Real Estate Guide
Principles of ownership
Freehold/Ownership - acquiring ownership of an immovable property requires making a contract in written form and registration of the purchaser at the Public Registry. An owner may, within the limits of legal and other restraints, freely possess and use the property, exclude others from using the property and dispose of it unless the exercise of such rights would violate the rights of neighbours or of other third persons, or unless such actions constitute abuse of the right of ownership. The right of ownership extends to the essential component parts of the property.
Common hold/Usufruct - property may be transferred to the use of another person (the holder of a usufruct) enabling that person to use the property as the owner and to exclude third persons from its use. The holder of a usufruct is entitled to those benefits of the property that are not derived from its ordinary economic use (provided that the holder of the usufruct compensates the owner for any damage caused to the property as a result of such use). However, the holder of a usufruct may not alienate, mortgage or inherit the property. Leasing or renting out the real estate requires the owner’s consent. Usufruct may be agreed for a certain period or for the life of the holder of a usufruct. Accordingly, the usufruct is extinguished by the death of the individual or liquidation of the legal person in whose favour the usufruct was established. Usufruct may be subject to payment or granted free of charge. After the usufruct is extinguished, the owner of the property becomes a party to any existing leases or rentals.
Condominium ownership - owners of real estate are entitled to possess and use the property for an indefinite period or to dispose of it. An owner may also transfer its property to a third person, enabling them to possess and use the real estate during a specified period, based on a number of legal grounds (listed below). It is noteworthy that the real estate may be freely alienated by the owner even if it is subject to the rights of third persons (such as usufruct, rental or mortgage).
Utilisation right – a plot of land may be transferred to the use of another person for a fixed period in such a manner as to grant that person the right to build on or beneath this plot, as well as the right to alienate, inherit, lend, rent or lease such right (right to build). The duration of the right to build depends on the agreement of the parties but, according to statute, cannot exceed 59 years. The possessor of the right to build may be bound by the agreement to pay compensation for such right. The parties may predetermine the compensation for a ten-year period. However, if economic conditions substantially change, the parties are bound to agree on the compensation anew. At the termination of the right to build, the owner of the plot of land becomes a party to any lease or rental agreement concluded by the holder of the right.
Joint/Co-ownership - joint ownership arises by virtue of law or on the grounds of a transaction. Each co-owner may assert a claim against third persons with respect to the property under joint ownership. Each co-owner is entitled to reclaim the property only in favour of all co-owners. A property under joint ownership may be pledged or otherwise encumbered with a right in favour of and in the interest of one of the co-owners. Expenses for maintenance and storage of a property under joint ownership are borne equally by the co-owners, unless otherwise provided by law or the contract. Each co-owner has a pre-emptive right to the acquisition of any share of the joint property if agreed under the contract.
Registration - information from the Public Registry is available to the public. This includes evidence of title, details of the land and the owner, as well as any rights/encumbrances registered for the relevant plot. The buyer’s lawyer will carry out searches of the Public Registry, while the notary officer of the Public Registry investigates title.
Restrictions on foreign ownership
Georgian law provides that foreign individuals as well as corporations are treated equally. The only exception concerns agricultural land, which until 31 December 2014 may only be owned by Georgian citizens or legal persons incorporated under Georgian law.
Title to real estate
Investigation of title - the notary officer of the Public Registry investigates title. Transfer of title - where a transaction needs to be registered, legal title passes on registration. In other cases, such title passes on execution of the transaction or at a later date when completion takes place.
Registration - ownership as well as the right to build and usufruct must be registered with the Public Registry at the Ministry of Justice of Georgia. As to the other rights outlined below, registration of them optional. This includes evidence of title, details of the land and the owner, as well as any rights/encumbrances registered for the relevant plot.
Information on register - information from the Public Registry is publicly available.
Commercial leases - under a commercial leasing contract the lessor is obliged to transfer to the use of the lessee the specified property for a term fixed by the contract. The lessee is obliged to pay compensation to the lessor in accordance with the specified period. The lessor is obliged to produce or purchase the property specified under the contract. The commercial leasing agreement may oblige or entitle the lessee to either purchase or rent the object of the commercial lease upon expiration of the term of agreement, unless the contract ends with the complete depreciation of the property. A commercial leasing contact must be concluded in writing.
Structure of a real estate transaction
Negotiation of terms/Agreement - commercial terms are usually offered by the sellers or their estate agents. Many of these terms are negotiable. The agreed terms are then provided to the buyer’s lawyer.
Heads of terms – The heads of terms are binding between the parties.
Investigation of title - the notary officer of the Public Registry investigates title.
Purchase deed - is an extract issued by the Public Registry which ascertains the right of ownership or any other rights (limited use of property, usufruct, and servitude) on the immovable property. The extract is issued after all the necessary documents are presented and the ownership right is registered by Public Registry. The extract can be issued at anytime, upon the request on the party.
Contracts - the buyer’s lawyer usually drafts the contract. On signing the contract, the parties must complete at a specified date as agreed in the contract. In some cases, the contract may include conditions precedent to the completion, such as remedying defects in registration or releasing encumbrances.
Completion/closing occurs upon the registration of the real estate. From this moment, the buyer is entitled to take ownership.
Post completion - after completion, the buyer must register at the Public Registry as a new proprietor of the purchased property.
Leases - Under a lease agreement, the landlord transfers the real estate to the temporary use of the tenant, enabling the tenant to benefit from the property during the lease term provided that the benefits are obtained through proper management of the leased property. The tenant must pay to the landlord the stipulated lease rental, which may be determined both in money and in kind. The parties may also agree on other means of determining the lease rental. Subject to the terms of the lease, the tenant may sublet the leased property with the landlord’s consent.
Transfer of ownership of leased property (alienation) - where a transaction needs to be registered, legal title passes on registration. In other cases, such title passes on execution of the transaction or at a later date when completion takes place. Information from the Public Registry is available to the public. This includes evidence of title, details of the land and the owner, as well as any rights/encumbrances registered for the relevant plot. The buyer's lawyer will carry out searches of the Public Registry, while the notary officer of the Public Registry investigates title.
Language requirement – For the registration before the Public Registry all documents shall be presented in Georgian, or notarised Georgian translation of the documents.
Governance of lease signature/administration – Execution of lease agreement does not need to be facilitated by a local representative, it shall be signed by the parties and notarised and afterwards registered by the Public Registry (if concluded for the term more than one year).
Usual commercial lease terms
Summary of available lease types - the two available lease types under Georgian Law are lease of land with inventory and lease of agricultural land. If a plot of land is leased with inventory, then the lessee is liable for maintenance of each part of the inventory. Under an agreement for a lease of agricultural land, a plot of land is transferred for agricultural purposes, with or without dwellings or farming equipment (or an enterprise) intended for economic use. Except for some peculiarities, the rules governing lease agreements apply to the lease of agricultural land. An agreement for a lease of agricultural land must be in writing, otherwise the agreement is deemed to be concluded for an indefinite term. According to Georgian law, if more than half of the lessee’s annual harvest is destroyed due to natural disasters or other force majeure circumstances, the lessee is entitled to demand a pro rata reduction of the lease payment. Once a lease of agricultural land has expired, the lessee must return the leased property in the same condition as existed at the start of the lease.
Alterations/modifications - under Georgian law, the lessor’s prior consent is required for the lessee to undertake reconstruction works of the rented/leased property. The lessee is not liable for alteration of the rented property by the use specified under the contract. The lessee may not make alteration or reconstruct any dwellings forming part of the property without the consent of the lessor.
Assignment and sub/under letting - the lessee is not entitled to sublet the rented property to a third party without the lessor’s consent. Family members of the lessee do not qualify as ‘third parties’. However, the lessor may not withhold consent if the lessee has a legitimate reason to sublet some or all of the property. This rule does not apply if the lessor finds the subtenant to be unacceptable, if the sublet property would be overcrowded or if there are other reasons why the subletting is unacceptable for the lessor. To prevent subletting being used to evade termination of the rental agreement, the lessor may take on the rights and duties that exist between the lessee and subtenant on completion of the rental agreement. The lessee has no right to sublet without the lessor’s consent. The lessor may refuse to allow individual parts of the leased property to be sublet if this would result in significant loss to the lessor.
The lessee is liable to the lessor for any unauthorised use of the property by the sublessee. The lessor may directly put an end to the sublessee’s unauthorised use of the property.
Destruction/reinstatement - the lessee is not liable for normal wear and tear of the property. If the lessor delays remedying of the defect, then the lessee may repair it himself and claim against the lessor. As a rule, the lessee is bound to do current repairs.
Duration of lease - the length of lease term is subject to agreement between the parties. Under Georgian law, a lease term may be for a definite or an indefinite period.
Forfeiture/irritancy - a contract of tenancy that is detrimental to the lessee of lodging is void. The lessee has the right to protect his possession from any encroacher including the owner. In the rental of lodging, an agreement which prohibits or restricts the right to dissolve the agreement is void. In addition, an agreement by which the lessee is bound to compensate damages in excess of the damage sustained is also void.
Insurance - there are no rules regulating the insurance of leased/rented property.
Rent deposit/bank guarantee - if, under a rental agreement for a dwelling, the lessee has to provide security by way of a deposit, the amount can be no more than the equivalent of three months’ rent. If this has to be paid in advance, the lessee is entitled to pay it in equal monthly instalments over three months. Interest at the rate prescribed by law will accrue on any security paid in advance. When the agreement ends, the deposit must be returned to the lessee together with the accrued interest. Any agreement concluded otherwise to the detriment of the lessee will be void. A bank guarantee in lease/rental situation is rather rare.
Rent review - may be negotiated between the parties to the agreement. It is worth noting that if a lessee refuses to pay the increased rental fee offered by the lessor, and if it accords with the market rate, this may be regarded as a legitimate reason for terminating the agreement. Georgian law provides that, if the leased property is defective, the amount of the rent shall be reduced in proportion to the amount by which the suitability of the property is decreased due to its defect. This right to a reduced rent expires once the defect is remedied. It should be noted that immaterial defects will not be taken into account for the purpose of reducing the rent. Under a rental agreement, the landlord (e.g. owner, the possessor of the right to build or the holder of the usufruct) is bound to transfer the real estate to the use of the tenant for a specified period. Rent is to be paid upon expiration of the term of the rental agreement. If the payment of rent is specified to be made periodically, it must be paid at the end of each period. Subject to the terms of the rental agreement, the tenant may sublet the rental property with the landlord’s consent.
Repair/decoration/furnishing - under Georgian law, the lessor must compensate the lessee for necessary expenses that the lessee incurs for repair/decoration of the rented property. Obligation to reimburse other expenses is subject to the rules governing management of the affairs of another person without the relevant mandate. Lessees are responsible for ordinary day-to-day repairs, at their own expense. If the lessee fails to fulfil this obligation, the lessor may be able to make a claim against the lessee. Lease of agricultural land - The lessor must transfer the leased property to the tenant in a condition suitable for the use specified under the agreement and must maintain this condition during the whole term of the lease. Lessees must carry out day-to-day repairs of the property, at their own expense. This includes repairs to the dwelling and farm structures, roads, ditches, pipelines and fences. The lessee must use the leased property for business purposes. The lessor must compensate the lessee for necessary expenses that the tenant incurs for repair of the leased property. The landlord is obliged to compensate the tenant only for those expenses incurred to fundamentally restore the property, not for day-to-day maintenance.
Service Charges - not applicable.
Tenant’s duties - the tenant must pay to the landlord the stipulated lease rental, which may be determined both in money and in kind.
Termination/break clauses - if a lease agreement is concluded for a term of more than ten years, after ten years each party may revoke the agreement by giving three months’ notice to the other party. If the term of a lease agreement for a plot of land is not specified, the agreement may be revoked no later than one month after the end of the year of lease. If a rental agreement is concluded for a term of more than ten years, after ten years each party may revoke the agreement by giving three months’ notice to the other party. The Lessor and lessee are each entitled to terminate the rental relationship early. The lessee is entitled to early termination, provided that the lessee notifies the landlord one month in advance and offers another solvent and acceptable lessee who will agree to be the lessee for the remaining term of the rental. On the other hand, the lessor is entitled to early termination of the agreement if the lessee, despite notice from the lessor, substantially damages the rented property or creates an imminent threat of damage. If the duration of a lease of agricultural land is not specified, each party to the agreement may, no later than ten days from the commencement of a year of the lease, declare its intention to revoke the agreement for the next year of the lease (i.e. a calendar year). Alienation of the property by the lessor does not affect the rental agreement or lead to its termination. The acquirer of the real estate replaces the lessor and accepts the rights and obligations arising out of the rental agreement.
Increasing covenant strength
Lease deposit - if, under a lease agreement for a dwelling, the tenant has to provide security by way of a deposit, the amount can be no more than the equivalent of three months’ rent. If this has to be paid in advance, the tenant is entitled to pay it in equal monthly instalments over three months. Interest at the rate prescribed by law will accrue on any security paid in advance. When the agreement ends, the deposit must be returned to the tenant together with the accrued interest. Any agreement concluded otherwise to the detriment of the tenant will be void.
Surety - like bank guarantees, sureties are rarely used in Georgian real estate.
Warranty - a warranty in lease/rental relations is rather rare
Rent deposit/bank guarantee - see lease deposit above, bank guarantees are rarely used.
Security of tenure
Rental relations are terminated when the term of the agreement expires. However, if the tenant continues to use the property after the agreement has expired, and the landlord raises no objections, the agreement will be deemed to have been extended for an indefinite period. Where a rental agreement for a dwelling is concluded for a fixed term, the tenant may claim an extension on the agreement for an indefinite period by giving two months’ written notice to the landlord, provided the lessor consents. If the tenant does not return the rented property when the rental term expires, the landlord is entitled to claim payment of the rental fee, as damages, for the period for which the tenant retains the property. In the case of agricultural land, lease relations are terminated on expiry of the term of the relevant agreement. An agreement concluded for more than three years may be extended for an indefinite period if one party’s offer to extend the lease is not rejected by the other party in writing within three months. Both the offer and the rejection of such as offer must be in writing.
On sale/acquisition of real estate - tax is paid on the acquisition of property.
Immovable property tax - the maximum rate of property tax for immovable property is one per cent.
Income tax - if the seller of the immovable property is an individual, the income tax is paid for immovable property defined by its income: A. for the family having income up to 100,000 GEL - from 0.05 to 0.2 per cent of market value of the property at the end of the year. B. for the family having income more than 100,000 GEL - from 0.8 to 1 per cent of market value of the property at the end of the year. Where the individual is not involved in business activity and owns the immovable property for more than two years, it will be exempt from income tax.
Land tax - there are two types of land tax: land tax on non-agricultural land and land tax on agricultural land. The basic rate for non-agricultural land is GEL 0.24 (equivalent to approximately US$ 0.15) per square metre. This rate may be increased or reduced, depending on the location. The rate for agricultural land also differs according to quality and location. The maximum rate is GEL 85 (around US$ 35) per hectare of land.
Lease tax - can be no more that one per cent of the average annual value of the property calculated at the end of the year.
Local tax - according to the Georgian Tax Code, Property tax is considered to be a local tax. Local governments are entitled to set such taxes.
Mortgage - there is no tax on mortgages. However, Georgian law includes the concept of tax mortgage/security interest.
Other taxes - for profit tax, the surplus of the legal entity, received from the transfer of immovable property, is usually included in annual taxable income, and subject to profit tax for this procedure at 15 per cent.
Property lease tax - for an agricultural lease, if the land is for pasture the tax is from 1.5 to 20 GEL for one hectare, for other lands the tax is 50 to 100 GEL for one hectare.
Value added tax - (VAT) is payable on the transfer of immovable property at the rate of 18 per cent, if the seller of the property is a VAT payer. If the seller is not registered as a VAT payer, is a resident legal entity or a permanent institution of a non-resident, and the value of the transfer of immovable property exceeds GEL 100,000 (approximately US$ 62,500), the seller must register as a VAT payer before the transaction and pay VAT at the rate of 18 per cent. If the seller is an individual, not involved in business activity, it is exempt from VAT. If the individual is involved in business activities, it should pay VAT as above.
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