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Eversheds Global Estate Management

Estonia

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - ownership of title to land provides the owner with the right to possess, use and dispose of the land and to demand the prevention of violation of these rights and elimination of the consequences of violation by all other persons. Ownership of the immovable is registered in the Land Register (in Estonian: “Kinnistusraamat”).

Leasehold - leasehold title is the contractual right to use the land or parts of it (i.e. buildings on the land or premises in these buildings) as specified in the lease agreement.

Common hold/Usufruct - a usufruct encumbers an immovable in such a way that the person for whose benefit the usufruct is established is entitled to use the immovable and to acquire the fruits thereof. Common hold has to be registered in the Land Register.

Condominium ownership - apartment ownership (in Estonian: “korterihoonestusõigus”) - means ownership of the physical share of a building (apartment) together with a legal share of co-ownership of land plot and such parts and equipment of a building which are not part of the physical share (e.g. the roof and staircase).

Immovable (in Estonian: “kinnistu” or “kinnisasi”) - an immovable is a delimited part of land (plot of land). The essential parts of an immovable are the things permanently attached to it, such as buildings, constructions, standing crop, other vegetation and unharvested fruit.

Real rights – the main real rights are ownership (right of ownership) and restricted real rights: servitudes, real encumbrances, right of superficies, right of pre-emption and right of security, which have to be registered in the Land Register.

Right of superficies (in Estonian: “hoonestusõigus”) - an immovable may be encumbered such that the person for whose benefit a right of superficies is constituted has a transferable and inheritable right for a specified term to own a construction permanently attached to the immovable. Right of superficies has to be registered in the Land Register.

Utilisation right - not applicable.

Joint/Co-ownership - co-ownership is ownership belonging to two or more persons concurrently. Ownership of the land as well as other property rights (condominium ownership, right of superficies etc) are always registered in the Land Register Registering leases is optional. If the lease agreement has been registered in the Land Register, the new owner of leased premises has no right of early termination of the lease agreement which is otherwise provided by law. However, it is not common to register the lease agreements in the Land Register.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

According to the law there are restrictions on acquiring plots of land which include ten or more hectares of agricultural or forest land or are situating in some state border areas. Persons of a third country (e.g. a natural persons who are not a citizens of a country which is a contracting party to the EEA Agreement or a member state of the Organisation for Economic Cooperation and Development) may acquire such land only with the consent of certain state agencies.

 

Title to real estate

Title to real estate

Investigation of title - the title of land and property and issues related to encumbrances and usage agreements are registered in the Land Registry. The buildings are registered in the Building Register (in Estonian: „Ehitisregister“). In case of larger transactions it is common to have solicitors investigate the title, carry out searches of public registers, raise enquiries of the seller/landlord and review and where necessary negotiate the contract and any draft lease.

Transfer of title - the legal title passes over upon registration in the Land Register.

Registration - ownership of the land as well as other property rights are always registered at the Land Register. The Land Register is public and provides absolute evidence of title and shows a description of the land, the identity of the owner, and any matters beneficial or detrimental to the land.

Information on register - not applicable.

Commercial leases - not applicable.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of commercial terms - commercial terms are usually negotiated between the seller/landlord and the buyer/tenant and the agreed terms are then provided to the parties’ solicitors. There is an increasing trend to use estate agents and surveyors to represent the parties.

Heads of terms – the preliminary contracts are not binding between the parties. Regardless of this, the performance of signing sale and purchase agreement and property right agreement could be claimed successfully only if the conditions of preliminary contract enable it.

To ensure the enforceability of a preliminary contract of sale agreement for immovables, the preliminary contract must be notarised. To secure that any preliminary right is public and secures the right of the purchaser, there should be a notation entered to the Land Registry referring to the preliminary contract concluded.

Investigation of title - the title of land and property and issues related to encumbrances and usage agreements are registered in the Land Registry. The buildings are registered in the Building Register. In case of larger transactions it is common to have solicitors to investigate the title, carry out searches of public registers, raise enquiries of the seller/landlord and review and where necessary negotiate the contract and any draft lease.

Purchase deed - not applicable.

Contracts - the sale agreement for property and land is always concluded at the notary (unless the company owning the property/land is sold). The parties conclude a sale and purchase agreement by which the obligations of the parties are specified (e.g. price, payment schedule, transfer of possession, pre-conditions for sale). Usually the parties conclude the property right agreement (agreement concerning transfer of ownership) by which the entry of title shall be made in the Land Register simultaneously with the notarised sale agreement. If there are no preconditions for the completion then the transaction (sale and purchase agreement and property right agreement) may all be performed by way of one document.

Completion/closing - the completion in case of transfer of ownership (normally with transfer of possession) usually takes place when all the obligations of the parties described in the respective agreement have been fulfilled, including payment of the monies due. The completion of leases normally takes effect after the tenant has provided security to the landlord.

Post completion - simultaneously with completion, the state taxes and notary fees are paid.

Leases - for a lease agreement, usually the parties use unattested written form. In the lease agreement the parties may also agree about the obligations of the parties which must be complied with before possession can be transferred.

Transfer of ownership of leased property (alienation) - unless otherwise stated in the lease agreement, there are no further requirements for transfer of a leased property. Attention has to be paid to mutual claims of the tenant and landlord.

Language requirement – lease agreements could be in any language understandable to the parties. As soon as there is a need of submitting the lease agreement to the court or other authorities, it has to be translated to Estonian. The Land Register is maintained in Estonian and the documents in foreign languages shall be submitted together with the translation into Estonian notarised by a sworn translator or notary.

Governance of lease signature/administration – there is no mandatory mediation needed at signing leases. Also there are no local administrative processes required before signing leases, unless the transaction falls within the scope of the Competition Board. Nevertheless, it has to considered that using premises for certain economic activity an activity license issued by the authorities might be required.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - the lease agreements can be concluded regarding whole building, part of a building, offices, apartments, land plots, agricultural land, etc.

Alterations/modifications - alterations are only generally permitted with the consent of the landlord if not agreed upon already in the lease agreement. It is common for a tenant to be obliged to reinstate any alterations at the end of the term and to deliver the premises back to the landlord in accordance with its repair covenants. Unless otherwise agreed between the parties, a tenant is compensated for the alterations agreed by the landlord if the value of the premises has increased due to such alterations.

Assignment and sub/under letting - the tenant may, with the consent of the landlord, transfer the use of premises fully or partially to a third party (ie sublet the premises). The period of sublease cannot be longer than the period of the lease agreement.

Destruction/reinstatement - see section "insurance" below - where the property is destroyed by an insured risk or uninsured risk. Commonly, the tenant must reinstate any alterations at the end of the term and return the premises to the landlord in accordance with the repairing covenants. The tenant is not normally compensated for improvements (it is common to agree so in the lease agreements).

Duration of lease - usually up to five years. Longer lease agreements are not common. Lease agreements may also be concluded for an unspecified term. In this case, according to law parties have the right to terminate the agreement with prior notice of three months, unless it is otherwise agreed. If, after expiry of the term of a lease contract, the tenant continues to use the premises, the lease contract is deemed to have become a lease contract entered into for an unspecified term unless either the landlord or tenant express some other intention to the other party within two weeks.

Forfeiture/irritancy - the right to terminate the agreement as a result of breach depends on the mutual agreement of the parties or the law. There is no separate regulation provided by the law similar to forfeiture/irritancy.

Insurance - the insurance of the building is usually the obligation of the landlord. The tenant is usually obliged to insure the decorations, furnishings and contents.

Rent deposit/bank guarantee – it is common to agree to deposit/bank guarantee in total sum of monthly rent multiplied with 2 or 3, however, it is not mandatory under law.

Rent review - rent is commonly reviewed upwards on a one year cycle taking into consideration the consumer price index or some other index agreed by the parties.

Repair/decoration/furnishing - the tenant is normally liable for internal repairs and decoration with the landlord carrying out structural repairs of the whole building.

Service charge - if a landlord repairs the structure and common parts of the building, the lease will usually provide a service charge pursuant to which certain costs can be recovered by the landlord from the tenants.

Tenant’s duties - the tenant has numerous obligations in the lease (such as keeping the premises repaired and decorated, complying with all the statues affecting the property etc).

Termination/break clauses - it is possible to negotiate early termination rights and sometimes a landlord may require a break clause. Some break clauses are also enacted by law (e.g. if the tenant does not pay properly or the tenant cannot use the premises because of reasons caused by the landlord).

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - the most common form of security is a deposit in the amount of one to three months rent which will be repaid on termination of the term or will be settled with the last month's payments. Bank guarantee and surety are less common.

Surety - it is not common to require a company or individual to guarantee the tenant's performance of its covenants. However, guarantee can be used if so required by the landlord.

Warranty - not applicable.

 

Security of tenure

Security of tenure

Security of tenure - an owner has a right of claim against anyone who possesses a thing of the owner without legal basis. The claim of the owner shall be for recognition of the right of ownership and reclamation of the thing from illegal possession into the owner's possession.

There are no specific rights of the tenant to claim new term of the lease unless this is agreed. A lease agreement which is not prolonged after expiry of term will continue as an agreement without term, if parties proceed with the usage.

 

Taxes

Taxes

On sale/acquisition of real estate - notary fees and state fees are payable for the value of the property sold. Immovable property tax - not applicable.

Income tax - income tax on the rental income and on the profits gained by selling the property is payable only by private persons and non-resident persons. Resident legal persons and non-resident legal persons who have registered permanent establishments in Estonia pay corporate income tax only upon paying dividends or other payments which are considered as profit distribution.

Land tax - the owner of a plot of land is obliged to pay land tax. Upon the encumbrance of land with a right of superficies or a usufruct, land tax is paid by the superficiary or usufructuary.

Lease tax - not applicable.

Local tax - not applicable.

Mortgage - notary fees and state fees at registering.

Property lease tax - not applicable.

Value added tax – generally, sale or lease of a real estate is VAT exempted. The exemption does not apply to:

  1. realty with a building, which is sold or leased out before the first use of the building;
  2. realty with an established detailed plan, design criteria or building permit if there is no buildings on the realty;
  3. realty with a building which is significantly improved and which is sold or leased out before the first use of the building after improvement.
  4. Further, regardless of the exemption, a person may voluntarily, by informing the tax and customs authorities, add VAT to the sale and lease of a real estate, other than dwelling. Upon voluntary application of VAT, the VAT is declared and paid by the buyer or lessee (in place of seller or lessor).