In Serbia, historically, only the State could own city-zoned land. Private entities were entitled to use that land in accordance with a so-called ‘land-use right’, which provided holders with a broad range of rights, including the right to obtain construction permits for the land. Investors, including from abroad, have long invested in the country on the basis of the existence and validity of these rights.
This position has now changed radically: Holders of land-use rights are no longer entitled to obtain construction permits. In order to obtain these permits, the land-use right must now be converted into full ownership, which may involve the payment of substantial consideration.
Serbia requires conversion of land-use rights for any construction permit
In 2015, Serbia introduced the Law on Conversion of Land-Use Right into Ownership Right (the Conversion Law), which provides that, from 28 July 2016, holders of land-use rights must convert that right into ownership before they can obtain a construction permit for their land – including to change the way they use their property. In many cases, they must also pay consideration.
The Conversion Law affects a broad range of entities, including:
- many privatised entities as well as their legal successors; and
- entities whose entitlement to the land-use right is based upon certain governmental regulations or decisions.
The consideration payable may be as much as the fair market value of the land, regardless of whether or not the value of the land was factored into the amount paid to acquire the entity or the land use right in the first place.
Impact on foreign investors
Those affected by the Conversion Law include a large number of foreign investors, many of whom took advantage of the wave of privatisation activity that took place in Serbia from 2003 to 2009.
In effect, foreign investors who hold a land-use right in respect of a privatised entity must now take the following additional steps to obtain a construction permit:
- engage in a costly, lengthy and uncertain conversion process; and
- pay consideration potentially equal to the fair market value of the land.
Not only does this result in an additional financial and administrative burden for these foreign investors, but it also diminishes or destroys the value of their land-use right. It may adversely affect the value of the privatised entity they have acquired as well. These foreign investors must now effectively buy a right they have already acquired.
Foreign investors affected by the Conversion Law may be able to invoke bilateral investment treaties between Serbia and their home State and recover damages from the Serbian government through international arbitration proceedings. Serbia has close to 50 bilateral investment treaties in force, including with Austria, Croatia, Denmark, the Netherlands, the United Kingdom and France.
Bilateral investment treaties establish objective standards of State conduct and provide foreign investors with access to international arbitration directly against the State, with the right to full compensation for harm suffered as a result of treaty violations. Protections accorded to qualifying investors and investments include:
- compensation in respect of property that is expropriated directly or indirectly through regulatory or other government measures that deprive the investor of the economic benefit of its investment;
- ‘fair and equitable treatment’, including protection of the investor’s legitimate expectations as to future State action and the right to a predictable legal and regulatory framework for investment; and
- a prohibition on discriminatory treatment in relation to similarly-situated investors.
The Conversion Law may well fall foul of these international standards.