When a company buys or leases property from a public sector entity, such as a municipality, the company must always ensure that the transaction is not underpriced. In an underpriced real estate transaction, the company may afterwards be considered to have received prohibited state aid. In order to avoid the state aid risk, a prospective buyer must ensure that the real estate is market-priced in accordance with the European Commission's provisions before making the decision to purchase. If the transaction is not properly prepared, the consequence could be an obligation to repay the aid. Another possible consequence is that the buyer's title to the acquisition will not be registered.
Ignoring state aid regulations in the decision-making process is much-used as grounds for municipal appeals. If the decision itself does not make it evident that the correct procedures have been complied with, there is a risk that the decision will be overturned on appeal. Additionally, it must be recognised that the title to the property cannot be registered if the decision does not become final. In such a case, it will be more difficult for the buyer to finalise its project.
What Constitutes State Aid? Can Real Estate Transactions with Municipalities be Considered State Aid?
State aid is defined by the following criteria:
- The aid or benefit is given from public funds: form does not matter, companies owned by municipalities can also be considered to grant aid.
- The aid distorts or threatens to distort competition (competition criterion). The threshold for meeting this criterion is very low.
- The benefit favours certain companies or products (exclusiveness criterion).
- The benefit can affect the trade between member states (trade criterion). The threshold for meeting this criterion is very low.
The purchase or lease of real estate from a municipality can be considered state aid if it is underpriced.
How Can One Ensure that a Real Estate Transaction is not Underpriced?
In accordance with European Commission guidance, a transaction does not constitute state aid if:
- the sale is carried out through sufficiently a publicised, open competitive bidding procedure that has no conditions are attached and that results in the best or only tender being chosen, or
- the sale is carried out at a market price that has been confirmed by independent experts.
The Commission notice (10 July 1997, C 209/3) provides more details on how to carry out the competitive bidding procedure as well as on the requirements for the independent experts. Sales that are not carried out in accordance with the Commission notice must be separately reported to the Commission and must receive clearance from the Commission. The aforementioned principles also to a large extent apply to the lease of land areas and buildings. Market terms must also be observed in leases.
Why Should Companies Take State Aid Issues into Consideration in Real Estate Transactions with Municipalities?
- Municipal appeals are a real risk for the buyer: the title to property cannot be registered if the decisions are not enforceable.
- An appeal to the Commission is ‘to the detriment of the buyer’: if the sale is considered prohibited aid, the prohibited aid, plus interest, will be recovered from the buyer.
- The recipient of prohibited aid cannot plead good faith.
- Municipal Real estate transactions, including prices and terms of sale, are public, and the related decisions are published on the Internet. It is easy for competitors, inhabitants of a municipality and third parties to follow the proceedings and lodge a complaint of illegal aid. It also possible to lodge a complaint anonymously.
- The company, for its part, must ensure that the preparatory texts for purchase decisions make it evident that Commission guidance has been complied with. The texts cannot be amended later for the purposes of Supreme Administrative Court or Commission proceedings.
- Appeal processes are lengthy, expensive and public.
- The company may receive negative publicity: allegations of ‘under the counter’ purchase prices do no one any good.