Sale of land outside the buildable area
Daniel Vlasceanu – Partener, Vlasceanu, Ene & Partners
New restrictions and ways to cope with them
Unlike other economic sectors, energy is a domain where activity is primarily developed on land: be it fossil fuels or renewable energy, the operations require large surfaces of land for the development of the projects. It is self understood that such large surfaces cannot be secured (but only to a limited extend) within the buildable area (Romanian: intravilan) and, as such, the operators have to look for suitable and available surfaces in the extra-murros realm, but still in the vicinity of existing infrastructure which itself is concentrated in the neighborhood of existing communities (due to the need of using the roads, electrical network etc.). Consequently, the recently enacted Law no 175/2020 (“Law no 175/2020”) amending Law no 17/2014 concerning the sale-purchase of agricultural land located outside buildable areas (“Law no 17/2014”) is of extreme importance. Reactions of professional associations have been publicly made available and submitted to the Romanian President before the promulgation of Law no 175/2020; despite said reactions, Law no 175/2020 was published in the Official Gazette on 14 August 2020 and it will enter into force upon 13 October 2020.
II. The importance of the location. Practices
In any oil and gas or renewable energy project, land represents a cost. It is generally not the highest one (as drilling or the cost of the equipment itself outruns by far the cost of land, especially in Romania where extra-murros land is still not that expensive compared to other jurisdictions), but the relevance of the secured land reveals itself from a different perspective: it is where the heavy development investments into power plants/ facilities/ wells etc. will be made and where production will be generated for decades; as such, it is essential that the location is “clean” from the very start. In short, a viable location (together with a good relationship with the surrounding communities) offers a project the sense of stability which is highly valued by the investors that must “pour” large amounts of money and wait for years before seeing any returns.
In any permitting schedule of a project, securing the land is the first operation where the operator consistently reveals its presence (and, indirectly, its intentions) in the local community. Within the Romanian framework, energy operators consider several options:
Some operators have a practice of securing the required land by simply purchasing it1 – as such, they get hold of the ownership right (i.e. the most “complete” right in rem). While ownership is obviously the most costly alternative, it provides the whole range of attributes of a landowner (e.g. the right to use, the right to lease, the right to freely dispose of the land etc.) and, consequently, the largest freedom of movement. It also offers the most secured feeling in terms of long term stability (that is why there is a preference that the most important parts of a project – .e.g. treatment facilities/ transformer stations etc. – are placed on owned land).
Other operators (primarily in the renewable sector and, to a limited, extend, also in the oil and gas industry) choose to secure the land via superficies agreements. The superficies right entails ownership over the construction as it is erected (e.g. a wind/solar plant, a treatment facility etc.) and only the right to use the land underneath. Payment is (generally) made on a yearly basis or per objective at a fix price established for a long period of time² (with the beneficiary’s right to unilaterally terminate the agreement if the project runs uneconomic at some point).
Right of use
The third most used practice of securing land is via rental agreements, based on which the operator obtains the right to use the land in exchange of an amount periodically (i.e. 1 year/ 6 months etc.) paid to the landowner. The rental agreement is valid for as long as the objective is used; the construction must be removed at the end of the rental period (which is anyhow a mandatory requirement under the oil and gas legislation). Note is to be made that the petroleum industry benefits of a specific exception under Law no 50/1991 (i.e. the “Construction Law”) which allows for the issuance of a construction permit based only of a rental agreement (i.e. right of use which is a so-called personal right) instead of a right in rem.
All three above mentioned possibilities may be used for land owned by public authorities also (yet, in such cases, special provisions³ must be observed). To a less extend, concession agreements are also used (entailing a public tender – longer and more difficult formalities). Additionally, the free use agreement (Romanian: contract de comodat) is used in even more rare cases and for specific situations (e.g. when an affiliate has the right to use and transfer it).
III. Recent legal amendments. Implications
We have presented the above for a better understanding of the impact of the recent amendments brought by Law no 17/2014. We shall begin by mentioning that Law no 17/2014 refers only to the sale -purchase of extra-murros land (i.e. ownership option). As such, the amendments should have no direct impact on the other legal options above presented; such options may be used for the future as they were prior to the entry into force of the new amendments (i.e. land secured via superficies agreement will not be subject – and anyhow it was not till today – subject to said amendments).
That being said, sale of land outside the buildable is to be done in substantially more restrictive conditions than before:
- Enlarged list of pre-emptors
A pre-emptor has a (legal) preference in purchasing the land over third parties against the same price/ conditions offered by such third party. The existing (i.e. prior to the amendment) additions of pre-emptors are enlarged by new categories. In the justification (Romanian: expunerea de motive) of the initiators of the amendments, the initiators consider that the amendments will benefit to the young farmers and help consolidate larger agricultural surfaces. Consequently, young farmers are added to the list of pre-emptors, but also persons having domicile in the same or neighboring administrative unit(s) and owners of agricultural investments in vineyard, hops cultures, private irrigation and agricultural research institutions.
2. Procedural aspects
Clearer rules for determining the order of pre-emptors are introduced. Reaction times are increased (for example, the offer for sale must be listed for 45 days
instead of 30 days); city hall must notify all pre-emptors of the offer for sale (this will entail certain costs and logistical efforts) and, only in case they cannot be contacted, the city hall must post the offer for sale at the city hall’s headquarters/ or on its website.
3. Potential purchasers (i.e. purchasers meeting specific conditions)
If the pre-emptors do not express their intention to purchase within the above mentioned 45 day term, a category of “potential purchasers” is enabled under the Law no 175/2020 to express their intention to purchase within another 30 days (computed as of the expiry of the 45 day term reserved for pre-emptors).
Such potential purchasers (i.e. a new category of “preferred” buyers which are not considered by the law as pre-emptors, but nor regular potential purchasers) must meet certain conditions reflected in the new Article
Correlatively, the legal entities willing to purchase the land must cumulatively and for at least 5 years:
- have their headquarters and/or a secondary office in Romania;
- perform agricultural activities in Romania;
- show that at least 75% of their revenues stems from agricultural activities4;
- the (ultimate) controlling shareholder – as a natural person - must have his domicile in Romania (also for at least 5 years);
It is not clear what would happen in case both natural person(s) and legal entity(ies) meeting the above conditions express their intention to purchase.
Certification of meeting the conditions must be issued by the county Agricultural Directorates (for surfaces up to 30 ha) or by the Ministry of Agricultural and Rural Development (for surfaces exceeding 30 ha).
4. Sale to any other person
If no pre-emptor and no potential purchaser falling under the above categories expressed its intention to purchase, the land can be sold to any natural person/ legal entity under the conditions provided by the Civil Code.
5. Restrictions/ burdens for re-sale (Art 42 newly introduced under Law no 17/2014)
If the land is sold within less than 8 years as of its purchase, the state will change the seller with a tax of 80% applied on the difference between the purchase price and the sale price. While we recognize the potential of such a provision to encourage an owner to keep the land for at least 8 years, we see little benefits from it. Eight years is a rather long period; it does not necessarily mean that one is into speculative transactions if one sells the land earlier than 8 years; many rationales can change in such a long period… unfortunately, irrespective of the reason, the tax penalty will be applied!
Similarly, in case of a change of control within less than 8 years (as of equity purchase) over companies owning extra-murros lands representing more than 25% of their assets, the seller will owe the same 80% tax computed against the value of said lands upon their purchase and the land’s value considered at the change of control. First comment is that this provision shall not be applicable to companies not owning land (and have it secured through other means than ownership). Second comment is that there are so many unclarities in this provision that one can hardly see it applied without interpretation issues: in case of multiple lands purchased at different moments in time, will there be an individual calculation per each land? What if there is absolutely no speculative intention in said transactions - why should the tax be applied? Is 25% the right threshold – is it too low or is it too high? - was there a study done to identify this threshold?
The 80% tax set under Art 42 refers to 8 years as of the purchase of the controlling stake in the company. What if at the time of acquiring the controlling stake, the lands did not make 25% of the assets of the company’s assets and their value increased over time to the detriment of other assets of the company? Why should the tax be paid in such cases?
We can foresee many questions in relation to this new tax and we express hope that the methodological norms (which must be issued within 15 days as of the entry into force of Law no 175/2020) will clarify at least part of said questions.
6. Other relevant provisions
The new Art 42 paragraph 5 sets forth that owners of lands outside the buildable area must use such lands exclusively for agricultural purposes. If this is read on a standalone basis, one may interpret that no other activities may be performed. And it is by definition that energy related activities require removal of land from agricultural circuit. We believe that despite the imperative character of this provision, it must be corroborated with the specific provisions of Law no 18/1991 regarding land fund (Romanian: legea fondului funciar) which allows for energy related activities (e.g. drilling of wells or power infrastructure) to be performed on extra-murros surfaces.
It is worth noting that pecuniary sanctions will be doubled (Art 15 under Law no 17/2014); the legal sanction of relative nullity (which, under certain circumstances, could be remedied and can be invoked only by an interested party) will be replaced with absolute nullity (which cannot be remedied, can be invoked by any interested person etc) as per Art 16 under Law no 17/2014.
7. According to the amendments brought to Law no 17/2014, in any situation, buyers of agricultural lands situated extra-murros have the obligation to use them exclusively in order to carry out agricultural activities from the date of purchase, and in case that, on the agricultural land there are agricultural investments for trees, vineyards, hop cultures and private irrigation, the agricultural destination of said investments shall be kept.
IV. Final Considerations
The amendments brought by Law no 175/2020 obviously reveal the legislator’s intention to protect local agricultural investors and offer facilities to young farmers. These are remarkable intentions (in line with the trend observed in other neighboring countries – e.g. Poland), but their reflection in Law no 175/2020 might exert repercussions on other activities entailing ownership on land (including part of the energy sector/ telecom etc.); it is beyond doubt that acquisition of extra-murros land will be impacted/ restricted for such “other” activities; even existing businesses with owned land may potentially be impacted in case of sale of such land within less than 8 years as of acquisition (and if the other conditions above detailed are met). At the same time, certain provisions under Law no 175/2020 leave room for interpretation; if the methodological norms will not clarify them, one would have to wait for the practice of the authorities to apply said provisions before interpreting them.
1 In rare cases, some operators purchase the land through vehicles/third parties indirectly controlled by them, in order to avoid an artificial increase of the price of land, but we will not dwell into such practices. The Romanian oil and gas realm recently witnessed a case in Western Romania where land was secured though such third party to avoid criticism of the local community (which is, actually, more detrimental than acting openly…).
2 Up to 99 years, as per Article 694 of the New Civil Code.
3 Such as Articles 334-346 of the Administrative Code etc.
4 As classified according to the NACE codification.