This brief report provides a summary of the most recent Luxembourg legal developments that currently affect and will be affecting real estate practitioners throughout 2017.
Tax reform 2017 – Abolition of Lease Registration Requirement
In accordance with the law dated 23 December, 2016 on the adoption of the 2017 tax reform, as of 1 January, 2017, the mandatory requirement to register leases, subleases, and subrogation of leases within three months of their signature date has been abolished.
Consequently, all the leases, subleases and subrogation of leases signed after 30 September will be exempt from the registration requirement and the payment of registration duties.
In addition, as of the entry into force of the new law no sanctions will be imposed for the leases and subleases which, according to the previous tax regime, should have been mandatorily registered. However, lease agreements that have a duration of more than 9 years, should be signed before a public notary and registered.
Voluntary registration of leases, subleases, and subrogation of leases will still be possible for those who wish to assign a defined record date to a lease and which will be held as evidence against any third party claims, in particular against the purchaser of a building.
The registration duty rates remain unvaried:
- 0.6% on the cumulated value of the rent over the total duration of the lease.
- Fixed duty of €12 if the lease is submitted to VAT.
Adoption of the Omnibus Bill of Law
On 8 February, 2017 the Luxembourg Parliament adopted Bill of Law n° 6704, the so called Omnibus Bill. The new law will amend, among others, several provisions on municipal planning, urban development, and expropriation in the public interest.
The new law provides for the simplification of some municipal planning and urban development procedures. For instance, it contains provisions that will:
- Simplify the procedure that the Luxembourg municipalities will have to comply with to adopt their new general urban plan (plan d’aménagement général - PAG).
- Shorten the time-limit to request indemnification as a result of easements imposed by the PAG or special urban plan (plan d’amémagement particulier – PAP) five years as from the entry into force of the new PAG or the PAP.
- Allow landowners to request the adoption of the PAP, if at least half of their plots of land are covered by it. Under the former legal provisions, landowners could only require the adoption of a new PAP if they owned or had a title over all the plots of land covered by the request.
- Extend a building permit’s validity time-limit. Building permits will be valid one year and can be renewed twice with one year validity, whereas in the past they were valid one year and could only be renewed once with one year validity).
Share sale and payment of loan agreement breach costs
In some cases, target companies that hold real estate assets borrow funds from a bank to acquire, renovate, and construct buildings. Upon the sale of a target company’s shares, a purchaser may decide to prematurely terminate an existing loan agreement and reimburse the loan in order to avoid purchasing a company with liabilities. If the latter occurs, banks usually require the payment of contract breach costs. Consequently, the issue of which party bears the burden of the breach of contract costs arises.
According to Article 1187 of the Civil Code, the contract term is always presumed to be stipulated in favor of the obligor-debtor, unless the stipulation or other circumstances may reveal it was also agreed upon in favor of the creditor. It is generally agreed that in the case of an interest-bearing loan, the contract term is stipulated in the interest of both the lender and borrower.
If the loan agreement does not foresee an early contract termination and loan reimbursement clause, the lender will be able to refuse early repayment. If the lender agrees, an indemnity might be negotiated to compensate the loss suffered from the contract breach. If a court calculates the indemnity’s amount, it will include the contract breach costs and the lender’s earning loss.
However, loan agreements usually contain an early loan repayment clause combined with a provision granting an indemnity to the lender. This type of clause is enforceable and the lender will not be allowed to refuse an early loan repayment. The amount of the indemnity might be material and, contrary to what would apply for consumers, the debtor might not be able to obtain its reduction.
In the context of a share purchase agreement, the contract breach costs should be borne by the target company as it usually is the borrower.
Finally, negotiations between the seller and the purchaser will determine which party will bear the final burden of the contract breach costs.
Case law briefing
Luxembourg District Court: Decision of 3 November, 2015 on the Termination of an Office Lease by the Purchaser of a Building
Lease registration assigns a record date to a lease which will be held as evidence against any third party claims. For instance, in case a building is sold and a record date has not been assigned by a lease registration, the purchaser may terminate the lease agreement.
Over recent years, case law has always considered that although lease agreements had not been registered, purchasers could not terminate them if they were aware of their existence.
However, on 3 November, 2015 the Luxembourg District Court considered that an article mentioned in a notarial deed that generally referred to any lease agreement was not specific enough to protect a lessee against the purchaser’s termination of the lease agreement. As no other evidence demonstrated that the purchaser was aware of the lease’s existence, the court confirmed that the purchaser was allowed to terminate the lease.
A tenant refused to pay the rent due to his landlord as he argued that the landlord had breached the lease agreement because the electrical and technical installations did not comply with current legislation. The court decided that the landlord could not be forced, during the duration of the lease agreement, to carry out, at his own expense, renovation works imposed by public authorities according to new legislation.
Landlords are obliged to maintain and repair existing installations but cannot be forced to transform, build or renovate them. Works required by public authorities cannot be considered as maintenance or repair works and thus shall not be carried out at the expense of the landlord.
A tenant that rented space in a shopping mall argued that its consent to the rental agreement had been vitiated and should consequently be nullified. The tenant stated that its consent to the agreement had been vitiated by the landlord’s unfulfilled promise of the shopping mall’s high level of customer attendance.However, according to the rental agreement the landlord was only supposed to promote the shopping mall without providing any guarantee concerning its level of customer attendance.
The court considered that a mistake, as a defect of consent (vice du consentement), can only nullify an agreement if it is based on an essential fact that determined the consent. However, it is insufficient for a party to prove that there was a substantial mistake, as the affected party must prove that the counterpart knew that it was substantial for the mistake’s victim. The court also rejected the argument of deception (dol). The court considered that the consent is vitiated by deception, if:
- A party to an agreement is aware of a fact that is crucially important for the counterparty and which the counterparty cannot verify
- The counterparty should legitimately trust the party to the agreement.
The court held that the landlord had not promised a determined level of customer attendance and the tenant had not proven that the signature of the rental agreement depended on it.
Luxembourg District Court: Decision of 22 December, 2015 on Renting Space in a Shopping Mall Under Construction and the Annulment of a Rental Agreement for Deception (dol)
In another case, the court considered that the consent had been vitiated by deception. The rental agreement explicitly stated that it would enter into force upon the realization of conditions precedent, including the rental of more than 60% of the shopping mall. Evidence submitted to court proved that the landlord had falsely and intentionally informed the tenant that more than 60% of the shopping mall had been rented. The court also stated that the occupation of more than 60% of the shopping mall determined the tenant’s initial consent to enter into the rental agreement and thus justified the vitiation of its consent on grounds of deception.