New legal framework applicable to residential real estate transactions in Romania

Amendments to Law no. 10/1995 on Construction Quality and Law no. 7/1996 on Cadastre and Real Estate Publicity

The Romanian Parliament has adopted, in its decisional chamber, a new law introducing provisions regarding real estate transactions involving future residential properties, such as units in condominiums or individual dwellings under development (the “Legislative Proposal“).

The Legislative Proposal expressly amends Law no. 10/1995 on Construction Quality and Law no. 7/1996 on Cadastre and Real Estate Publicity and has been sent to the President of Romania for promulgation.

The provisions of the new law will enter into force only after promulgation, within six months from its publication in the Official Gazette, except for the provisions on preliminary de-merger, which will enter into force within three months from the law’s publication in the Official Gazette.

Broadly, the new provisions address the following aspects:

• Introduction of a legal definition for the term “developer”: The term refers to individual or legal entity investors who finance and carry out investments or interventions on existing constructions within the meaning of the law, as well as those who develop real estate projects such as condominiums or individual dwellings intended for sale.
• Preliminary conditions for entering into pre-sale agreements: Pre-sale agreements may only be concluded after the registration of the building permit in the land book, the execution of the preliminary de-merger operation and the opening of land books for the future units.
• Notarised form: All pre-sale agreements must be executed in notarised form (in Romanian: “in forma autentica“) before a public notary. Preliminary de-merger operations must also be executed in notarised form. These operations are based on the preliminary de-merger cadastral documentation prepared by an individual or legal entity authorised to perform specialised works. The documentation must rely on the building permit and related  technical documentation and be receptioned by the territorial cadastre and real estate publicity office.
• Reservation: The amount paid as a reservation price may not exceed 5% of the purchase price, under the penalty of absolute nullity of the reservation agreement. The term of a reservation agreement is limited to a duration of 60 days. If the developer, due to their exclusive fault, fails to conclude the pre-sale agreement or the sale and purchase agreement within this term, they have the legal obligation to reimburse the entire amount within 30 days.
• Management of advance payments: Amounts paid as advances must be deposited in a bank account dedicated to the project for which the advance payments were made and may only be used for the development of the project, with the prior approval of the responsible person or the site supervisor (in Romanian: “diriginte de santier“). Following a last-minute amendment to the Legislative Proposal, the version of the law sent for promulgation no longer regulates a maximum threshold for advances or for the successive payment instalments.
• Restrictions and sanctions: The use of advance payments by the developer for purposes other than those provided by law is prohibited and sanctioned with a fine of 1% of the turnover recorded in the previous year, unless it constitutes a criminal offense.
• Changes without the buyer’s consent: Updating the land books as a result of changes in the number of individual units, as well as any administrative steps, legal or cadastral operations carried out by the developer regarding the completion of the project, do not require the prior consent of the promissory buyer, except where the total area or the location of the unit subject to the pre-sale agreement is modified.
• Applicability: The provisions of the new law do not apply to pre-sale agreements or sale and purchase agreements concluded prior to its entry into force.

Implications for promissory buyers:

• Buyers benefit from additional legal protection through the mandatory registration in the land book of pre-sale agreements, the limitation of the advance paid under the reservation agreement, the limitation of the reservation agreement’s term, as well as the developer’s obligation to transfer amounts received as advances into a dedicated bank account. These measures balance the allocation of contractual risk between the promissory seller and the promissory buyer.
• To the extent that the Legislative Proposal remains unchanged after promulgation, the current draft does not regulate a maximum threshold on the advance that the promissory seller may collect. Therefore, the promissory buyer must continue to pay close attention to the contractual mechanisms governing the payment of the advance and its refund in case the sale and purchase agreement is not concluded.
• By way of example, in this context, the legal mortgage of the promissory buyer regulated by the Civil Code remains a relevant protection mechanism. The legal mortgage is compatible with the developer’s right to carry out any steps and legal operations without requiring the prior consent of the promissory buyer, provided such steps aim at completing the project and do not change the total area or the location of the unit subject to the pre-sale agreement.
• It should be noted, however, that the legal mortgage of the promissory buyer does not represent an absolute protection mechanism. Specifically, this means that the legal mortgage encumbers the real estate asset (it remains to be clarified whether “real estate asset” refers exclusively to the future asset for which the Legislative Proposal requires the opening of a land book or also the related land on which the future asset is developed) and not the bank account of the promissory seller where the amounts paid as advance are collected. To the extent that the legal mortgage encumbers the future asset exclusively, if the project is not completed, the legal mortgage right becomes devoid of substance, rendering the right illusory and leaving the promissory buyer as an unsecured creditor who will most likely compete with creditors benefiting from tangible guarantees, such as a financing bank.
• Given that the current form of the Legislative Proposal no longer includes the initial proposal under which the promissory buyer would acquire the status of a privileged creditor in the event of the promissory seller’s insolvency, a promissory buyer must act diligently to secure sufficient contractual protection mechanisms. Consequently, it is advisable for the promissory buyer to obtain genuine legal assistance when entering into pre-sale agreements.

Implications for promissory sellers (developers):

• Developers face stricter legal obligations, including the requirement to carry out the preliminary de-merger in notarised form before entering into pre-sale agreements, the limitation of the amount they can collect under the reservation agreement and notably, the opening of a dedicated bank account for collecting advance payments and using these funds strictly for project development.
• The abusive use of funds triggers a significant fine amounting to 1% of the developer’s turnover recorded in the previous year, providing a strong deterrent and promoting financial discipline. The Legislative Proposal does not clarify whether “previous year” refers to the year prior to determining the abusive use of funds or the year prior to the actual misuse. Such ambiguities may lead to divergences in judicial practice and undermine the legislator’s intended purpose.
• In the context of limiting the duration of the reservation agreement to 60 days and considering that the pre-sale agreement can only be signed after obtaining the building permit and performing the preliminary de-merger, developers must act with the highest diligence in coordinating all operational and contractual processes to avoid the early reimbursement of amounts collected under reservation agreements. A prudent approach would involve signing reservation agreements only after obtaining the building permit and, ideally, after registering the preliminary de-merger with the land book, thereby reducing the risk of delays caused by the authorisation process, which may be complex and lengthy. 
• Following a last-minute amendment, the Legislative Proposal currently sets a limit of 25% of the purchase price for structural works and 20% for installations. It remains unclear whether these thresholds represent the maximum amount the developer can collect as advances from the promissory buyer or the maximum amount that can be used from collected advances. Developers should include contractual provisions aimed at ensuring compliance with the law in the project management agreement, given that work progress statements and bill of quantities are most often confirmed by the project manager.
• Developers must pay attention to the entire contractual package used for project development – from design agreements to the project management agreement, construction agreement, reservation agreement and pre-sale agreement – to incorporate and accommodate all relevant legal provisions, thereby reducing potential exposure both towards the promissory buyer and the supervisory authorities.
• The obligation to enter into pre-sale agreements only after obtaining the building permit and completing and registering the preliminary de-merger in the land book may restrict traditional bank financing options. This could incentivise developers to seek alternative financing options (e.g. crowdfunding, private equity, owner’s equity) for land acquisition and permitting costs. Specialised legal assistance tailored to the chosen financing option can provide an additional layer of protection for the developer.

Conclusions and lege ferenda proposals

• Although the main changes introduced by the Legislative Proposal aim to balance contractual risk between the developer and the buyer in residential real estate transactions, increase transparency and prevent fraudulent practices in the residential market, it is important to note that, in the absence of an effectively regulated legal framework, the new provisions may remain without effect or may even create significant uncertainty in the application of the law.
• Without diminishing the importance of the measures proposed under the Legislative Proposal, progress should be assessed based on impact rather than intention. Considering that the Legislative Proposal has the status of an ordinary law, while the proposed amendments address aspects that fall within the scope of an organic law, we expect the Legislative Proposal to undergo further updates. On this occasion or separately – and in order to meet legislative drafting requirements – at least the following aspects require further clarification:
  • clarifying whether the 20% and 25% thresholds represent limits for the advance payment that the developer may collect from the promissory buyer or limits for the amounts that the developer may use from the advance collected;
  • clarifying that as long as the amount of the advance that can be collected is limited by law, any additional restrictions imposed on the developer regarding the use of these amounts (beyond the requirement that they be used exclusively for completing the project) may be excessive and could negatively impact the real estate market. Therefore, the Legislative Proposal should allow the developer to freely decide on the allocation of the advance collected from promissory buyers for the purpose of completing the project;
  • regulating an acceptable margin (+/-) for exceptional situation in which the total area of the unit is modified after the preliminary de-merger, for which prior consent of the promissory buyer would not be required (given that, in practice, unforeseen situations may lead to minor changes in total area that should not trigger consent requirements);
  • defining the object of the legal mortgage in the context where land books will be opened for the future asset;
  • clarifying the concept of the “previous year” relevant for the applicability of the 1% turnover penalty; and
  • expressly regulating the status of the promissory buyer as a privileged creditor in the event of the developer/promissory seller’s insolvency.