis of these estimates, the financial mechanisms involved, and whether there are contracts or instruments supporting them.

4. What are the essential elements that should be included in a pre-construction property acquisition contract in Romania? How can investors ensure that their contract includes specific deadlines, penalties for delays, and guarantees regarding the quality of the delivered units?

A pre-construction property sales agreement should include clear and detailed clauses to protect the investors' rights and prevent potential conflicts. Such a contract should contain a detailed description of the property with clear specifications, including cadastral identification, surface area, future layout, permitted construction materials, and amenities; a fixed price and any expressly and restrictively defined conditions for its adjustment; specific deadlines with exact dates for the developer to complete the construction and deliver the property; penalties establishing clear and effective fines in case of delays or failure to meet deadlines, as well as compensation mechanisms; guarantees for construction standards and material quality, with details on the remedy of any defects post-delivery (e.g., warranty period, maximum remedy time); a payment plan with structured payments, correlated with the construction stages, so that investors are not required to pay a significant portion before delivery.

At this stage, a real guarantee from the developer is always recommended, namely the establishment of a mortgage right in favor of the buyer over the property.

Additionally, the contract should confirm that the developer holds all necessary permits for the project, including urban planning certificates and construction permits, with no ongoing litigations or other administrative procedures that could affect the property rights or completion of the project. Thus, the rights and obligations of both parties should be clearly defined, including the procedure for contract termination.

5. Is it advisable for foreign investors to hire a Romanian lawyer or legal advisor for real estate transactions? What specific protections can the legal advisor offer, and are there any essential local laws that investors should be aware of?

It is highly recommended that foreign investors collaborate with a real estate lawyer in Romania. The local legal system, the specifics of real estate transactions, and potential risks require a professional approach to ensure the protection of investors' interests. A lawyer can conduct a thorough due diligence process – verifying property documents, building permits, the developer's history, and any encumbrances or legal disputes related to the property. Additionally, the lawyer can draft, negotiate, and review contracts, ensuring that all essential clauses are included (penalties, warranties, delivery deadlines, etc.). A lawyer will also check for compliance with local legislation, identify legal or tax risks, and provide legal solutions to mitigate such risks arising during the transaction process or afterwards.

There are essential regulations that the investor's team should be aware of, which is why it's important for them to have a specialized legal team by their side. These include the Civil Code, which regulates the sale contract, warranties, property rights, and contractual obligations in general; Law No. 50/1991 regarding the authorization of construction works; Law No. 10/1995 on construction quality, which establishes the developer's obligations regarding post-delivery warranties and quality standards; Law No. 372/2005 on the energy performance of buildings, which requires developers to provide an energy performance certificate upon delivery of the property; and Law No. 85/2014 on insolvency prevention and insolvency procedures.

Aspects related to VAT, taxes, and other fees (e.g., notary fees) are critical for the financial structure of the transaction, and a local legal team ensures that foreign investors are properly informed and protected against potential legal or operational risks.

6. How can investors confirm that the property holds all the necessary planning permits and complies with local zoning regulations? Are there public databases or local authorities in Romania that investors can contact to verify the legal status of the project?

There are several important steps for verifying the legal status and compliance of a real estate project in Romania, ensuring that the developer adheres to urban planning and zoning regulations.

The first step is the urbanism certificate – this is the first document to be analyzed. It indicates the land's designated use, the height regime, the percentage of land occupancy (POT), and the land use coefficient (CUT), along with other relevant urban planning conditions.

The second step is the building permit – an essential document that certifies the developer's right to begin construction in accordance with urban planning regulations, issued by the local municipality.

The third step involves the necessary approvals, which include environmental permits, utilities (water, gas, electricity), civil protection, or historical monuments, if applicable, as indicated in the urbanism certificate.

At the same time, it is important to verify whether the developer complies with local zoning regulations. These are established through the General Urban Plan (PUG), Zoning Plan (PUZ), or Detailed Urban Plan (PUD). Investors can check if the project complies with these regulations.

Public institutions where such information can be requested include local municipalities, the National Inspectorate for Constructions, the Environmental Protection Agency, the National Agency for Cadastre and Land Registration, and the Public Urban Planning Registry. For example, some local municipalities such as those in Bucharest or Cluj-Napoca offer online access to urban planning documents and issued permits.

However, confirming the legal compliance of the project is essential to avoid potential legal or financial risks down the line.

7. What financial protections are available for buyers, especially when purchasing properties in the project or pre-construction stage? Does Romanian legislation provide options such as escrow accounts, guarantee funds, or other secure methods for protecting buyers' deposits?

Purchasing a property before construction is completed involves financial risks, but Romanian legislation provides several protection mechanisms for buyers. In practice, developers can use escrow accounts to manage buyers' payments. The amounts deposited in these accounts are only released based on the progress of construction, according to an agreed payment plan. While not mandatory by law, using an escrow account is a recommended practice to reduce the buyer's financial risk.

Additionally, developers can offer real guarantees, such as mortgages, or personal guarantees, such as bank guarantee letters, to ensure the return of sums paid in the event of project non-completion. This mechanism is an additional measure to protect buyers from the developer's bankruptcy. In some cases, developers may take out insurance policies covering risks related to project non-completion or significant delays.

Another mechanism involves structuring payments according to the progress of construction, where buyers make payments in installments based on the project's stages. This limits financial exposure to potential delays or issues and prevents the situation where an investor pays a large percentage of the price at an early stage of the project, which is the most vulnerable position.

We recommend that buyers, whether individuals or legal entities, negotiate contractual clauses with clear provisions regarding the return of deposits, penalties for delays, and other guarantees, as well as detailing the termination regime. Essentially, collaborating with a lawyer who can propose legal solutions to mitigate risks is advisable.

However, there is a legislative proposal currently in the legislative process at the Senate in 2024. In its initial form, real estate developers could request an advance of a maximum of 10% of the total value of the property upon signing the sales promise. If the developer takes out an insurance policy that protects the investment, the advance can rise to 40%. Furthermore, advance funds must be deposited into a special account designated exclusively for the project and used solely for it. This legislation aims to protect buyers, increase transparency in the real estate market, and hold developers accountable. This legislative proposal has not yet been adopted.

8. Are there insurance schemes or guarantees that protect investors' funds in case a developer goes bankrupt? Can investors purchase additional insurance policies independently for extra security in case of non-delivery?

Although the Romanian market offers some protective measures, investors should be proactive in ensuring their own financial security. Those purchasing properties in the project or construction stages face significant risks, including developer insolvency. Legislation and practices in Romania provide some protection mechanisms, but they are not fully standardized.

Therefore, there are guarantees offered by developers—insurance policies to protect amounts paid in advance by buyers, special accounts for advance payments, and advance sums should be deposited into a dedicated account for the project undertaken by the developer. This mechanism provides some protection since the funds are used exclusively for the development of the specific project.

Additionally, investors can opt for independent insurance policies that provide extra security, such as non-performance insurance, which protects against major delays or non-completion of the project, or insurance for bankruptcy risks—these policies are less common in the Romanian market but can be accessed through insurance brokers.

Furthermore, investors should negotiate the inclusion of clauses in contracts, such as the return of deposits and damages in case of termination, clear penalties for delays, and a payment plan tied to the progress of the works.

9. What due diligence steps should investors take regarding the financing and construction timeline of the project? Are there ways to confirm that a project has adequate financing and track its progress throughout construction?

Investors looking to minimize the risks associated with purchasing off-plan properties should follow a series of steps to assess the financial stability of the developer, property rights, and the viability of the construction timeline. Collaborating with industry experts, such as independent legal, financial, and technical consultants, can help identify relevant risks from all of these perspectives.

10. How can investors ensure that they receive regular updates and transparency regarding the project's status? Are there contractual clauses that investors should include to guarantee constant updates and evidence of progress?

To ensure they receive regular updates and transparency regarding the project's status, investors should include clear clauses in the contract regarding the developer's reporting obligations and the buyer's/promising buyer's right to access information and documents related to the entire construction process.

Such clauses ensure transparency and, implicitly, increased protection for investors, but they must be tailored to each specific case based on the project’s details. Of course, each contract should be customized to meet the needs and circumstances of each party, and the recommendations should be discussed and negotiated by a qualified legal team, taking into account the specific legal context.

11. What measures can investors take to verify that the final property matches the promoted specifications and quality? Can investors request independent inspections or are there industry standards that developers must adhere to upon delivery?

Investors can take several measures to verify that the property in its final construction phase meets the promoted specifications and quality, and these measures should be outlined in the preliminary contract or the sales agreement. Some key measures may include: independent inspections, compliance audits to verify adherence to construction regulations and standards, including safety norms, environmental protection, and urban planning regulations, a work acceptance clause, or a quality warranty clause. The latter obliges the developer to remedy any construction defects or quality issues within a specified period after delivery, in accordance with the applicable legislation and the agreed contractual regime.

Additionally, investors are required to comply with certain construction regulations, including collaborating with specialized and authorized personnel from the State Inspectorate for Constructions (ISC) during construction, adhering to safety standards, durability standards, and urban planning requirements. Contracts may stipulate compliance with international quality standards or certifications, such as ISO or LEED, where applicable.

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These insights have been provided by Lorena Ciobanu, a partner at ONV LAW, with extensive experience in strategic legal counsel in areas such as construction, real estate, telecom, and employment law. For further information or if you require legal counsel, please visit www.onvlaw.ro.

*This is expert content provided by ONV Law.