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Eversheds Global Estate Management

Lithuania

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - the ownership right is a right to manage, possess, use and dispose of an object of ownership right at one’s discretion, without violating the laws and the rights and interests of other persons. The object of the ownership right might be things and other property. The owner can transfer the ownership right or a part thereof to another person, or only specific rights (ie the right to manage, possess, use and dispose).

Leasehold - leases can be created for a fixed term or unlimited term. However, the term of a lease may not exceed one hundred years. The law may provide for other lease terms of property held by ownership right by the state (eg, the term of state land lease agreement shall not exceed 99 years). A short-term lease (up to ten years), where a rent is usually fixed at market rate, is the usual type of lease used in Lithuania. Long-term lease agreements are usually entered into in relation to state-owned land (up to 99 years). Subleases may not be created for a period exceeding the period of the lease agreement.

Common hold/Usufruct - not applicable.

Condominium ownership - not applicable.

Utilisation right - not applicable.

Joint/Co-ownership - co-ownership right is the right of two or several owners to possess, use, and dispose of the object of the right of ownership held by them jointly. Common partial ownership is ownership when shares of each co-owner are established in the co-ownership, while common joint ownership (usually that of spouses) is ownership when such shares are not established. Co-ownership is considered to be partial, except where provided otherwise by law. Common joint ownership is derived only according to the laws. Owners of apartments and other premises in a building have common partial ownership rights to commonly used areas of a house, for example, the mechanical, electrical, sanitary and other equipment of common use. For implementation of common rights, duties and interests related to management, use and maintenance of common areas, the owners of the building’s premises may establish a partnership of owners or conclude a contract on joint activities (partnership) or appoint an administrator of parts in common use.

Registration - ownership must be registered with the Register of Real Estate of the Republic of Lithuania. Lease agreements for a period of more than one year must be concluded in written form and may only be enforced against third persons if they are registered with the Register of Real Estate.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

Generally, investors are entitled to acquire all kinds of real estate in the Republic of Lithuania. However, in accordance with the Constitutional Law on Implementation of Part 3 of Article 47 of the Constitution of the Republic of Lithuania, only those individuals and legal entities that meet the criteria of European and Transatlantic integration are entitled to acquire land, internal waters and forests in the Republic of Lithuania. Even if the foreign subjects met the criteria they were not entitled to acquire agricultural land and forestry land until 30 April 2014, except the certain exceptions provided by the Constitutional Law. As of the 1 May 2014 a new Law on Acquisition of Agricultural Land came into force which entitles the foreign individuals and legal entities, subject to the requirements provided by law, to buy agricultural land in Lithuania. An initiative group, which does not approve it, initiated a referendum to adopt a constitutional amendment stating that land could only be owned by the citizens of the Republic of Lithuania and the state. The referendum will take place on 29 June 2014.

Where a foreign subject is subject to restrictions provided by Lithuanian laws, it may establish a legal entity in the Republic of Lithuania for the acquisition of certain real estate (eg land). Foreign investments are prohibited in activities concerning state security and defence (except for investments by the economic entities meeting the criteria of European and Transatlantic integration which Lithuania has opted for, provided this is approved of by the State Defence Council).

 

Title to real estate

Title to real estate

Investigation of title - the lawyer of the buyer/tenant performs the legal due diligence and will inter alia, examine the information of the public registers regarding title, encumbrances and other data regarding the property. The buyer/tenant usually inspects the building/premises (they may also take technical advisers for that purpose) and complete his financial arrangements. A real estate sale and purchase agreement must be certified by the notary public. Prior to certification of the agreement the notary public will perform searches of public registers as well prior to starting due diligence on the property, the parties may sign a confidentiality agreement and a letter of intent or preliminary sale and purchase agreement.

Transfer of title - following the Lithuanian Civil Code, the title to real estate passes upon its transfer. The transfer of real estate is usually documented by a transfer and acceptance deed. However, a sale and purchase agreement is only enforceable against third persons if it is registered in the Register of Real Estate.

Registration - ownership must be registered with the Register of Real Estate of the Republic of Lithuania. Lease agreements for a period of more than one year must be concluded in written form and may only be enforced against third persons if they are registered with the Register of Real Estate.

Information on register - data kept on the Lithuanian register of Real Estate is public, except where provided otherwise by law. The Register contains info on title, leases, as well as description of the land, owner, real rights to real estate, their encumbrances, legal facts and other information.

Commercial leases - not applicable.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - commercial terms are usually negotiated between the seller/landlord and the buyer/tenant directly. It is common for each party to use a lawyer/real estate broker when negotiating commercial terms.

Heads of terms – "Heads of terms" usually means a document signed by two parties intending to enter into a formal contract. Such a document is also commonly referred to as a memorandum of understanding or a letter of intent. This document is in most regards not legally binding, and merely records future intention of the parties without imposing enforceable obligations on them (with some exceptions).

The purpose of heads of terms is to set out what the parties expect the basic terms of a contract to be, before negotiating the fine detail. The heads of terms will generally cover the most basic features of the proposed contract, such as the identities of the parties, the fundamental purpose of the contract and the price. However, the heads of terms may also contain "lock-out" provisions. These are clauses which are legally binding (unlike the main part of the document) and prevent the parties from negotiating with any other person for a fixed period.

Investigation of title - the lawyer of the buyer/tenant performs the legal due diligence and will inter alia, examine the information of the public registers regarding title, encumbrances and other data regarding the property. The buyer/tenant usually inspects the building/premises (they may also take technical advisers for that purpose) and complete his financial arrangements. A real estate sale and purchase agreement must be certified by the notary public. Prior to certification of the agreement the notary public will perform searches of public registers as well prior to starting due diligence on the property, the parties may sign a confidentiality agreement and a letter of intent or preliminary sale and purchase agreement.

Purchase deed - not applicable

Contracts - the lawyer of either buyer/tenant or seller/landlord drafts the real estate sale and purchase or lease agreement depending on what is agreed between the parties. If the property is of low value, a notary public usually prepares the draft of the sale and purchase contract. Where the agreement is conditional (eg elimination of defects found during inspection, dealing with findings of legal due diligence, etc), the parties can agree on the triggers for completion. A real estate sale-purchase agreement must be certified by a notary. Failure to notarize an agreement makes it null and void.

Completion/closing - usually takes place when all the conditions for completion/closing specified in the appropriate agreement are fulfilled and the parties meet to sign the completion documents (transference and acceptance deed for title or lease). At this point the property is duly transferred to the ownership/possession of the buyer/tenant. In the case of sale of real property the final payment of the price is usually made at completion/closing.

Post completion - after completion, the buyer or the tenant (unless the parties agreed that this is the obligation of the landlord) must register the respective agreement with the Lithuanian Register of Real Estate in order for it to be invoked against third parties. If requested by the buyer, the application to register a buyer’s title to the real estate with the Lithuanian Register of Real Estate may be submitted by the notary as well for some additional fee.

Leases - not applicable.

Transfer of ownership of leased property (alienation) - transfer of the ownership of property from the landlord to another person shall preserve validity of the contract of lease towards the new owner, provided the rights deriving from that contract are registered in the Public Register within the procedure established by laws. Transfer of the right of ownership of leased property from the landlord to another person is a ground for the termination of the lease agreement upon the request of the tenant.

Language requirement – There is a requirement of law that all the contracts between the Lithuanian natural and legal persons and/or contracts with natural and legal persons of foreign states shall be concluded in the state language (Lithuanian), translations of the contracts into one or more languages may be attached to them. Non-compliance with the mentioned law requirement invokes the risk of potential sanctions imposed by the state institutions supervising the implementation of the mentioned law. However, this does not influence the legal enforceability of the contract concluded only in English language.

Governance of lease signature/administration – Not applicable.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - not applicable.

Alterations/modifications - as a general rule, any alterations can only be made by the tenant if the landlord approves them unless the lease agreement provides otherwise. Where the tenant with the permission of the landlord has made improvements he has the right to compensation unless the law on the agreement provides for otherwise. Where the improvements were made by the tenant without the permission of the landlord and are capable of being reinstated without harm to the property, and where the landlord does not agree to compensate the tenant, the alterations may be removed by the tenant. For any alterations made without consent and which cannot be reinstated without damaging the property the tenant need not be compensated.

Assignment and sub/under letting - general principle is that the tenant has the right to assign the lease and the right to sublet the property only with the written consent of the landlord unless otherwise provided for by the agreement. The sublease agreement may not be granted for a period exceeding the period of the head lease. The tenant is liable to the landlord for breaches of the sublease. Transfer of ownership of leased property. Transfer of the ownership of property from the landlord to another person shall preserve validity of the contract of lease towards the new owner, provided the rights deriving from that contract are registered in the Public Register within the procedure established by laws. Transfer of the right of ownership of leased property from the landlord to another person is a ground for the termination of the lease agreement upon the request of the tenant. In case of assignment of the rights and duties of the tenant to another person, the tenant is released from the obligations which he has under the lease agreement towards the landlord.

Destruction/reinstatement - the general rule is that the tenant shall upon the termination of the lease agreement return the leased property to the landlord in the same condition in which the tenant received it, taking into account normal wear and tear, or in the condition specified in the agreement.

Insurance - the landlord usually insures the building.

Rent review - rent is usually subject to indexation by the increase in the consumer price index on an annual basis. If the agreement is concluded for a longer term, a different rent fee during this period might be agreed between the parties. Unless otherwise provided for by the lease agreement, the rent fee may be changed by the agreement of the parties within the periods agreed between them.

Repair/decoration/furnishing - according to the Lithuanian Civil Code the landlord has an obligation to perform major repair works at its own expense unless the agreement or law provides otherwise. The tenant has an obligation at its own expense to perform minor repair works, unless the agreement or law provides otherwise.

Service charges - if according to the lease agreement the expenses of the landlord not directly related to the leased area (common areas of the building, security of the territory around the building, etc.) are to be reimbursed by the tenant, the proportion of service charge payable by each tenant is usually calculated by reference to the area occupied by the tenant compared to the area of the whole building.

Tenant's duties

The tenant is obliged to pay the rent payment on time. The tenant is also under obligation to use the leased property in accordance to the lease agreement and the purpose of the property, to maintain the leased property in a proper state, to bear expenses for the maintenance of the property and to make its current repair at his own expense unless otherwise provided for by laws or the contract.

Upon the termination of the lease agreement, the tenant must return the property to the landlord in the state he received it, taking into account normal wear and tear, or in the state agreed in the agreement. In case the tenant causes damage to the leased property, he is bound to compensate the landlord these damages, except the cases when the tenant proves that the deterioration occurred not due to his fault.

Termination/break clauses - the Civil Code provides for a list of grounds of possible unilateral termination of the lease agreement prior to expiry of its term due to the breaches made by one party or impossibility to use the property. This list may be supplemented by the agreement of the parties. Usually parties agree on the relevant compensation if terminating the agreement before the agreed lease term. If the lease is of indefinite duration, both parties shall have the right at any time to terminate the contract with prior written notice of three months served on the other party (unless a longer notice period is fixed by the agreement of the parties).

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - the tenant might be required to pay a sum equal to several months’ rent (usually from three to 12 months’ rent) as security for the performance of its obligations. The deposit is granted back to the tenant after the expiry of the lease agreement.

Surety - Less common.

Warranty - Less common.

Rent deposit/bank guarantee - the tenant might be required to pay a sum equal to several months’ rent (usually from three to 12 months’ rent) as security for the performance of its obligations. The deposit is granted back to the tenant after the expiry of the lease agreement.

 

Security of tenure

Security of tenure

A lease agreement is deemed to be for an indefinite period where the tenant continues to use the property for more than ten days after the expiry of the lease period and the landlord raises no objection. In addition, the Lithuanian Civil Code provides for a preference right for a tenant to renew the agreement (on the same or modified terms and conditions) provided he has duly performed his obligations under the initial lease. If the landlord refuses to grant a lease to the tenant for a new period, but within a year from the termination of the lease agreement concludes a lease agreement of the same property with another person without informing the previous tenant, the latter shall have the right at his choice to claim either to transfer to him the rights and duties of the tenant under the lease agreement concluded or compensation of damages incurred as a result of the refusal to conclude a lease agreement for a new period.

 

Taxes

Taxes

On sale/acquisition of real estate:

  1. Sale: in accordance with tax laws, the taxation of real estate transactions varies depending on the circumstances. Where the seller is an individual, the capital gain from the sale of real estate is subject to an individual income tax, unless it was held by title within a certain period. Capital gain from the sale of real property is not taxed by individual income tax if it was acquired earlier than five years before (in the case of sale of property, where the seller declared his/her residence address non taxable holding period is shorter). If the seller is a corporate entity, the profit derived from the transfer of a real estate is subject to a corporate profit tax. Usually the seller is liable for the tax declaration and payment.

  2. Acquisition: the acquisition of real estate is subject to a notary fee, which according to the agreement of the parties may be paid by the seller, by the buyer or shared by both of them in equal parts. The buyer/tenant shall pay the stamp duty for registration of the title/lease with the Real Estate Register.

On lease of real estate:

Income tax - rental income is subject to individual income tax (where the landlord is an individual) or corporate profit tax (where the landlord is a legal entity).

Other taxes:

Land tax - land is subject to the land tax and payable by natural and legal persons.

Real estate tax - buildings, premises, other structures are subject to real estate tax and payable by natural and legal persons

Lease tax - not applicable.

Local tax - not applicable.

Mortgage - not applicable.

Other taxes - not applicable.

Property lease tax - not applicable.

Value added tax - The sale of newly constructed or essentially improved real estate objects (before expiry of 24 months after the construction or essential improvements) as well as sale of land plots sold together with the mentioned real estate objects is subject to VAT. The sale of land for construction purposes is also subject to VAT.