Building blocks: Restitution issues in CEE

15 November 2010

When curtains and walls started to rise and fall across Europe in the late 1980s, the general mood of optimism was palpable. Many of the former communist states of Central and Eastern Europe (CEE) welcomed the opportunity for change and economic renewal on a massive scale. Cue the foreign investors eager to pump cash into these jurisdictions - all hoping to make substantial returns from real estate acquisition and property development activity. On the face of it, a neat symbiosis. However, even before the fall of communism, the fragmented and disparate property law and title structures in the main CEE jurisdictions - Poland, Romania, Slovakia, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Serbia and Slovenia - would have been difficult to navigate. And, since 1989, the complexity has only been ramped up by the introduction of restitution and compensation measures.

There can be little doubt as to the huge value in human, economic, social and moral terms of the principle of restitution. According to the Council of Europe: "The restoration of rights to and physical possession of properties through restitution, or the provision of equivalent properties or value though compensation, are essential forms of redress. The failure to provide such redress perpetuates the displacement of over 2.5 million people in Europe..." Nonetheless, the restitution and compensation measures established in CEE jurisdictions affected by post-communist liberalisation have created a host of problems both for claimants and for those against whom claims have been filed. In most of the main CEE jurisdictions, these measures have been written into statute. In others (notably Poland) they have not. But the common threads that link them are mostly complex and negative. In all cases, the restitution and compensation processes have been inconsistent and protracted; and the legal and administrative procedures have been incoherent. Indeed, much of the legislation already in place has not been fully tested; while some states have continued to adapt and add laws creating greater confusion.

Against this backdrop, even with the best legal advice, foreign investors have had to accept a high degree of risk and uncertainty if they wish to commit capital to real estate ventures in this part of the world. One of the key concerns for existing and potential new foreign investors is the issue of timescale - the slow process of claims resolution and the uncertainty as to whether new claims could still emerge in the future. The majority of the CEE jurisdictions have established statutes of limitations with firm deadlines for filing new restitution claims. However, the tail of unresolved claims is long - in Romania, for example, there are still around 60,000 unresolved cases. And, in some states, restitution legislation continues to evolve, so extending the opportunity for claimants to file applications.

Inconsistency and uncertainty

Romania is an interesting example in many ways. Though the restitution laws themselves had a range of earlier cut-off dates, there is no statute of limitations governing the Romanian Civil Code which, until June 2008, allowed for 'civil code restitution claims' actiuni in revendicare to be filed against current property owners. A lack of binding court precedence and inconsistency of approach in courts across the country led to many courts rejecting the civil code restitution claims on the grounds that dispossessed claimants could only file for restitution claims under the restitution law procedure. In the face of this confusion, the Romanian General Prosecutor filed an extraordinary appeal with the High Court of Cassation and Justice. The judgment on the case was delivered by the court on 9 June 2008, making civil code restitution claims inadmissible.

Yet, still there was no definitive resolution. The decision by the High Court of Cassation and Justice also ruled that a civil code restitution claim could remain admissible in certain cases, provided that such admissibility does not hinder another ownership right or the security of the civil circuit. This lack of jurisprudence, which is generally applicable to the restitution laws themselves, has only exacerbated the situation of uncertainty. Law 10, for example, was often condemned as being confusing and placing too many procedural burdens on claimants, before the implementing normshad been drafted. This opened the door for claimants to seek redress in the European Court of Human Rights (ECtHR), so adding to the level of claims.

Indeed, Romania is some way ahead of other CEE jurisdictions in the number of restitution cases that have been taken to the ECtHR. It has also notched up the largest number of sanctions applied by the court in respect of property issues. With this context, it's impossible to accurately predict when the flow of restitution claims will cease. Legal experts in the jurisdiction suggest that restitution claims will continue to be a factor for many years to come.

The situation is compounded by the fact that the Romanian record system is, at best, patchy. There is no central database of ongoing litigations. Generally, the courts should inform the Land Registry about pending claims. Upon request of the property owner, the relevant municipality should issue a formal confirmation of the existence or absence of a restitution claim related to a particular address. However, in practice, this has often not been the case. Therefore, even a 'clean' Land Registry abstract in respect of litigations does not represent absolute proof that there is no pending restitution claim. In Bucharest, there is an electronic database for filed restitution claims, which is searchable by the address of the property. However, even here there is no guarantee of accuracy as the database has not been rigorously kept updated.

The general issue of poor record keeping only adds to the uncertainty facing existing property owners and would-be investors over when, or if, they will ever have absolute legitimate ownership of title. Title records are largely inconsistent and inaccurate. And because records of the Land Registry are not necessarily complete or legible, even full-title searches do not eliminate the risks. In the commercial context, lack of appropriate documentary evidence of title ownership tends to unravel the chain of title, making sale and purchase transactions difficult to complete successfully.

Overcoming the hurdles

Our experience in CEE jurisdictions over the past five years suggests that foreign investors can overcome the potential barriers imposed through the implementation of restitution measures by ensuring they pursue the following key strategies:

  • Partner with a reputable local law firm whose lawyers in each jurisdiction have expert knowledge of the legal framework governing that particular jurisdiction's restitution and compensation measures and who are able to provide advice in a 'commercial' manner.
  • Undertake rigorous due diligence of the political, legal and economic conditions of the particular jurisdiction in which they have an interest in investing.
  • Make use of title indemnity insurance as a protective measure against known and unknown title issues to facilitate their funding and exit strategies.

Evidence we see indicates that, however thorough the legal investigations on a particular transaction, lenders are increasingly insistent on additional levels of security before they will agree to release debt finance for real estate acquisition, development and construction. In a rapidly growing number of cases, investors and developers are using title indemnity insurance to provide this extra degree of surety. Looking ahead, one might assume the issue of restitution will work itself through, giving investors greater certainty and security. It is to be hoped that legislation will improve and more consistent Land Registry systems will ensure more accurate record keeping. However, for the immediate future it seems likely that the parlous state of most European (and world) economies means that things will get worse before they get better. Against this backdrop, lawyers acting for foreign clients in the former communist states of Central and Eastern Europe should consider the benefits of adding title indemnity insurance to the list of tools at their disposal in dealing with restitution issues.

 

Ian Borders, European Underwriting Director at First Title Insurance Plc