In Latvia, buildings and land are generally unified into one legal estate. Sometimes, however, they are two distinct estates. While developers will ordinarily require the acquisition of a title to the land they are building upon, this is not always the case. Sometimes property development projects involve construction on land that does not belong to the developer but to a third person. As you can probably imagine, this may pose special risks.
In accordance with a law which reinstates certain parts of Latvia's 1937 Civil Law, buildings are to be recognized as "independent objects of property." This means that in certain cases the title to the buildings is under a separate estate from the title to the land below the buildings. In cases where buildings are erected on leased land which belongs to third parties, if the lease term is not less than ten years and provides the lessee's right to construct "independent objects of property" then construction may, if other applicable permits and consents are obtained, be built on leased land. The law provides that such buildings may only be deemed "independent objects of property" during the term of the land lease. Once the lease term expires, the building estates cease to be "independent" estates from the land upon which they sit. At that point, title to the buildings constructively passes to the land owner and is fused with the land estate, at least theoretically. In practice, if the parties do not agree, there may be a need to litigate the issue. In any case, this fusion of estates does not take place automatically. It requires visits to the landbook and notarized applications to transfer the title.
Upon the termination of the lease, an issue may arise as to whether the landowner is required to compensate the lessee for the construction costs and associated expenses of the buildings. A plain reading of the Civil law suggests that such obligation exists.
Where the land lease term is for a long period of time, such as for several decades, (which is not unheard of) then it is not necessarily the case that at the end of the lease, the building will retain its original value. It is not beyond the realm of possibilities that in certain cases, when the land lease expires that the building atop the land may require demolition and removal, in which case the building owner may be required to compensate the land owner for the expenses it has incurred in connection with the demolition and removal.
In the case of multi dwelling units being built upon third party land under land lease contracts, the situation may become very complicated, especially where there are subleases, and if sublessees do not meet their obligations to pay their portion of land rent, as is known to happen from time to time. Litigation in such cases may be time consuming and costly.
It would therefore ordinarily be considered wise, in order to minimize the risk of future conflicts over the issue, when concluding a lease agreement with permission to build, to stipulate in advance the mechanism for the determination of value of the building when the lease expires and the scope of compensation applicable to the lessor from the lessee or visa versa. Yet what may preempt all this is the fact that there is some discussion underway at the moment about amending the law to put an end to the separation of estates of land and buildings where such continue to exist. If the discussion turns into tangible legislative reform, the separation of distinct land and the buildings built on top of it may soon be a thing of the past.
Elina Rubeze, Associate, Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.
