1. Real Estate Law in Croatia

The main laws that govern real estate in Croatia are the Law on the Ownership and Other Property Rights (Official Gazette Nos. 91/96, 68/98, 73/00, 114/01), which defines property rights, their acquisition and protection; the Law on Land Registries (Official Gazette Nos. 91/96, 68/98, 137/99, 114/01, 100/04), which regulates the organisation of Land Registries; the Law on the State Measurement and Cadastre of Real Estates (Official Gazette No. 128/99), which regulates the organisation of Cadastre and its content; and the By-law on Organisation, Keeping of Land Registries and Managing Other Works in Land Registries’ Court's Departments (Official Gazette Nos. 81/97, 109/02, 123/02, 153/02).

As Croatia pertains to a circle of Roman law-based countries, the concept of common law – although recognised in jurisprudence – has a rather insignificant impact.  Customs are applicable only if the Law provides for their application (e.g. Article 102, paragraph 2 of the Law on the Ownership and Other Property Rights).

International laws relevant to real estate in Croatia are applicable if approved in the appropriate proceedings before the Parliament: as a rule, if signed, ratified or acceded and proclaimed in the Official Gazette of the Republic of Croatia, they enter into force and by strength they come before the domestic laws.

2. Ownership

There are no legal restrictions on acquisition of ownership for particular classes of person, but foreign nationals must acquire a special approval issued by the Ministry for Foreign Affairs.

3. Real Estate Rights

The rights over land recognised in Croatia are ownership (co-ownership, joint ownership, individual ownership, neighbouring rights); servitude (real property or personal); right to build; and hypothecation.  An indispensable requirement for effectiveness of all property rights in Croatia is registration of the title with the Land Registries of competent courts.

 4. System of Registration

As mentioned above, in Croatia an indispensable requirement for effectiveness of all property rights is registration of the title with the Land Registries of competent courts.

But, there are districts in which the Land Registries do not exist.  It has to be mentioned, though, that the process of an overall adjustment of Land Registries in Croatia towards the actual status is currently under way, as one of many political priorities established by the Government as part of the process of speedy accession to the EU.  The project is supervised by the Croatian Ministry of Justice.

Pursuant to Article 48 of the Croatian Constitution, the State guarantees the right of individual, i.e. private, ownership.  It represents one of the material principles laid down by the Constitution.  The Law on Ownership and Other Property Rights (Official Gazette No. 91/96) further elaborates this principle to the full extent permitted by law.

There are no compulsorily registrable property rights, but the sanctions for an owner or any other person who holds property rights is the danger that in the case of a bona fidei acquisition of a real estate property by a third person, the owner will have to raise claim to defend his right and prove that he was the owner of the real estate.

As mentioned above, in Croatia, an indispensable requirement for the effectiveness of all property rights is registration of the title with the Land Registries of competent courts.

However, if for example – due to discrepancies between the actual (ownership) status and the registered one (see above, under question 4.1) which is still rather often the situation in Croatia, in urban zones as well as in the country - a building is not registered with a Land Registry, legislation has provided a way in which flats (privatised by their tenants due to a set of laws targeted at the transition of the former “social” ownership into private property) could be registered by the depositing of contracts with the so-called Registry of Deposited Contracts, with the same effect as registration in the Land Registry.  However, this is only a temporary regime, until all buildings are registered in the Land Registry.

Under the Croatian Law on Land Registries, the principle which could be described as the first-to-file principle governs the registration of all property rights.  This means that the relationship between rights on the same property is governed by the time of the filing of the request for their registration with the Land Registry: the first request filed shall be the first to be registered (provided that all other requirements for registration are fulfilled).

The Law on Land Registries recognises 3 (three) types of registrations:

1.                   regular registration by which the rights are acquired, transferred or terminated without any subsequent justification;

2.                   pre-registration by which the rights are acquired, transferred or terminated under condition of subsequent justification (this applies to cases when, at the moment of filing the request for registration, all particular pre-conditions for registration of the right were not fulfilled); and

3.                   notification of certain legally relevant facts – this type of registration merely preserves the visibility of such facts in the Land Register.

Title (or ownership) is transferred to the buyer at the moment of registration with the Land Registry.

Article 45 of the Law on Land Registries provides that the priority rank of the registration in Land Registry is established according to the timing of an application's submission.

 5. The Registry / Registries

In order to understand the system of public records in which real properties in Croatia are kept, it has to be pointed out that two separate public records exist in Croatia, each of them having a specific purpose and legal role.

There are two principal public records where all information relevant for the status of the real property could be found:

-           cadastre; and

-           Land Registry.

Cadastre is a public register of real property where data such as the location, shape, surface, method of use, production capability, cadastral income and user / possessor of the property is recorded (Article 32 of the Law on the State Measurement and Cadastre of the Real Estates).  The original purpose of the cadastre, which was to ensure the proper taxation of land, was soon extended to a number of other issues such as regional planning, settlement of border disputes, possessor’s rights, etc.

The information on land recorded with the cadastre serves / should serve as a basis for registering the data on real property with Land Registries.

The Land Registry, in addition to the identification of land (on the basis of cadastral records), represents a public record detailing legal status of the real property relevant for legal transactions.  In other words, Land Registries keep records of all real property rights.  Pursuant to the Croatian Law on Ownership, Article 119, title to real property is acquired only by registration with the Land Registry of the qualified statement of the transferor on transfer of his/her ownership title to the transferee.

Information on real estate ownership can be accessed from the Registry online but those excerpts are not certified and do not have evidentiary value in any judicial and administrative process.

The information can be accessed at www.pravosudje.hr

The Law on Courts provides that the Republic of Croatia is liable for damages caused by judges to citizens or legal persons, by illegal and irregular work, in performing their judicial activity.

As mentioned before there are no restrictions on public access to the Land Registry.

  6. Real Estate Market

a)         Selling and purchasing agents

They are are involved in real estate transactions by imposing an offer, granting advice and abetment in the adaptation of the property, and granting assistance in acquiring credits from banks or other financial institutions.

Of course, each of them will ask for commission (see below, under question 6.2).

Some agencies may offer their templates of a sale agreement to the purchaser and seller.

b)         Lawyers

They are engaged in real estate transactions by giving counsel services to the parties of the transaction.  They also investigate the legal status of real estate and provide the parties with a draft of the sale contract.

c)         Notaries

Notaries Public provide parties of a sale agreement with a public certificate of their signatures – notarial certification of the seller’s signature is an indispensable requirement for the validity of the transaction. 

d)                   Others - Guarantors

In some situations when a purchaser has to finance the purchase by loan arrangements with banks, real estate transactions would be inconceivable without guarantors (see below, under question 8.2.).

Selling and purchasing agencies charge commission for intermediation in the sale of real estate equal to 2% of the actual value of the property sold/purchased.  As a rule, if the property is in a particular agency’s portfolio, it shall charge both purchaser and seller with commission of 2%, i.e. 4% per transaction.  If the property is not included in the respective agency’s portfolio, each of the agencies involved in the transaction shall charge 2% of the value of the property to the party they represent.

Lawyers, on the other hand, are bound by the valid Tariff on Rewards and Remuneration of Costs for Lawyers’ Work (Official Gazette No. 91/04).  Basically, there are two possible ways of charging for services rendered: either by application of Tariff No. 29 (a certain number of points, as provided in Tariff No. 7.1, are calculated on the basis of the value of the transaction and the end result is increased by 25%); or Tariff No. 24, which provides for charging on the basis of billable hours (the minimum rate is approx. EUR 30/h).

 7. Liabilities of Buyers and Sellers in Real Estate Transactions

There are two minimum formalities that must be fulfilled for the sale and purchase of real estate to be valid:

1.                   the object of sale must be a real estate property that is not extra commercium.  Extra commercium real estate is defined by the Law on Ownership and Other Property Rights (Article 3 and 4) as those properties which, by their nature, cannot belong to one person or legal subject but to the whole community; and

2.                   the transaction is strictly formal, i.e. it must be executed in a written form and the signature of the seller must be publicly certified (Article 455 of the Law on Obligations, Official Gazette Nos. 53/91, 73/91, 3/94, 7/96, 112/99).  If the purchaser is a foreign national, further formalities, as described above under question 2.1, must be observed.

Croatian law does not recognise the doctrine of disclosure which exists in the common law countries.  The seller warrants that (s)he is the owner of the property or that (s)he possesses a valid title on certain property.  However, it is still common practice in Croatia that, before entering into any real estate transaction, the status registered with the Land Registry is checked.

The buyer may claim damages (actual damages – damnum emergens) under conditions provided by the Law on Obligations.  The Law on Obligations provides that one would be responsible for any actual damages suffered by the other party if those damages were caused by the fact that the injuring party negotiated without the actual will to conclude a contract at all.

Of course, if the sale agreement is already signed and afterwards it is revealed that the seller was either not entitled to sell real estate because: (s)he was not a registered owner of the property; (s)he was not empowered by the owner to conclude such agreement; or if the agreement was the result of a wilful misrepresentation on the part of the seller, the buyer is entitled to claim the invalidity (nullity) of such transaction, resulting in the return of all gains acquired thereby, but the sellers’ liability for damages is also not excluded.

Giving representations and warranties with respect to the material facts of the transaction and to the abilities of the parties to exercise their rights, although not entirely absent in practice, does not carry the same importance as in the documents of the common law system.  The Croatian Law on Obligations provides for contractual freedom which implies the freedom to conclude the contract, freedom to choose a form – transactions involving real estate are a notable exception to this freedom - and freedom to determine the contents of the contract, always provided that these contents are not contrary to the Constitution, statutory laws and ethics of society (Art. 322 of the Law on Obligations).

As a rule, contracts on the sale/purchase of real property in Croatia do contain seller’s warranties on the ownership title of the property and/or non-existence of encumbrances on the property.  The liability of the seller for material defects of the object of sale is established in Art. 400 of the Law on Obligations:

“A seller is liable not only for material defects of the object of sale agreement that existed at the moment of conclusion of the agreement but also for those material defects that emerge after the transfer of risks to the buyer, if those defects were caused by reasons that existed before the transfer.”

One of the buyer's liabilities, in addition to paying the sale price, is to thoroughly examine the object of sale - in the case of real estate: to examine the contents of the Land Registry regarding the legal status of a particular real estate property.  According to the provisions of the Law on Obligations, a buyer is also liable for the payment of the interests from the moment of transfer if the object brings gains and if (s)he did not pay the price at the moment of transfer of ownership.

Article 519 of the Law on Obligations obliges a buyer to take over the transferred object of the sale contract.  Takeover, for real estate, means registering the obtained ownership in Land Registries.  Of course, the buyer is not liable for not registering his ownership in the Land Registries but may suffer consequences described under question 4.3.

8. Finance and Banking

Generally, regulations do not contain limitations with respect to the lending of money between natural and legal persons, irrespective of the purpose of lending.  On the other hand, the lending of money performed as business activity is, as a rule, limited to banks and other financial institutions pursuant to the Law on Banks.  

Regulations do not provide for a different treatment between residents and non-residents, irrespective of whether they are natural persons or legal entities.  In other words, non-residents/borrowers shall have to fulfil the same conditions as residents.  In the event that financing is performed by a foreign entity (e.g. a foreign bank), such transaction must be reported to the Croatian National Bank under the rules of the Foreign Exchange Law. 

The main methods for security of claims arising from credit arrangements involving real estate are:

-                      The establishment of so-called fiduciary ownership – an ownership restricted by  termination or by cancellatory conditions, which is transferred for the purpose of creation of security for the benefit of the holder of the fiduciary ownership right, i.e. creditor.  Under the concept, the creditor is entitled either to receive a purchase price effected by sale of the object of fiduciary ownership, or to retain the ownership title of such object, subject to fulfilment of other conditions.  Possession of the object of fiduciary ownership remains with the original owner, i.e. debtor.  The settlement of a claim secured by fiduciary ownership could be exercised only at an auction conducted for the purpose of the sale of the respective object.  The creditor has a choice: either to collect money effected by sale of the object to the highest bidder up to the amount of its claim, along with accrued interest and costs of proceedings; or to purchase the object under auction itself, thus acquiring legitimate ownership title of the auctioned object.

-                      The establishment of a hypothecation on a real estate property.  A real estate claim has priority in settlement before other claims against the same real estate (Article 302, paragraph 1 of the Law on Ownership and Other Property Rights).  If there are two or more claims secured with hypothecation over the same real estate property, priority in settlement is granted to one of them according to the priority ranking, i.e. first-to-file system (see above, under question 4.7).

The minimum formalities are the existence of the ownership title of the seller registered with the competent Land Register; and a written contract, or at least a pre-contract, with all material provisions (object, price, clausula intabulandi – statement of the owner/transferor on transfer of the title to the buyer), signed and certified in statutory form.  Of course, banks and other financial institutions shall require one of the various modes of insurances as described under question 8.2.  

See above, under question 8.2.

9. Tax

Transfers of real estate in Croatia are subject to a transfer tax of 5% (tax rate) of the tax base.  The taxpayer is the buyer of the real estate.

According to the Article 14 of the Law on the Real Property Transfer Tax (Official Gazette Nos. 69/97, 26/00, 153/02), tax liability is created at the moment of conclusion of the contract whose object is the respective real estate.  If a real estate acquisition is based on a court decision or on the decision of any other administrative body, tax liability is created at the moment of their finality.

The buyer must apply for taxation of the respective transaction before the territorially competent Taxation Office where the real estate is situated, within 30 days from the date of conclusion of the contract.

Transfers of real estate are subject to VAT only when the object of transaction is a newly-constructed building and if sellers are legal or natural persons subject to the VAT system.

The By-law on the Value Added Tax (Official Gazette Nos. 60/96, 113/97, 7/99, 112/99, 119/99, 44/00, 63/00, 80/00, 109/00, 54/01) defines new buildings as those built, delivered or charged after implementation of the respective Law, i.e. after 1 January 1998.  In all other cases, transfer of real estate is subject to real estate transfer tax (see above under question 9.1).

The tax rate for VAT is 22% of the tax base.

The tax base for computation of VAT is calculated exclusively on the basis of the value of the building.  As for the value of the land pertaining to the building, VAT is not payable but real estate transfer tax is (at the rate of 5%).

The seller shall be liable for payment of VAT if the object of transaction is a newly-constructed building and (s)he is a legal or natural person who is subject to the VAT system (see above, under question 9.3).

Furthermore, if the seller further disposes of her/his property within 3 years after purchasing the real estate property, (s)he shall be liable to payment of income tax (Article 3, paragraph 5 of the Law on Income Tax, Official Gazette Nos. 127/00, 150/02, 163/03).  In this case, the tax base consists in the increase in value of the real estate from the moment of the acquisition until disposal.  Tax rates for income tax vary (15%, 25%, 35%, 45%) depending on the value of the tax base.

Article 15, paragraph 1 of the Law on Income Tax provides that if one disposes of more than 3 real estate properties or of more than 3 property rights of the same kind in a period of 5 years, the income thus acquired shall be considered as an income gained on the basis of performance of the permanent activity of the same kind, and shall be treated as taxable income.

See above, under question 9.3.

10. Leases of Business Premises

The main laws that regulate leases of business premises are the Law on Obligations (as lex generalis) and the Law on the Lease of Business Premises (Official Gazette Nos. 91/96, 124/97, 174/04).

The Law on Obligations generally defines the lease agreement, and the lessor's and lessee's obligations according to the lease agreement.  The same law also defines the sub-lease and disposal of the leased object.

The Law on the Lease of the Business Premises provides the subjects, objects and form of a lease agreement, with business premises being treated as a special type of real estate.  It also defines the rights and duties of contractual parties, the sub-lease of business premises and the termination of a lease agreement.

There is only one type of business lease.  The sub-lease of business premises is forbidden unless otherwise agreed between the parties of lease agreement.

The following provisions are applicable:

a)                   Length of term:

This is left to the will of contractual parties, as a contract for the lease of business premises may be concluded for a definite or indefinite period of time.

b)                   Rent increases:

These are left to the will of the contractual parties.  A lessee is obliged to pay the contracted rent.

c)                   Tenant's right to sell or sub-lease:

The sub-lease of business premises is forbidden unless otherwise agreed between the parties of a lease agreement.

d)                   (i) Change of control of tenant

            (ii) Transfer of lease as a result of a corporate restructuring (e.g. merger)

It is explicitly provided that any change in the legal status of the lessee will have no influence on the lease contract.

e)                   Repairs:

The lessee is not entitled to make repairs resulting in material changes in the construction, surface, purpose of use or external appearance of the business premises without consent of the landlord.  As a rule, the landlord is liable for securing of the costs of repairs necessary for the maintenance of the property in a proper condition, and necessary for its main purpose, and the lessee is liable for day to day repairs, especially if attributable to its own fault.

If the landlord is exempted from the VAT system, (s)he is charged to income tax at the rate of 15%, 25%, 35% or 45% pursuant to Art. 5, paragraph 1 of the Law on Income Tax.

Landlords, both, natural and legal person(s), who are subject to VAT must charge VAT in the rental fee.

If a lease of business premises is concluded for a definite period of time, the contract shall be deemed expired on the last date of the term of lease.  If a lease agreement is concluded for an indefinite period of time, it can be terminated in writing and shall be deemed terminated on the last date of the termination notice period.  Each party can, at any time, terminate the contract, irrespective of whether it was concluded for a definite or indefinite period of time, in the event of default by the other party.

There are no special provisions allowing a lessee to extend or renew the lease.  Such possibility is open only to the landlord and only providing that the lessee fulfilled all its contractual obligations towards the landlord: in such case, the landlord may offer an extension of the lease but only if (s)he offers the extension within 60 days before the expiry of the earlier contract.

As mentioned above, the lessee is not entitled to make repairs resulting in material changes in the construction, surface, purpose of use or external appearance of the business premises without the consent of the landlord.  Any conduct contrary to this may trigger a) termination of the contract; and b) liability of the lessee for damages. 

If the landlord sells or in any other manner transfers its right over business premises, the business lease agreement shall not be terminated.  The third party who acquired the business premises enters into the position of the former landlord – party to the already existing lease contract, with all rights and obligations arising therefrom.

If the lessee dies or changes its legal status (if it is a legal person), the lease contract will not cease.  The descendants or legal successors will enter into the position of former lessee with all rights and obligations arising therefrom.

11. Zoning and Environmental Issues

The main laws which govern zoning, the use and occupation of land and buildings and environmental protection are the Law on Regional Planning (Official Gazette Nos. 30/94, 68/98, 61/00, 32/02, 100/04), the Law on Environmental Protection (Official Gazette Nos. 82/94, 28/99) and the Building Law (Official Gazette Nos. 52/99, 75/99, 117/01, 47/03, 100/04).

The Law on Regional Planning provides general rules of regional planning; requirements and the method of drafting of documents of regional planning; as well as the competencies of the State authorities authorised to implement them.  The Building Law regulates the design, construction, maintenance of buildings; sets essential requirements for construction, and for performance of activities of design, construction, and expert supervision; and is in charge of organisation and construction inspection.  Finally, the Law on Environmental Protection regulates the main goals of environmental protection, State institutions that should take care of environmental protection, etc.

Administrative and normative tasks, as well as professional analysis regarding construction and the use of buildings, are undertaken by the Ministry for the Protection of Environment, Regional Planning and Construction.  The Ministry also acts as the supervisory body for the implementation of State policy by territorially competent State authorities for regional planning, construction and environment.  As a rule, without entering into a lengthy discourse on the organisation of administration at a local level in Croatia, the buyers can obtain reliable information on these matters by approaching local administrative bodies / departments competent for particular issues.

A location permit is issued on the basis of documents of regional planning for every alteration in space, unless such alteration relates to the area for which a detailed plan of regional planning has been made or is otherwise provided for by governmental regulation.

A location permit designates only the main characteristics of future construction and a respective cadastral plot.

An indispensable requirement for construction is a building permit.  Legally, it represents an administrative act by which the competent administrative body decides on the applicant's right to build a specific building on a specific location (as provided by the location permit) under specific rules as defined in the building permit. 

Finally, the third document required for construction is a permit for use, which is issued upon satisfactory technical examination of the construction.

All permits mentioned in question 11.3 above are obtained only through appropriate proceedings before State authorities competent for their issuance – any construction works exercised without such permits are considered illegal and can be sanctioned with a number of measures, in the range of an immediate stop of further works by State inspectors for construction, an initiation of misdemeanour proceedings against the investors, and even the tearing down of the illegal constructions.

The costs for issuance of building / use permits vary depending on the size of the future building.  For example, the Law on Administrative Fees (Official Gazette No. 8/96) provides the cost for buildings which, for simple buildings, is equal to 2,500 HRK (approx. EUR 3); but for buildings used as dwellings which are under 300 m² and business constructions which are under 200 m², costs can extend to 0.5‰ of the value of building.

All permits are administrative acts which, under the Law on Administrative Procedure, should be passed within 30 days from the receipt of the orderly application and all required documents.

Environmental legislation does not deal specifically with this issue.

12. General

Although private ownership was not entirely abandoned by the former Yugoslav socialist State, in the years after the Second World War almost 90% of the real property fund in the territory of the former State was nationalised and converted into a regime of so-called “social ownership”.  Therefore, one of the primary tasks of the Croatian legislators was to re-establish the principle of unity of property and trust in the Land Registers, along with the abolishment of social ownership, with a view to creating a legal environment which is fully apt to modern standards.

This is a huge task which is still ongoing.  Currently, the State is involved in the task of creating electronic Land Registries, which would provide the public with easily accessible information on the status of property.

The last amendment of the Law on the Ownership and Other Property Rights became effective as of 20 December 2001.

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